Another deal from hell

We knew that Wachovia's purchase of Golden West Financial (parent of World Savings) was imprudent and ill-timed, but it's taken a while to recognize the depths of the blunder. In reporting its disastrous third-quarter results this morning, Wachovia noted a $26.1 billion loss related to "Pick-a-Payment" mortgages, where borrowers would choose the amount of their payments each month. Most of these pay-option mortgages were inherited through the Golden West deal. Wachovia has lost more money through these payments in a single quarter than it paid for Golden West ($24.3 billion) two years ago. Wowser. From DealBook:

In light of all this, it might be a good time to revisit what some doubters had to say about the Golden West deal back in May 2006. Here’s a choice comment form Christopher Whalen, a managing director of Institutional Risk Analytics: "Golden West might be the best-run thrift in the country, but it looks like Wachovia is buying it in a speculative bubble and that makes me nervous. I think Wachovia wanted to take this off the table before J.P. Morgan or anyone else could buy it, but I wonder whether they are going to regret this later on."

Buy that man a drink. I guess it's time to tack this onto the list of all-time worst deals in U.S. business (courtesy of Robert Bruner, dean of the University of Virginia's Darden School of Business, in his book, “Deals From Hell: M&A Lessons That Rise Above the Ashes”).

1) Merger of Pennsylvania Railroad and New York Central Railroad, February 1968: The largest merger to date, this deal created the 6th largest corporation in the U.S. Investors in Penn Central lost $1.84 billion in stock market value. The merged company filed for Bankruptcy in June 1970.

2) The leveraged buyout of Revco Drug Stores, December 1986. At $1.4 billion, it was one of the largest LBOs to that point, a 48% premium to the stock price of 12 months earlier. Just 19 months later it filed for bankruptcy.

3) AT&T’s acquisition of NCR, September 1991: A $7.48 billion deal that was a 132% premium to NCR’s stock price of October 1990. Five years later, AT&T spun off NCR, leaving an entity with a market cap of $3.4 billion.

4) Quaker Oats’s purchase Snapple Beverage Corp., December 1994: A $1.7 billion deal, but a 48% discount to the Snapple’s highest stock price of that year. Quaker Oats stock price fell 9% the day the deal was announced, wiping out more than $1 billion of market value. Just 29 months later, Quaker sold Snapple for $300 million and took a $1.4 billion write off associated with the deal.

5) Merger of AOL Inc. and Time Warner, January 2001: A $165 billion “merger of equals,” but the combined companies’ market cap implied a deal of $350 billion. Within months, more than $200 billion of that market cap was gone. Two years later, AOL leader Steve Case was gone as chairman of AOL Time Warner

Here's my post on the subject from last year.