Wachovia Deal Lifts Raymond James, Other Brokers

In a brief statement issued in response to the run-up, Raymond James Chief Executive Tom James tried to rein in the rumors. "As usual, the announcement of one regional firm acquired by another larger firm — in this case, A.G. Edwards by Wachovia — has caused a plethora of rank speculation about 'Which firm is next?'" said the CEO of the Tampa, Fla.-based brokerage. "Raymond James has consistently proven that remaining independent has rewarded our clients, employees and shareholders."

Not that the Wachovia deal doesn't offer much to like. The merger with A.G. Edwards will create the second-largest retail brokerage in the country behind Merrill Lynch (MER). The combined operation, which will be known as Wachovia Securities and based in A.G. Edwards's St. Louis home, will have about 15,000 financial advisors and manage $1.1 trillion in client assets, according to the Charlotte, N.C.-based bank. Wachovia will pay the equivalent of $89.50 a share for A.G. Edwards in a combined stock and cash deal expected to close in the fourth quarter of this year.

Oppenheimer & Co. analyst Jennifer Thompson wrote Thursday that A.G. Edwards could add two cents a share to Wachovia's 2008 earnings per share, and five cents by 2009.

"Bottom line, it is a relatively small deal for Wachovia, but in our opinion makes a lot of strategic sense and the financials look reasonable," she wrote.

Thompson says bank revenues are faltering as less money is being made off loans in the wake of the collapse of the subprime-lending sector. While the fallout from mortgage defaults hasn't affected bigger banks to the degree it's crushed smaller lenders, credit standards have tightened.

"The revenue story for banks in general is lot more challenged than it was even a year ago, given the interest-rate environment and turn in credit quality," she says. "Loan growth has slowed and the bottom line is that revenue growth is under pressure. Banks are looking for ways to generate more stable sources of revenue."

Retail brokerages offer those stable cash flows as they shift to fee models based on client assets under management, rather than commissions on individual transactions, says Morningstar analyst Patrick O'Shaughnessy.

"They can make money even when their customers aren't trading," he says. Also, he says Raymond James's expansion of banking services, much like online and discount competitors E-Trade Financial (ETFC), TD Ameritrade (AMTD) and Charles Schwab (SCHW), has encouraged clients to leave more money with the company and generate more income from those financial services.