Wachovia Mystery: Independence, Merger?

When Wachovia Corp. completes the sale of its banking operation to Citigroup Inc., it plans to remain a public company with two main subsidiaries—Wachovia Securities, the nation's third-largest brokerage, and its proprietary investment arm, Evergreen Asset Management.

But its ultimate strategy remains a mystery.

The Charlotte company said Monday that it will sell its retail bank, its corporate and investment bank, and selected wealth management businesses, including its private banking arm.

Analysts said that what is left is a stand-alone investment management business, a brokerage company, and a bunch of question marks about the future.

Nancy Bush, the founder of NAB Research LLC, said that Wachovia appears headed in the opposite direction of Morgan Stanley and Goldman Sachs Group Inc., which became bank holding companies last month.

"This is just an odd, odd structure," she said in an interview Monday. "The FDIC said that Wachovia didn't fail, and they didn't, all they did was divest the bank. But it boggles the mind to see where they will go from here."

Frank Barkocy, director of research at Mendon Capital Advisors LLC, said Wachovia "clearly has a reasonable critical mass to continue as an independent company with what is left," and added, "But I'd think at some point in time they are going to look for the possibility to combine that operation with someone else."

He said there will be no shortage of potential partners if Wachovia decides to sell. The company might merge with a regional broker or be bought by a foreign company, he said. Geoffrey Bobroff, an analyst at Bobroff Consulting in East Greenwich, R.I., agreed that it will be tough for Wachovia to remain independent because it will need capital to deal with some "serious money fund issues."

Bobroff added: "What's left of Wachovia isn't terribly meaty. In the long run, it is going to be very hard for them to be a stand-alone," he said.

Robert Patten, a managing director at Morgan Keegan & Co., wrote in a research note: "It is hard to value what the remaining company is worth, given that we have few details with regard to what the new capital structure and expense base will shape up to be."

He estimated the remaining businesses earned about $1.4 billion in annual after-tax net income, "based on which we estimate a valuation of $5-7 per share."

Others asked why Citi would not want to buy Wachovia Securities and Evergreen. "Getting a branch network is one thing, but there is a benefit to buying Evergreen and Wachovia Securities," Bobroff said. Vikram Pandit, Citi's CEO, said his company was not interested in the brokerage or asset management units. "We got out of the asset management business; there is no real strategic need to be in that business," he said during a conference call.

Analysts said a combination of Wachovia Securities and Citi's Smith Barney unit could have created antitrust issues. Wachovia's purchase of A.G. Edwards in June 2007 created a brokerage company with $1.1 trillion under management and 14,600 advisers, trailing only Merrill Lynch & Co. Inc. and Smith Barney in terms of advisers.

Evergreen had $245 billion under management at June 30.

On the brokerage side, Pandit said, “we've got Smith Barney, which is a great business."