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Does Wachovia Deal Make Sense?


The pros and cons for JPMorgan.

Earlier this year, in a high profile move, JPMorgan Chase (JPM) scooped up former Wall Street stalwart Bear Stearns. Now it looks like the well-known New York-based investment bank could be on the prowl once again.

According to CNBC, JPMorgan insiders have told the network that, "Wachovia is high on the firm's radar screen."

There was no official word on what a buyout price could be, but some are talking about a potential deal in the high $30s, or about double Wachovia's (WB) current stock price.

If JPMorgan does indeed have its eye on Wachovia it shouldn't come as too much of a surprise. For the last several months the press and others have been speculating that it was only a matter of time until JPMorgan was going to go a-courting.

In any case, here's what I like and don't like about such a potential combination.

The positive: Wachovia has a pretty big footprint, with "3,300 financial centers and more than 1,500 retail brokerage offices." It also has a particularly heavy presence in the U.S. East/Southeast, where it's rumored JPMorgan wants to expand its footprint.

Making it even more attractive in my mind is the fact that the shares currently trade near their 52-week low. Yet, at the same time, analysts are expecting the North Carolina-based company to grow at a more than 9% clip per annum in the next five years. Not too shabby for a company of its size (more than $35 billion in revenue estimated for 2008).

But even beyond that, I would argue that Wachovia has a great name, and likely a shareholder base that's itching for some sort of catalyst.

However, I see a couple of potential negatives as well.

I think JPMorgan's just starting to wrap its arms around Bear Stearns, and I wonder how it could swallow another big fish right now given all it has currently going on.

Next, it'd be nice for JPMorgan to pick up a big name on the cheap. But this would still likely be a pricey event and I think that could probably prevent it from going on the prowl again soon.

Another thing I haven't heard too many folks talk about yet is what would happen if the financial crisis were to deepen. With Bear under its umbrella, and Wachovia not exactly playing its "A game" right now (as evidenced by the steep first quarter loss it posted back in April), what happens if another shoe drops and macro conditions worsen? I feel it could be too much for JPMorgan to handle.

To make a long story short, I like the idea of a Wachovia pickup, but I'm concerned about the short-term pain JPMorgan could face at this point by gobbling up such a large company. I'd also want to hear more about cost savings, etc. before I jumped on either stock.

Is there another Bear Stearns out there?
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No positions in stocks mentioned.

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