By Ari Levy
July 29 (Bloomberg) -- Wells Fargo & Co.’s $12.7 billion purchase of Wachovia Corp., meant to bolster deposits and mortgage operations, has deepened the company’s commitment to investment banking as corporate stock and bond sales surge.
Wells Fargo ranked 13th in the second quarter among underwriters of U.S. bonds and 10th in global equity offerings, according to data compiled by Bloomberg. Last year, before the Wachovia acquisition, Wells Fargo failed to crack the top 30 in either category. Investment banking revenue jumped 29 percent in the second quarter from the first three months of 2009.
Chairman Richard Kovacevich said in 2005 that Wells Fargo’s consumer-oriented culture was “incompatible” with an investment bank, and Executive Vice President Bruce Helsel said in March 2008 that the businesses would be difficult to integrate. That was before Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. collapsed or were sold, allowing San Francisco-based Wells Fargo to expand, said Executive Vice President Tim Sloan, in an interview last week.
“There are just fewer competitors out there,” said Sloan, 49, head of wholesale banking’s commercial, real estate and specialized financial services group in Los Angeles. “We’re out pitching business everyday.”
Earlier this month, the Wachovia Securities brand was changed to Wells Fargo Securities, a unit that includes the acquired investment banking and capital markets divisions as well as Barrington Associates, a Los Angeles-based investment bank that Wells Fargo bought three years ago. Former Wachovia executives Robert Engel and Jonathan Weiss were appointed in January to lead the groups.
Wholesale Banking
The 2,800-person unit is part of Wells Fargo’s wholesale banking group, which generated $5.2 billion in second-quarter revenue, more than double a year earlier before the Wachovia deal. Wholesale banking accounted for 23 percent of Wells Fargo’s total revenue in the period.
Sloan, who oversees 25 businesses and has worked at Wells Fargo for 22 years, said the company is making its first significant push into investment banking by offering more services to existing customers. Wells Fargo was able to win underwriting services to Oracle Corp. because it already provided treasury management and investment products to the Redwood City, California-based software company, he said.
Wells Fargo participated in two deals yesterday, the biggest acquisitions it’s been involved with this year. The company advised Sprint Nextel Corp. on its agreement to buy out Virgin Mobile USA Inc. for $420 million and worked on Targa Resources Partners LP’s agreement to buy its founder’s natural- gas-liquids business for $530 million.
Debt and Equity
Among Wells Fargo’s largest deals in the second quarter were Oracle’s $4.5 billion debt sale and co-managing casino owner MGM Mirage’s $2.5 billion stock and bond sales. Debt sales in the U.S. jumped 17 percent in the first half from the first six months of 2008 to $1.18 trillion, and the $165.7 billion in second-quarter global equity offerings marked the busiest period since the fourth quarter of 2007, Bloomberg data show.
The bank is also reviving equity research, a division that Sloan eliminated in 2005 because “we didn’t have a large enough investment banking or sales and trading presence to justify it,” he said. In buying Wachovia, Wells Fargo inherited A.G. Edwards Inc., a St. Louis-based securities company with a research division that Wachovia bought for $6.5 billion in 2007.
Wells Fargo now has 65 research analysts covering equity, fixed-income and structured products, spokeswoman Elise Wilkinson said in an e-mail. Research will focus on areas where the company has the biggest lending presence, Sloan said.
Prudential Stake
The bank’s financial commitment to the securities business will deepen when it buys back a stake in the unit from Prudential Financial Inc., which last month exercised an option to sell its minority stake in Wells Fargo Advisors. Prudential helped create Wachovia Securities in 2003. The sale is expected to close by Jan. 1.
Wells Fargo agreed to buy Wachovia in October, outbidding Citigroup Inc., after surging mortgage defaults left the Charlotte, North Carolina-based lender on the verge of collapse. Wells Fargo Chief Financial Officer Howard Atkins said in a conference call the following month that the company was looking to downsize the “higher risk, more transactional elements” of Wachovia’s operations, including investment banking.
That approach initially created some “concern and trepidation” among employees about the company’s direction, Sloan said. While the bank eliminated the proprietary trading component of the securities division because it was considered too risky, the overall business is growing, he said.
Waning Competition
“It’s outside of their core competency,” said Chris Armbruster, an analyst at Al Frank Asset Management Inc. in Laguna Beach, California, which oversees $390 million including Wells Fargo shares. “The Wachovia guys are a little better suited to bring their past expertise to the business, but there’s still a little bit of risk.”
Lehman Brothers, which went bankrupt in September, was the fifth-biggest underwriter of U.S. debt sales and ranked ninth in global equity offerings in 2007. Merrill Lynch was in the top 10 in both categories before agreeing to be bought by Bank of America Corp. Bear Stearns was in the top 20 in both areas in 2007, prior to being rescued by JPMorgan Chase & Co. the following March.
“There is market share to be had because you have lost some players and you still have some weak players,” said Charles Peabody, an investment banking analyst at Portales Partners LLC in New York, in an interview. “There is an underwriting cycle that has emerged once again in both fixed income and equity.”
Goldman Sachs
While Wells Fargo can gain business from current customers, it can’t compete with Goldman Sachs Group Inc., Morgan Stanley and JPMorgan in advising on the biggest deals, said Joe Morford, an analyst at RBC Capital Markets in San Francisco. The three New York-based firms participated in at least 28 percent of announced mergers and acquisitions globally this year by dollar amount, according to Bloomberg data. Wells Fargo has been involved with 0.2 percent.
“I don’t think they have the aspirations to compete against the big boys,” said Morford, who owns Wells Fargo shares and has a “buy” rating on them.
To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net
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