By DAVID SPEAKMAN
Sometimes small steps are the best way to get you where you want to go.
Making good on its promise to grow through small acquisitions in existing markets (see Biz Ink, April 18) San Fransico-based Wells Fargo & Co. (NYSE:WFC) says it will buy Pacific Northwest Bancorp (NASD:PNWB).
The all-stock deal, worth $590 million, will add 53 branches and $3 billion in assets to Wells Fargo, making it the fourth-largest bank in Washington state with slightly less than 7 percent of the market. Wells has 14.5 percent of the California market, where it ranks as the second-largest bank behind Bank of America Corp. of Charlotte, N.C.
This so-called “fill-in” buying allows Wells Fargo to give itself a bigger slice of the banking pie in markets where is it relatively weak.
“We grow our store distribution system in two ways — de novos [opening new branches] and strategic acquisitions,” says Wendy Grover, spokeswoman for Wells Fargo.
She says strategic acquisitions either take the form of “fill-ins” or extending its territory into markets that border existing Wells Fargo territory.
“The two methods are complimentary,” she says.
In general, Wall Street analysts see this as a positive move.
“Wells has been opportunistic with acquisitions and particularly has been looking to fill-in their franchise or enhance their presence in markets with above average growth prospects,” says RBC Capital Markets San Francisco-based financial services analyst Joe Morford.
RBC does not have an investment banking relationship with Wells Fargo.
“They already have a presence in Washington which, relative to Wells Fargo, is a smaller share than they have in other states,” he says.
Even though Washington state is suffering from the same dot-com bust economy as Northern California, Morford says Wells sees that market as a growth opportunity.
“So, this is a longer term investment; it’s still a good place to be. And here’s an opportunity to pick up $3 billion in assets and another 53 branches for what they consider a reasonable price.” Morford says.
That reasonable price of $590 million comes out to $35 a share for Pacific Northwest — a 23 percent premium over its $28.44 stock price at Monday’s close according to a May 20 research report from San Francisco-based Friedman Billings Ramsey & Co. Inc.
FBR says that’s a higher premium than other bank mergers in recent months, which average about 12 percent over market capitalization.
Since Wells can eliminate management and some back-end operations in the long run, it can afford the higher price tag, says RBC’s Morford.
“Fill-ins are the easiest transactions to do and carry the lowest risk and they are able to pay more for the banks because of synergies that they can realize,” he says.
But Morford will not rule out Wells being involved in a future big-ticket merger to expand its territorial footprint, which currently stops in the Fort Wayne, Ind. market, further toward the east coast.
Some analysts think Wells should target a big southeastern regional bank like SunTrust Banks Inc. of Atlanta.
“These rumors come up from time to time, but the price would have to be right before Wells would bite,” Morford says.