Wachovia-A.G. Edwards: The vulnerability of the mid-sized company
Wachovia Bank, one of the champion acquirers in the US financial industry, announced it would buy US-based broker A.G. Edwards. The deal is for $6.8 billion, and will make Wachovia the #2 retail broker in the US after Merrill Lynch. Smith Barney, a division of Citigroup, will move to #3, or stay at #2 by some measures.
Aside from its extensive banking holdings, Wachovia is currently the #3 US stock brokerage firm in terms of brokers. In many other measures it is one of the top five brokerage firms in the world. Wachovia got big in brokerage service through a number of acquisitions, including a deal with Prudential Securities in 2003.
A.G. Edwards is company with over 120 years of history. It is #7 in terms of active brokers. It has been a family-run business until recently and retains a definitely old-school air.
Conventional stock brokering is an industry on the way out. As we have noted before, the exchanges are becoming concentrated, private equity is growing, and a variety of financial instruments not usually sold by traditional stockbrokers is squeezing the biggest players. But Wachovia as a full-service bank has wider variety of products to sell to its customers than a single-functional stockbroker. In that way, what Wachovia is buying above all else is a customer list, one that growing in value as baby boomers look retirement in the face.
A New York Times article ("Wachovia in Deal to Acquire A.G. Edwards" ,6/1/07) bears this out.
Investors are increasingly turning to bigger firms like UBS and Morgan Stanley, which offer more attractive prices and a broader set of investment products. Others are heading to online and discount brokerage firms, where they pay even lower commission fees to execute trades.
The traditional role of a stockbroker recommending stocks at high commissions based on "insightful company research" isn't fooling any savvy investors. The smartest ones pick their own stocks; most others go for mutual funds or other instruments. The era of the cold-calling charmer yelling "Buy!" and "Sell!" to customers is a relic.
Also a relic are midsize firms that do not have the power to shape the market and investor behavior on their own. Small brokers that cater to the rich in a very personal way will survive, and the big giants look likely to prosper, but the mid-size ones, as in many industries, are often losers when industries shift.
