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Wachovia stock jumps on analyst's takeover talk

Wachovia Corp. shares jumped more than 5 percent Thursday after an analyst suggested the company was an alluring takeover target.

Deutsche Bank analyst Mike Mayo said the Charlotte bank is “uniquely attractive as a merger partner” because its stock price has fallen to less than half of the company's estimated franchise value, a rare occurrence. He also suggested the company could land a permanent chief executive “sooner rather than later” in a bid to improve credibility with investors.

The bank's shares climbed 89 cents to $17.77; they're down more than 25 percent since Wachovia's board ousted chief executive Ken Thompson on June 1. Merger speculation can help stocks because investors expect the buyer to pay a premium above the current share price.

Interim CEO Lanty Smith has launched a search for a new leader and has stressed the company's desire to stay independent. A source said senior management and board members have been meeting this week to talk strategy.

Also, Wachovia has hired investment bank Goldman Sachs Group Inc. to advise on strategy and in the CEO hunt, the Wall Street Journal reported Thursday. A source told the Observer that Goldman had been tapped to analyze the bank's balance sheet. The bank also has selected recruiting firm Spencer Stuart to help with the CEO search.

A Wachovia spokeswoman declined comment.

In his report, Mayo reiterated his “buy” rating on Wachovia's stock, bucking most of the analyst community. However, he lowered his 2008 earnings estimate to $1.15 per share from $2 per share, citing rising loan losses. Over time, he said losses on the bank's $120 billion Pick-A-Payment mortgage portfolio, acquired in 2006 from Golden West Financial Corp., could rise to 15 percent, or $19 billion.

In the first quarter, Wachovia set aside $1.3 billion to cover losses in Pick-A-Payment loans, a big part of its $2.8 billion provision for bad loans. For the period, the bank reported an overall loss of $707 million, or 36 cents per share. It discloses second-quarter earnings next month.

Mayo touted former Bank of America Corp. chief financial officer Al de Molina as his choice for the CEO post. Like other analysts, he floated New York-based JPMorgan Chase & Co. as a possible Wachovia buyer, citing its interest in expanding into the Southeast.

Also on Thursday, analyst Kevin Fitzsimmons of Sandler O'Neill + Partners slashed his 2008 Wachovia earnings estimate to 56 cents per share from $1.34. He has a “hold” rating on the stock.

In his report, Fitzsimmons said there is a “good chance” Wachovia will cut its dividend and raise more capital over the next several quarters.

Mayo said he believes the bank will not raise capital in the near-term.

“We think the stock will likely continue to be weighed down by a high degree of uncertainty,” Fitzsimmons wrote. “And while we still consider a merger involving (Wachovia) as unlikely, we can't rule it out altogether.”

Wachovia Corp. shares jumped more than 5 percent Thursday after an analyst suggested the company was an alluring takeover target.

Deutsche Bank analyst Mike Mayo said the Charlotte bank is “uniquely attractive as a merger partner” because its stock price has fallen to less than half of the company's estimated franchise value, a rare occurrence. He also suggested the company could land a permanent chief executive “sooner rather than later” in a bid to improve credibility with investors.

The bank's shares climbed 89 cents to $17.77; they're down more than 25 percent since Wachovia's board ousted chief executive Ken Thompson on June 1. Merger speculation can help stocks because investors expect the buyer to pay a premium above the current share price.

Interim CEO Lanty Smith has launched a search for a new leader and has stressed the company's desire to stay independent. A source said senior management and board members have been meeting this week to talk strategy.

Also, Wachovia has hired investment bank Goldman Sachs Group Inc. to advise on strategy and in the CEO hunt, the Wall Street Journal reported Thursday. A source told the Observer that Goldman had been tapped to analyze the bank's balance sheet. The bank also has selected recruiting firm Spencer Stuart to help with the CEO search.

A Wachovia spokeswoman declined comment.

In his report, Mayo reiterated his “buy” rating on Wachovia's stock, bucking most of the analyst community. However, he lowered his 2008 earnings estimate to $1.15 per share from $2 per share, citing rising loan losses. Over time, he said losses on the bank's $120 billion Pick-A-Payment mortgage portfolio, acquired in 2006 from Golden West Financial Corp., could rise to 15 percent, or $19 billion.

In the first quarter, Wachovia set aside $1.3 billion to cover losses in Pick-A-Payment loans, a big part of its $2.8 billion provision for bad loans. For the period, the bank reported an overall loss of $707 million, or 36 cents per share. It discloses second-quarter earnings next month.

Mayo touted former Bank of America Corp. chief financial officer Al de Molina as his choice for the CEO post. Like other analysts, he floated New York-based JPMorgan Chase & Co. as a possible Wachovia buyer, citing its interest in expanding into the Southeast.

Also on Thursday, analyst Kevin Fitzsimmons of Sandler O'Neill + Partners slashed his 2008 Wachovia earnings estimate to 56 cents per share from $1.34. He has a “hold” rating on the stock.

In his report, Fitzsimmons said there is a “good chance” Wachovia will cut its dividend and raise more capital over the next several quarters.

Mayo said he believes the bank will not raise capital in the near-term.

“We think the stock will likely continue to be weighed down by a high degree of uncertainty,” Fitzsimmons wrote. “And while we still consider a merger involving (Wachovia) as unlikely, we can't rule it out altogether.”

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