WaMu nosedives on U.S. seizure, industry wonders who's next; Alpharma says other offer tops King;

By Paul Deckelman

New York, Sept. 26 - Washington Mutual Inc. shares lost virtually all of what little value they still had on Thursday during Friday's frenetic session, after federal regulators stepped in, seized the faltering Seattle-based thrift operator and brokered a $1.9 billion sale of its worthwhile assets - though not its liabilities - to J.P. Morgan & Co.

The fall of WaMu - though hardly unexpected - represented the latest body blow sustained by a staggering U.S. financial services industry, which has seen a series of high-profile failures in recent months, including Bear Stearns Cos., Lehman Brothers Holdings Inc., IndyMac Bank and the twin mortgage giants Fannie Mae and Freddie Mac. The bad news sent shares of other banking companies sliding badly Friday, including Wachovia Corp. - widely perceived as likely the next big financial player to be forced into a shotgun marriage to a stronger partner or die trying to hold out - National City Corp. and BankUnited Financial Corp.

Apart from the tumbling dominoes of the financial sector, Alpharma Inc. officially rejected King Pharmaceuticals Inc.'s $37 per share offer - itself sweetened from $33 originally - and says it has already gotten an expression of interest from another party willing to top the King offer. The Bridgewater, N.J.-based pharmaceutical company further said that it has also gotten expressions of interest from other parties and has entered confidentiality agreements with them.

All eyes on WaMu

From the opening bell, Washington Mutual was the center of attention, as investors reacted to the not unexpected but still jarring news that regulators from the Office of Thrift Supervision and the Federal Deposit Insurance Corp. had stepped in on Thursday night, declaring the company failing and unstable after a panicky depositor run on the eponymous banking unit, and arranging to sell its branch network and other valuable assets to J.P. Morgan Chase & Co.

WaMu's shares (NYSE: WM) - which had been already pounded down over the previous several sessions - lost nearly $1.53, or 90.51% to close at 16 cents, although volume of 102.3 million shares was about 10% under its usual level.

"It was a beautiful deal for the country, and for J.P. Morgan," a trader said, though WaMu investors might be understandably less than thrilled at how things shook out once it became obvious that their bank wasn't going to find a deep-pocketed rescuer. "J.P. Morgan took the branches, the FDIC ended up getting $1.9 billion out of it, they got no liabilities, and everything got stuck to the shareholders and bondholders."

Despite analyst and media warnings prior to the seizure by the regulators that such a step could end up costing the FDIC's Deposit Insurance Fund incur liabilities of as much as $24 billion, the fund paid out not a dime.

JPMorgan Chase - which on the personal orders of its CEO, Jamie Dimon, had shrewdly gotten out of the subprime lending game two years ago, when WaMu and other lenders were jumping into the then-lucrative field with both feet, sparing JPMorgan most of the troubles that subsequently laid WaMu and other industry peers low - said it was not acquiring any senior unsecured debt, subordinated debt, or preferred stock of WaMu's banks, or any assets or liabilities of the Washington Mutual Inc. holding company. JPMorgan also said it will not assume any of the numerous lawsuits by investors, mortgage borrowers or other critics facing the holding company. The presence of those liabilities had prevented WaMu from reaching an agreement to be taken over whole by J.P. Morgan, Citigroup Inc., Wells Fargo & Co., Toronto Dominion Bank, HSBC or Banco Santander SA, all of which had been kicking WaMu's tires over the previous several days.

Who's next?

With WaMu now history, Wall Street's focus was turning to which financial institution would be the next one to be picked off, and many were thinking about Charlotte, N.C.-based Wachovia, the fourth-biggest U.S. banking company behind crosstown rival Bank of America Corp., J.P. Morgan Chase and Citigroup. Fears that Wachovia - which, like WaMu, has a heavy portfolio of troubled mortgage loans - might follow in the thrift's footsteps caused investors to beat down its shares (NYSE: WB) by as much as 41.4% in intraday dealings. They came up from their lows later in the session on the news that Wachovia had entered into preliminary M&A talks with a handful of possible buyers. Citi was the name most often mentioned, although Wells Fargo and Spain-based Banco Santander were also seen as possibilities. Wachovia ended down $3.70, or 27.01%, at an even $10 per share. Volume of some 329 million shares was over three times the usual turnover.

But while WaMu had been negotiating with a gun figuratively pressed to its corporate head - or at least a stopwatch, with the regulators waiting to swoop in when depositors began pulling too much money out - the better-capitalized Wachovia was reported to be feeling no such extreme pressure to strike a deal, or else.

A trader specializing in financial issues cautioned against drawing too close an analogy between Wachovia and WaMu.

"I think Wachovia is not in the same state as WaMu," he declared, noting that it can raise the capital it needs and "they're too major to go that way."

Wachovia was hardly the only banking name who was being punished Friday for the sins of WaMu. Another big loser on investor fears of either a federal seizure or a forced dilutive capital raise was National City (NYSE: NCC). The Cleveland-based regional lender's shares nosedived by 59.9% at one point during the session, before coming off those lows to end at $3.71, down $1.28, or 25.65%. Volume of 326 million shares was over 10 times the norm.

"There was a bear raid going on today at National City Bank too," the trader said, "but a bunch of people came out and said 'hey, they got $7 billion of excess capital, its not the same thing, and they've got new deposits coming in." He said that "as much as the shorts supposedly can't operate," because of the SEC's temporary ban on short-selling against the stocks of financial institutions, "there's somebody doing something there."

Troubled smaller banks

Among some of the smaller lenders, BankUnited Financial (Nasdaq: BKUNA) fell 21 cents, or 21%, to 79 cents a share on about-normal volume of 1.2 million shares

The trader said that BankUnited "is history," predicting that a WaMu-like scenario for the Coral Gables, Fla.-based lender could play out as soon as the weekend, and suggesting that Wells Fargo might walk away with that bank's useable assets. He noted that the bank was supposed to raise $100 million of fresh capital but had not done so.

And he saw Vineyard National Bancorp (Nasdaq: VNBC), which had been unable to raise $250 million of needed fresh capital, as another potential WaMu situation. The Corona, Calif.-based lender's shares plunged 28 cents, or 20.29%, to $1.10. Volume of 81,000 was two-thirds the norm.

Perhaps the biggest loser among the banks thought to be the next to go was Downey Financial Corp. (NYSE: DSL). The Newport Beach, Calif.-based lender's shares swooned $1.87, or 47.95% to $2.03, on volume of $3.6 million, or over twice the usual volume.

Downey "has a new guy in who's a pretty good guy," the trader said, referring to just-appointed CEO Charles R. Rinehart, "but they're so over the edge already that I don't know that they have a chance." He suggested that "maybe that one will go to Wells Fargo."

Noted television stock guru Jim Cramer said Friday that "more seizures are imminent, I believe. If the FDIC can come in and seize WaMu , how are they not going to seize BankUnited and Downey Savings? These are the obvious ones, the ones that the FDIC needs to see made whole or will take them, take the liabilities and sell the deposits. Both are damaged and wounded institutions that I would put in the camp of WaMu, and both need to be seized to make sure Congress knows the stakes and what is about to happen here."

No need for bailout

The trader meantime said that the way the WaMu scenario played out could provide a valuable lesson in how to handle future bank failures, "without the taxpayers paying the fees. They don't need [Senate majority leader] Harry Reid," or other politicians crafting an expensive, taxpayer-funded bailout. "The market handled it itself, without the Fed."

"The guys who are in decent shape are going to end up getting these [not-so-strong players] and the franchise they're in just keeps getting stronger." He noted the fact that on the day of the biggest bank failure in U.S. history, J.P. Morgan successfully sold an upsized $10 billion equity offering "and their stock went up 11%" - what he called "the most amazing story of the day."

He further opined that "when you get something that doesn't make any sense to be in business, you close it down." Then, "everybody else gets out of the way," as a strong player like J.P. Morgan steps in "and gets control of the assets and is able to raise capital because people have trust in them, and then the ongoing situation is better for everybody."

In contrast, he said, the plan being pushed by the government - taking the toxic loans off the books of the companies but allowing those lenders to continue operating, leaving the same management in place - makes no sense because "you don't want to keep crappy management. Now [under the proposed federal bailout plan], you'll get a lot of these guys who made really crappy loans, bad decisions, get new capital, and go back there again - when their management has proven that they suck."

Rather than the taxpayers getting stuck in the case of WaMu, "the shareholders and debtholders were the ones who lost - as they should. They took the risk to get their returns, but it didn't work out."

Alpharma rejects King

Outside of the financials, major news was made in the M&A sphere, where drugmaker Alpharma again publicly rejected the overtures of King Pharmaceutical - and said that it has other potential partners, including one which has indicated a willingness to pay more than the $37 per share that Bristol, Tenn.-based King has offered.

King, on the other hand, is continuing to play hardball. It is for the moment sticking to its offer - sweetened from its original $33 per share bid - and is continuing its current tender offer for Alpharma shares, seeing to get around the latter company's management by taking its case directly to the shareholders.

Faced with the formal rejection, King declared: "Our $37 per share cash tender offer, which is not conditioned on financing, is the only outstanding offer for Alpharma and would provide its shareholders with a 67% premium over Alpharma's closing price on Aug. 4, 2008, the date of our initial written offer. Given the uncertainty in the financial markets, we believe it is in the best interests of Alpharma stockholders to consummate our transaction as quickly as possible. Our management team and financial and legal advisors are available to meet with Alpharma immediately."

King's response "is preposterous," said analyst Ken Trbovitch of RBC Capital Markets, especially since King "could face trouble" from antitrust regulators, who were scheduled to rule over the weekend on the viability of its bid for Alpharma, which, like King, makes various kinds of pain medications. He told Prospect News that should the regulators make a second request to King for more information about its bid, that would seriously delay completion of its tender offer, undermining one of the company's key selling points an acquisition.

For another thing, Trbovitch said that King's assertions that its cash tender offer is "not conditioned on financing' is essentially a "so what?" sort of statement, "as if nobody else can go else and get $1 billion of financing," even with the current difficulty in the capital markets.

The emergence of the second potential bidder, whom Trbovitch calls "Company X" gives Alpharma more flexibility and almost dictates that the final bid for it will have to be in the $40 range or above, the analyst said. Indeed, he said that King already has the capital on hand to raise its price to that level - a step which he said King has to take if it wishes to remain competitive and win Alpharma.

"We would continue to be buyers of the [Alpharma] stock in the $37-$39 range, in anticipation of the auction [that would result from two or more bidders] concluding at a price at or above $40."

Alpharma (NYSE: ALO) rose 67 cents, or 1.83%, to $37.25, on volume of 2.2 million shares, almost 1.5 times the norm.

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