Wachovia-Edwards deal seen as a balancing act

The merger of Wachovia Securities and A.G. Edwards, scheduled to close today, will be the biggest retail-securities transaction since July 2000, when Swiss banking giant UBS AG acquired New York-based Paine Webber Group Inc. for $10.7 billion.

Charlotte, N.C.-based Wachovia Corp.’s deal for the St. Louis-based regional broker was valued at $6.8 billion when it was announced in May. A.G. Edwards & Sons Inc. shareholders approved the merger last Friday, and the new firm is to take the Wachovia Securities name sometime next year.

The combined organization, to be based in St. Louis, would have more offices than competing wirehouses and would rank No. 3 in number of brokers.

But for all its size, the new company would face significant challenges.

First, it would have some catching up to do in terms of broker productivity and assets per rep. In those two key measures, the combined firm would rank behind all of its New York-based competitors — Merrill Lynch & Co. Inc., Citigroup Inc.’s Smith Barney brokerage unit, UBS Financial Services Inc. and Morgan Stanley.

Another challenge is getting its management ranks stabilized.

Managers from both A.G. Edwards and Richmond, Va.-based Wachovia Securities LLC would split key executive roles and management of the sales force, resulting in a delicate balance between competing camps, according to observers.

The plan is for the firm to have co-heads of national sales, two leaders for its branch network and dual technology chiefs.

“The next time that works will be the first time it’s ever worked,” said recruiter Steve Trautwein, founder of Shoal Bay Agency LLC in Great Falls, Va., and a former Wachovia branch manager who now recruits for the firm.

“I’ve never seen that co-head stuff work,” he said.

Last month, the firms announced a new regional-management structure, splitting 12 regional posts equally between established Wa-chovia and A.G. Edwards managers.

The even split was a way for Wachovia to “keep the Edwards [brokers] in the fold,” said Rick Peterson, a Houston-based recruiter.

A Wachovia rep in the Northwest, who declined to speak for attribution, said the balance of regional chiefs will “keep both chains of command involved” and help avoid major mistakes.

In the end, most observers expect that the majority of A.G. Edwards reps will stick around.

“The Wachovia culture is fairly similar [to A.G. Edwards’],” said the Northwest Wachovia broker. “Wa-chovia is several years of undried paint on a regional face,” this rep said, referring to its history of acquiring regional firms.

Wachovia has “done exactly what they said they were going to do” in adopting best practices from both firms in coming up with operating plans, said an A.G. Edwards branch manager, who asked not to be identified. However, Wachovia’s goal of -losing no more than 3% of A.G. Edwards’ $250,000-plus producers is seen as unlikely to be realized.

From the time the deal was announced at the end of May through the end of August, A.G. Edwards lost a net 255 brokers. It had a total of 6,363 producers as of Aug. 31.

More are expected to leave through next year as they evaluate their options. “We’re not releasing the precise attrition numbers, but I can say that we’re pleased with the attrition rate so far,” Tony Mattera, spokes-man at Wachovia, wrote in an e-mail.

“It’s better than our projection for this point in the merger process and better even in percentage terms than where we were at the comparable point in the Prudential merger.”

A sense of betrayal still simmers among some A.G. Edwards brokers, who blame chief executive Robert Bagby for going back on promises to keep the firm independent.

“He’s a bought man,” said one A.G. Edwards rep in the Southwest, alluding to Mr. Bagby’s own retention package, which has him serving as chairman of the new firm through 2009, with a raise and guaranteed bonus of $4.5 million each year, plus a $7.5 million stock award.

The A.G. Edwards broker asked not to be identified.

“As for some [financial advisers’] being dissatisfied with the merger or bearing ill will, we understand entirely the loyalty and passion about their firm that AG Edwards financial consultants have,” said Mr. Mattera. “The reaction from most advisers has been overwhelmingly positive.”

Mr. Trautwein said Wachovia brokers may also leave if the firm’s service levels drop.

Morale at the company’s headquarters, where 2,200 jobs will be lost, has been “devastated,” he said.

Another driver of attrition might be having to “defend [to clients] policies we don’t agree with,” said the A.G. Edwards branch manager.

A.G. Edwards brokers have been clamoring for Wachovia to pay a competitive rate on its bank sweep program and to maintain A.G. Edwards’ relatively low account fees.

Wachovia, unlike A.G. Edwards, has a tiered interest rate on its sweep program based on household size. Wachovia officials have said that decisions on tiering and account fees have yet to be made.

But Wachovia Corp. officials have promised improved profit margins and have highlighted the increased use of bank deposits by A.G. Edwards brokers to achieve higher returns.

“They’re not going to go back to Wachovia [clients] and undo the tiered [bank sweep] rates,” said Patrick Kearns, president of Fulcrum Securities Inc. in Reston, Va.

There already is some grumbling among brokers whose new regional boss came from the other firm. “We do the lion’s share of business in my area, and I don’t want some [A.G. Edwards] guy peeling off some of our [clients],” said a Wachovia rep in California whose new regional boss hails from A.G. Edwards. The broker asked not to be identified.

Wachovia has yet to announce any decisions on branch consolidations. Closing of the deal, though, paves the way for branch closings, which could spur movement out of the firm, Mr. Peterson said.

Meanwhile, recruiters said, some Wachovia branch managers are ready to bolt due to pay cuts they experienced this year and a loss of authority resulting from Wachovia’s strategy of putting single managers in charge of multiple offices.

Mr. Peterson said that firms generally don’t hire managers until after bonuses have been paid early in the year. As a result, he expects to see some Wachovia managers jump ship in January and February.

Dan Jamieson can be reached at [email protected].