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Wachovia to Buy A.G. Edwards

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After helping to build Wachovia Securities through the consolidation of more than 20 broker-dealers, President and CEO Daniel Ludeman says, "The 'barbelling' is occurring very rapidly. You won't see any regional firms left in the industry."

And Ludeman should know. He joined the industry 28 years ago as the 299th broker at Wheat First, which joined Wachovia in 1998.

With Wachovia's plan (announced May 31) to buy A.G. Edwards of St. Louis for a reported $6.8 billion, the broker-dealer is positioning itself to be one of the two or three large players remaining in a quickly consolidating industry that's full of excess capacity, according to Ludeman. If approved by regulators and A.G. Edwards' shareholders, the combined firm would include 15,000 financial advisors, $1.1 trillion in client assets and 3,300 locations nationwide.

"We intend to be among the one or two survivors," stresses Ludeman, "by offering a great, compelling and different culture to attract the regional-type financial advisor."

"As we bring the two firms together, we'll allow the A.G. Edwards' financial consultant to pick the best model for their business," he shares, referring to Wachovia's private client, bank and independent channels.

Ludeman, who spoke to Research by phone from Richmond on June 15, is set to run the new firm out of St. Louis under the Wachovia Securities' banner. The deal should be completed in October, with integration set to wrap up in 18 months. The most time-consuming aspect of the integration, Ludeman says, is technology. "And that conversion should be easy," since the two broker-dealers have made recent changes to their respective information systems.

Robert L. Bagby, who's been chairman and CEO of A.G. Edwards since 2001, will serve as chairman of the combined brokerage firm. "In Wachovia Securities, we believe we found the perfect partner."

Why "perfect?" Both firms are known for "putting the broker first," says Chip Roame, head of Tiburon Strategic Advisors in Northern California. A.G. Edwards always scores very high in broker-satisfaction surveys, for instance, and Wachovia has given advisors a wide variety of ways to affiliate with the firm. Plus, they're both private-client and retail centric, adds Roame.

In comparison with other firms A.G. Edwards might have merged with — Merrill Lynch, Smith Barney, Morgan Stanley, Smith Barney and UBS — Wachovia has the most similar broker culture, he says. "It's a good choice for A.G. Edwards," concludes Roame.

Ludeman wholeheartedly agrees. "My visits with A.G. Edwards' financial consultants have been very gratifying. The people I've met are excited about the combination. Some have been reaching out and talking with our financial advisors. They're checking us out … A little uncertainty is natural with a change like this. I'm very encouraged with what we can create together."

And how might Wachovia do at digesting such a large firm? Its track record says pretty well, notes Roame. "Wachovia's done many acquisitions and integrated a lot of firms … Sure, there will be challenges, but the firm's met them before numerous times."

Wachovia is known for its success and expertise in integration, he says, the largest being Prudential Securities. (Prudential Financial now owns 38 percent of Wachovia Securities.)

It does face an uphill climb, though, in terms of the level of assets per advisor and 12-month revenue (or production) per advisor. Combined (see chart), the average level of client assets and yearly sales per advisor is about $72 million, while commissions average $613,000. Merrill's FAs, in contrast, average nearly $110 million in assets and $800,000 in yearly sales.

On their own, Wachovia advisors average nearly double the level of client assets of the A.G. Edwards' reps: $773 million vs. $374 million respectively. And Wachovia advisors have been bringing in some $690,000 a year in sales vs. $520,000 for the A.G. Edwards brokers. "The A.G. Edwards clients are more of the middle-market client, not super-high-net-worth," explains Roame.

But Ludeman says these figures are somewhat misleading. "The differences are not as large as they might first seem," he explains. That's because the A.G. Edwards' numbers include the 1,200-plus financial consultants who have been with the firm for four years or less.

And, Ludeman insists, Wachovia isn't about to "eliminate any producers" who are on the lower end of the production scale. "We have seen a huge increase in the productivity of those [advisors] with the broker-dealers that have become a part of us" through earlier acquisitions, he says. "We hope the financial consultants with A.G. Edwards will be excited" about this track record and the tools and services Wachovia can add to A.G. Edwards' platform.

Wachovia has "meaningfully improved the firms it's acquired in terms of profitability" in the past, says Richard Bove of Punk, Ziegel & Company in Lutz, Fla., but it has not proven to investors that it is doing "significantly" the right thing for them. "I'm surprised," says Bove, echoing the downcast sentiment of A.G. Edwards' heir Ben Edwards, who retired from the firm in 2001. "I thought A.G. Edwards would hang in there as a unique brokerage. But the business model wasn't working."

And who might be next to strike a major deal? "Merrill Lynch has been making retail acquisitions, like Advest and First Republic Bank," shares Bove. "Merrill will continue to look for buys and should do a big deal within the next 12 months."

Wachovia-A.G. Edwards: Pros & Cons

Pros:o Similar FA-oriented cultures o Both are retail-oriented firms o Great footprint overlap o Able to squeeze out costs o Wachovia needed a big deal o Partly defensive; stops rival from expanding via purchase of A.G. Edwards

Cons:o Price; a 16% premiumo Broker retention o Integration, which takes time (and effort)

Source: Chip Roame, Tiburon Strategic Advisors

Raymond James Says: "This Is Opportunity"A.G. Edwards may merge with Wachovia. But don't hold your breath on Raymond James Financial, says Chairman and CEO Tom James. "This gives us a terrific opportunity. We have such similarity in terms of our historic culture."

Translation: Raymond James hopes to attract some A.G. Edwards financial consultants who may be less than excited about joining a firm the size of Wachovia, as well as other FAs looking to sign on with a regional-size broker-dealer.

"I think the [deal's] 3 percent attrition estimate is a bit benign," James says. "Many people are essentially being forced to look at their alternatives. And that benefits us and other non-wirehouse firms."

James says he's personally spoken with a few A.G. Edwards advisors himself. "They want to hear a commitment to independence … Wachovia's got to do a good job or it will lose these brokers." He acknowledges that Wachovia and UBS have done well recently at keeping acquired FAs. "But it is expensive and takes a big commitment," notes James.

Janet Levaux is the managing editor of Research; reach her at [email protected].


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