Wells Fargo Case Study

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 to

answer the following questions: How should Wells Fargo Position itself for the future? Should it

strengthen its retail presence, grow internationally, or move into the void created by the

disappearance of investment banks? Develop Projected Financial Statements that fully assess and

evaluate the impact of the proposed strategy. How are the acquisitions/growth financed? Will

debt 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 and

supporting evidence.


Wells Fargo Case Study

Executive Summary

The paper submitted will contain a proposed plan of action using primarily data from

Morningstar to show a proposed acquisition for Wells Fargo. This acquisition will greatly

increase the Wealth, Brokerage, & Retirement segment of Wells Fargo that has been

underutilized and overlooked. This proposal will “marry” the benefits of TD Ameritrade with the

Cross-selling strength of Wells Fargo.

The primary purpose that TD Ameritrade was selected was convenience. Although

Charles Schwab and E*TRADE are competitors of TD Ameritrade, but they were not selected

for varying reasons. Charles Schwab has a history of refusing overtures for takeovers after his

disappointing 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, is

not nearly as stable or financially sound. Given the current economic uncertainty and the authors

penchant for avoiding risk, TD Ameritrade is the best option available of the large independent

retail brokerages. According to Zacks Equity Research, an interesting side note is “that Wells

Capital Management, the wholly owned institutional asset management subsidiary of Wells

Fargo Bank, N.A., and part of Wells Fargo’s Asset Management Group” (Zacks Equity

Research, 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 shopping

format for all financial products. Already with one of the highest cross-selling ratios in the

world “…at 5.81 products per banking household…” this number can and should go higher in

the not too distant future. (APA editorial, 2009)


According to the 2010 Annual Report for Wells Fargo, they have set an internal target of

8 products per banking household out of about 16 products normally available. While this may

seem excessive, a brief look at the historical data suggests that this focus is working

exceptionally well. The 1999-2010 Annual Reports along with revenue date from Morningstar

shows year over year growth in the number of products per household and that information has

corresponded 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 created

by the disappearance of investment banks?

Over the past few months, Wells Fargo has been on a buying spree. In December

2011, it was announced by Zacks Equity Research that Wells Fargo had “acquired investment

boutique firm EverKey Global Partners”. (Zacks Equity Research, 2011)


On February 21, 2012, Reuters announced Wells Fargo was purchasing the BNP Paribas

energy lending unit as some European banks have started shedding assets the credit crunch

overseas has been getting progressively worse. (Rothacker, 2012)

This buying spree has already been financed in some way, but the main strength of Wells

Fargo has been expanding its line of products to existing customers. Expanding the Wholesale

Banking segment would fund its acquisitions in the Wealth, Brokerage, & Retirement Segments.

For Example, Chrysler Inc. and GM have made some headlines recently with indications that

they 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 particular

segment could benefit from Cross-selling services the most. My assertion is that Wells Fargo

should aggressively expand its offerings of investment services by purchasing TD Ameritrade.

This would strengthen its electronic brokerage business and diversify its complementary

investment portfolio by offering a wider range of services. This backwards integration would

make sense for Wells Fargo and give it an online presence in one of the few independent firms

that have survived in the online brokerage business.

Develop Projected Financial Statements that fully assess and evaluate the impact of the

proposed strategy.

Included is the Projected Combined Balance Sheet, Income Statement, Statement of Cash

Flow. This acquisition would give Wells Fargo about 5.6 million online brokerage accounts.


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 & 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 & 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


The combined company would effectively merge TD Ameritrade’s online retail discount

brokerage with Wells Fargo sophisticated cross-selling strategy and further expand consumer

options 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

EBIT
This 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 billion

dollars of cash on hand at the beginning of 2012, they could almost entirely buy TD Ameritrade

directly. (Morningstar.com, 2012)

A more probable course of action is to fund the acquisition using cash on hand for about

50% and then issuing common stock for the remaining 50% purchase.


Will debt be increased further, or ownership of WFC stock be diluted to raise the capital

needed?

As suggested above, the best possible solution would dilute Wells Fargo stock, but given

the overwhelming strength of the company, it is difficult to see where this would become a

serious concern. TD Ameritrade is approximately 1/10 the size of Wells Fargo and is on very

good financial footing itself.

In conclusion, this assignment was extremely thought provoking and an excellent excuse

to spend a lot of time using excel and researching financial data.


References

APA 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.aspx

http://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_wellsfargo

Morningstar.com. (2012, March 2). Financials: Cash Flow. Retrieved from http://www.morningstar.com:

http://financials.morningstar.com/cash-flow/cf.html?t=WFC&region=USA&culture=en-us

Morningstar.com. (Accessed on 2012, March 1). Key Ratios. Retrieved from Morningstar.com:

http://financials.morningstar.com/ratios/r.html?t=WFC&region=USA&culture=en-us

Rothacker, 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-idUSTRE81L00O20120222

Wells 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

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