Running head: Wells Fargo Case Study 1 Wells Fargo Case Study Daniel Davis Liberty University Business 400-B02 Professor Nicole Lowes
Wells Fargo Case Study 2 Abstract Using the case study in our textbook on page 111-119, the purpose of this paper is toanswer the following questions: How should Wells Fargo Position itself for the future? Should itstrengthen its retail presence, grow internationally, or move into the void created by thedisappearance of investment banks? Develop Projected Financial Statements that fully assess andevaluate the impact of the proposed strategy. How are the acquisitions/growth financed? Willdebt be increased further, or ownership of WFC stock be diluted to raise the capital needed?The author will attempt to answer these questions using charts and graphs as illustrations andsupporting evidence.
Wells Fargo Case Study 3 Wells Fargo Case StudyExecutive Summary The paper submitted will contain a proposed plan of action using primarily data fromMorningstar to show a proposed acquisition for Wells Fargo. This acquisition will greatlyincrease the Wealth, Brokerage, & Retirement segment of Wells Fargo that has beenunderutilized and overlooked. This proposal will “marry” the benefits of TD Ameritrade with theCross-selling strength of Wells Fargo. The primary purpose that TD Ameritrade was selected was convenience. AlthoughCharles Schwab and E*TRADE are competitors of TD Ameritrade, but they were not selectedfor varying reasons. Charles Schwab has a history of refusing overtures for takeovers after hisdisappointing episode of being bought up by a large corporation many years ago. E*TRADE, whom some experts consider having a higher upside than TD Ameritrade, isnot nearly as stable or financially sound. Given the current economic uncertainty and the authorspenchant for avoiding risk, TD Ameritrade is the best option available of the large independentretail brokerages. According to Zacks Equity Research, an interesting side note is “that WellsCapital Management, the wholly owned institutional asset management subsidiary of WellsFargo Bank, N.A., and part of Wells Fargo’s Asset Management Group” (Zacks EquityResearch, 2011) already owns about 2.58% of TD Ameritrade. (Morningstar.com, 2012)How should Wells Fargo Position itself for the future? Wells Fargo can position itself for the future by capitalizing on its one-stop shoppingformat for all financial products. Already with one of the highest cross-selling ratios in theworld “…at 5.81 products per banking household…” this number can and should go higher inthe not too distant future. (APA editorial, 2009)
Wells Fargo Case Study 4 According to the 2010 Annual Report for Wells Fargo, they have set an internal target of8 products per banking household out of about 16 products normally available. While this mayseem excessive, a brief look at the historical data suggests that this focus is workingexceptionally well. The 1999-2010 Annual Reports along with revenue date from Morningstarshows year over year growth in the number of products per household and that information hascorresponded to a rise in Total Revenue: Year Banking Products per Household Total Revenue 1999 3.2 18,091,000,000 2000 3.4 19,708,000,000 2001 3.7 20,150,000,000 2002 3.8 24,496,000,000 2003 4.2 28,389,000,000 2004 4.3 30,059,000,000 2005 4.6 32,949,000,000 2006 4.8 35,691,000,000 2007 5.2 39,390,000,000 2008 5.5 41,897,000,000 2009 5.7 88,686,000,000 2010 5.9 85,210,000,000(Morningstar.com, Accessed on 2012) and(Wells Fargo, 2010,2009,2008,2007,2006,2005,2004,2003,2001,2001,2000,1999)Should it strengthen its retail presence, grow internationally, or move into the void createdby the disappearance of investment banks? Over the past few months, Wells Fargo has been on a buying spree. In December2011, it was announced by Zacks Equity Research that Wells Fargo had “acquired investmentboutique firm EverKey Global Partners”. (Zacks Equity Research, 2011)
Wells Fargo Case Study 5 On February 21, 2012, Reuters announced Wells Fargo was purchasing the BNP Paribasenergy lending unit as some European banks have started shedding assets the credit crunchoverseas has been getting progressively worse. (Rothacker, 2012) This buying spree has already been financed in some way, but the main strength of WellsFargo has been expanding its line of products to existing customers. Expanding the WholesaleBanking segment would fund its acquisitions in the Wealth, Brokerage, & Retirement Segments.For Example, Chrysler Inc. and GM have made some headlines recently with indications thatthey are looking to give Wells Fargo control of an auto financing partnership. As of March 1,2012, only GM has made the decision to do so. (http://media.gm.com, 2012) Looking over the business segment results in Case Study 11 on page 117 of our textbook,the Wealth, Brokerage & Retirement Services stands out as the weakest segment. This particularsegment could benefit from Cross-selling services the most. My assertion is that Wells Fargoshould aggressively expand its offerings of investment services by purchasing TD Ameritrade.This would strengthen its electronic brokerage business and diversify its complementaryinvestment portfolio by offering a wider range of services. This backwards integration wouldmake sense for Wells Fargo and give it an online presence in one of the few independent firmsthat have survived in the online brokerage business.Develop Projected Financial Statements that fully assess and evaluate the impact of theproposed strategy. Included is the Projected Combined Balance Sheet, Income Statement, Statement of CashFlow. This acquisition would give Wells Fargo about 5.6 million online brokerage accounts.
Wells Fargo Case Study 6 Wells Fargo Projected Combined Balance Sheet Enter Expected Growth Rate: 3% Fiscal year ends in December. 2011 2012 Assets Cash and due from banks $ 20,472 $ 21,086 Deposits with banks $ - $ - Federal funds sold $ 44,367 $ 45,698 Trading assets $ 77,814 $ 80,148 Debt securities $ 222,613 $ 229,291 Loans $ 819,326 $ 843,906 Allowance for loan losses $ (19,372) $ (19,953) Net loans $ 799,954 $ 823,953 Receivables $ 40,562 $ 41,779 Premises and equipment $ 9,872 $ 10,168 Goodwill $ 27,582 $ 28,409 Other intangible assets $ 23,985 $ 24,705 Other assets $ 63,325 $ 65,225 Securities and investments $ 447 $ 460 Total assets $ 2,130,947 $ 2,194,875 Liabilities and stockholders equity $ - Liabilities $ - Deposits $ 920,070 $ 947,672 Short-term borrowing $ 49,091 $ 50,564 Long-term debt $ 126,691 $ 122,890 Other liabilities $ 80,091 $ 82,494 Payables $ 10,693 $ 11,014 Total liabilities $ 1,186,636 $ 1,214,634 Stockholders equity $ - Preferred stock $ 11,431 $ 11,088 Common stock $ 8,937 $ 8,669 Other Equity $ (926) $ (898) Additional paid-in capital $ 57,540 $ 59,266 Retained earnings $ 68,031 $ 70,072 Treasury stock $ (3,864) $ (3,748) Accumulated other comprehensive income $ 3,207 $ 3,303 Total stockholders equity $ 144,356 $ 147,752 Total liabilities and stockholders equity $ 1,330,992 $ 1,362,386
Wells Fargo Case Study 7 Wells Fargo & Co (WFC) Frojected Combined Income Statement Enter Expected Growth Rate: 3.00% Fiscal year ends in December. 2011 2012 Revenue Interest income $ 497 $ 512 Loans and Leases $ 38,949 $ 40,117 Securities $ 8,475 $ 8,729 Trading assets $ 1,440 $ 1,483 Other assets $ (48,864) $ (47,398) Other income $ 2,271 $ 2,339 Total interest income $ 2,768 $ 5,783 Interest expense $ 37 $ 38 Deposits $ 2,275 $ 2,343 Short-term borrowing $ 80 $ 82 Long-term debt $ 3,978 $ 4,097 Other expense $ (6,333) $ (6,143) Total interest expense $ 37 $ 418 Net interest income $ 2,731 $ 5,365 Noninterest revenue Commissions and fees $ 23,430 $ 24,133 Principal transactions $ 1,014 $ 1,044 Equity investment income $ 1,482 $ 1,526 Lending and deposit-related fees $ 4,280 $ 4,408 Securities gains (losses) $ 54 $ 56 Credit card income $ 3,653 $ 3,763 Other income $ (33,913) $ (32,896) Total noninterest revenue $ - $ 2,035 Total net revenue $ 2,731 $ 7,400 Provisions for credit losses $ (49,412) $ (50,894) Noninterest expenses Compensation and benefits $ 19,485 $ 20,070 Occupancy expense $ 3,011 $ 3,101 Tech, communication and equipment $ 2,283 $ 2,351 Amortization of intangibles $ 1,977 $ 2,036 Other expenses $ (25,465) $ (24,701) Total noninterest expenses $ 1,291 $ 2,858 Income (loss) from cont ops before taxes $ 50,852 $ 55,436 Provision (benefit) for taxes $ 7,824 $ 8,059 Other income (expense) $ (26,098) $ (26,881) Net income $ 69,126 $ 74,259 Preferred dividend $ 844 $ 869 Net income available to common shareholders $ 68,282 $ 73,389
Wells Fargo Case Study 8 Wells Fargo & Co (WFC) Projected Statement of Cash Flow Enter Expected Growth Rate: 3.00% Fiscal year ends in December 2011 2012 Cash Flows From Operating Activities Net income $ 16,849 $ 17,354 Provision for credit losses $ 7,899 $ 8,136 Depreciation & amortization $ 2,372 $ 2,443 Deferred tax (benefit) expense $ 2 $ 2 Stock based compensation $ 564 $ 581 Receivable $ (739) $ (761) Accrued liabilities $ 2,638 $ 2,717 Interest payable $ 1,582 $ 1,629 Other assets and liabilities $ 25,915 $ 26,692 Other operating activities $ (42,603) $ (41,325) Investments (gains) losses $ (2) $ (2) Deferred charges $ (21) $ (20) Net cash provided by operating activities $ 14,456 $ 17,447 Cash Flows From Investing Activities Sales/maturity of investments $ 111,950 $ 115,309 Purchases of investments $ (121,244) $ (124,881) Acquisitions and dispositions $ (351) $ (362) Property, and equipments, net $ (153) $ (158) Other investing activities $ 10,344 $ 10,654 Changes in loans, net $ (35,749) $ (34,677) Net cash used for investing activities $ (35,203) $ (34,114) Cash Flows From Financing Activities Change in deposits $ 72,128 $ 74,292 Change in federal funds purchased $ 119 $ 123 Long-term debt issued $ 11,687 $ 11,336 Long-term debt repayment $ (50,559) $ (52,076) Excess tax benefit from stock based compensation $ 79 $ 81 Repurchases of treasury stock $ (2,765) $ (2,848) Cash dividends paid $ (3,495) $ (3,600) Other financing activities $ (332) $ (342) Change in short-term borrowing $ (6,231) $ (6,044) Common stock issued $ 1,296 $ 1,257 Preferred stock issued $ 2,501 $ 2,426 Net cash provided by (used for) financing activities $ 24,428 $ 24,606 Effect of exchange rate changes $ - $ - Net change in cash $ 3,681 $ 7,939 Cash at beginning of period $ 16,785 $ 20,472 Cash at end of period $ 20,472 $ 28,411
Wells Fargo Case Study 9 The combined company would effectively merge TD Ameritrade’s online retail discountbrokerage with Wells Fargo sophisticated cross-selling strategy and further expand consumeroptions along the entire spectrum of products.How are the acquisitions/growth financed? Using the chart as a guide, the best option seems to be a common stock financed path. EPS/EBIT Analysis 16.00 8.00 EPS 4.00 Common Stock Financing Debt Financing 70% Stock 2.00 70.00% Debt 1.00 $35,571.00 $50,582.00 $66,133.00 EBITThis returns the highest levels of growth to the shareholders and seems the most reasonable.However, looking over the cash flows for Wells Fargo, it becomes clear with almost 20 billiondollars of cash on hand at the beginning of 2012, they could almost entirely buy TD Ameritradedirectly. (Morningstar.com, 2012) A more probable course of action is to fund the acquisition using cash on hand for about50% and then issuing common stock for the remaining 50% purchase.
Wells Fargo Case Study 10Will debt be increased further, or ownership of WFC stock be diluted to raise the capitalneeded? As suggested above, the best possible solution would dilute Wells Fargo stock, but giventhe overwhelming strength of the company, it is difficult to see where this would become aserious concern. TD Ameritrade is approximately 1/10 the size of Wells Fargo and is on verygood financial footing itself. In conclusion, this assignment was extremely thought provoking and an excellent excuseto spend a lot of time using excel and researching financial data.
Wells Fargo Case Study 11 ReferencesAPA editorial. (2009, May 4). Bankinter tops global cross-selling league. Retrieved from http://www.vrl- financial-news.com: http://www.vrl-financial-news.com/bpa/banking--payments- asia/issues/bpa-2009/bpa3/bankinter-tops-global-cross-se.aspxhttp://media.gm.com. (2012, March 1). GM and Wells Fargo Launch Auto Financing Partnership. Retrieved from http://media.gm.com: http://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2012/Ma r/0301_wellsfargoMorningstar.com. (2012, March 2). Financials: Cash Flow. Retrieved from http://www.morningstar.com: http://financials.morningstar.com/cash-flow/cf.html?t=WFC®ion=USA&culture=en-usMorningstar.com. (Accessed on 2012, March 1). Key Ratios. Retrieved from Morningstar.com: http://financials.morningstar.com/ratios/r.html?t=WFC®ion=USA&culture=en-usRothacker, R. (2012, February 21). Wells Fargo buys BNP Paribas energy lending unit. Retrieved from http://www.reuters.com: http://www.reuters.com/article/2012/02/22/us-wellsfargo- acquisition-idUSTRE81L00O20120222Wells Fargo. (2010,2009,2008,2007,2006,2005,2004,2003,2001,2001,2000,1999). 2010 Annual Report.Zacks Equity Research. (2011, December 16). Wells Fargo to Acquire EverKey. Retrieved from http://www.zacks.com: http://www.zacks.com/stock/news/66480/Wells+Fargo+to+Acquire+EverKey