Street Capitalist: Event Driven Value Investments

For years Berkshire Hathaway (NYSE:BRK.A) has held two core positions in financial firms: Wells Fargo (NYSE:WFC) and American Express (NYSE:AXP). One of the things I did when the financial crisis began is put these two companies on my watch list. I thought that if they were good enough for Warren Buffett, maybe they could be good enough for me, especially if they experienced any sudden drops in their stock prices.

For much of the crisis, Buffett remained close lipped about his investments in either of these two companies. In the last 13F-HR filing, there appeared to be no addition to either of them. But today, on CNBC, Buffett announced a couple of things that I would take as positives for Wells Fargo:

[Buffett] told Becky that the Wachovia deal was indirectly spurred by a recent change in the tax laws. Buffett also praised Wells and its CEO, Bob Steel, saying no bank has done a better job for shareholders and depositors during the financial crisis.

He noted that he owns only two domestic stocks personally, Berkshire and Wells, and revealed that Berkshire has been adding to its Wells Fargo holdings over the year.

Warren Buffett to CNBC: Rescue Bill Not “Panacea” for Economy (CNBC)

So we now know that he’s been adding to the position and it’s actually the only domestic stock besides Berkshire that he’s holding personally. This is a pretty strong vote of confidence for the company, who is currently trying to acquire Wachovia (NYSE:WB). For much of the crisis, Wells Fargo has stayed out of the limelight of the big acquisitions we’ve seen. John Stumpf of Wells Fargo is a pretty sharp guy who is managed to create a great culture that has been conservative when compared to the rest of the excesses that have sickened the banking industry.

To get an idea for how he thinks, look at this article from the Financial Times:

In an interview with the Financial Times, Mr Stumpf quashed repeated speculation that Wells, the fifth-largest US bank, would take advantage of the collapse in the shares of many rivals to clinch a big deal.

“A large transformational [deal] is highly unlikely. Not impossible, but highly unlikely,” he said.

“We don’t need to do a deal. Organic growth is the core growth engine in this company.”

…

“We come from a culture where bigger is not better. You get bigger by being better, you don’t get better by being bigger,” he said, adding that Wells was also unlikely to stray from its western focus by buying on the East Coast.

Wells Fargo rejects speculation over deal for a struggling rival (FT)

Here’s more about Stumpf and the Wells Fargo culture from another FT article:

When, in the heady markets of 2005 and 2006, Mr Stumpf was staring down a different kind of barrel, he chose a similarly prudent route for the fifth largest bank in the US.

Faced with deciding whether to follow Wells’ rivals in selling lucrative securitised debt and subprime loans with few strings attached, Mr Stumpf and Dick Kovacevich, his long-time mentor who hand-picked him as successor in June last year, concluded the high risks did not justify the potentially high rewards…

“You can imagine the pressure on us. We were the number one mortgage originator and we had to give up market share and earnings,” Mr Stumpf says. “[But] it is more difficult to attend a party and leave before the trouble starts than not to attend the party at all. Part of my job here is to make sure we don’t attend parties that make no sense.”

With his laid-back delivery and penchant for catchy metaphors – traits he shares with Warren Buffett, his occasional bridge opponent and Wells’ largest shareholder – the 54-year-old Mr Stumpf makes Wells’ escape from the crisis sound easy. The reality is that the lender’s bold counter-cyclical call saved the company from the worst US housing bust since the Great Depression…

Asked to identify the biggest change he has introduced since taking over the CEO job from Mr Kovacevich, who is staying on as chairman until December, his brisk response is “None”. Noting that he has been with the company for more than 20 years, he adds: “There is no sea-change. I am fully invested in the culture, and one of my roles here is as the keeper of the culture…I don’t have any passion or ego to put my mark on the company. This is about sticking to our knitting”…

A strong balance sheet, an enviable competitive position and a satisfied workforce: Wells is such an outlier in the ravaged US financial sector that rivals have begun to wonder if it has a secret formula.

Mr Stumpf shakes his grey-haired head: “It’s about culture. I could leave our strategy on an aeroplane seat and have a competitor read it and it would not make any difference”.

Wells Fargo cracks the whip (FT)

I can’t say if the deal with Wachovia is a good deal for Wells Fargo (the pains of integration post-merger) or will even go through. As you know, Citigroup tried to buy the company with assistance of the US Government at a substantially lower price. If I had to bet though, I would say that the Wells Fargo deal has a greater likelihood of passing, simply because it doesn’t rely on assistance from the government. If Citigroup revises their bid to include that, there could be a good bidding war for Wachovia and its $448 billion in deposits.