2006 could be the year Chief Executive Kerry Killinger finds out whether Washington Mutual is strong enough to remain independent.
If it isn't, Seattle could lose another corporate headquarters and its last major financial institution.
WaMu has been here for more than a century, first as a sleepy local thrift, then in recent years as one of the country's largest financial institutions. It has a reputation for folksy commercials, open and friendly branches, and workers in polo shirts, not pinstripes.
If it leaves, Seattle could lose hundreds, possibly thousands, of bank jobs. Many decisions about loans, fees and other customer services would move thousands of miles away.
Coveted for its retail-banking and mortgage businesses, WaMu has dodged takeover rumors for years. But Jamie Dimon, the incoming chief executive of JPMorgan Chase, might change that.
Dimon expects the New York powerhouse to be able to make a major purchase in mid-2006. He stops short of saying that's what he is shooting for.
"The only way to get the West Coast is WaMu, unless you think Bank of America or Wells Fargo is for sale," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco.
Those banks are not for sale, and JPMorgan could not afford them if they were.
Neither is WaMu, Killinger said, but the company's relatively low value on the stock market — $43.8 billion — indicates it could be within reach of the New York financial giant.
If JPMorgan cannot persuade WaMu to sell, other possible acquisition targets include Golden West, U.S. Bancorp and Wachovia.
Cannon and other analysts say they think WaMu's board would back Killinger in trying to keep WaMu independent if it were approached by a suitor.
Legally, publicly traded companies must consider buyout offers. But they don't have to sell, even at a good price, if they believe long-range performance would be better without a merger. Plenty of data suggest big-bank mergers do not offer the best returns for investors.
If WaMu told JPMorgan quietly it has no interest in selling, shareholders might never know.
Moshe Orenbuch, a specialty-finance analyst at Credit Suisse First Boston, said WaMu is not likely to sell in the next year unless its performance rapidly declines.
"They view themselves as having reshaped the management team, and they want to give them a chance to demonstrate what they can do
Another point in favor of independence is the biggest hire, former JPMorgan executive Stephen Rotella, who became president of WaMu this year and brought other JPMorgan executives with him. Chances are good they would rather stay independent than return to the company they left.
While a hostile takeover is an option, it isn't likely. In banking, such takeovers are rare and tend not to work out.
Small thrift to big bank
Washington Mutual got its start shortly after the Seattle fire of 1889 and for decades was a little-known thrift with modest aspirations.
After Killinger became CEO in 1990, it expanded rapidly from a regional thrift with less than $7 billion in assets to a company with more than 2,000 branches in 15 states and $333.6 billion in assets.
More than 7,700 people work for WaMu in King County, and many would face layoffs if there were a buyout. It is unlikely the 78 branches in King County would be touched, though, because JPMorgan has no branches here.
Headquarters jobs are another matter. They often are hit hardest in a merger. JPMorgan slashed 2,000 jobs in Chicago after last year's acquisition of Bank One, that city's biggest bank. About 15,000 people still work for the company there.
WaMu's new 42-story headquarters building in downtown Seattle is to open next year, and a buyout probably would not affect those plans.
At 1.1 million square feet, it will not house all of WaMu's Seattle employees. Even if there were draconian cuts and the bank vacated the building, Seattle could absorb the space fairly quickly.
Many people know WaMu as the friendly bank with the quirky commercials, at one point featuring Rodeo Grandmas. It patented the style of its new branches, which have an open, laid-back feel.
The WaMu culture — some employees call themselves "WaMulians" — would certainly change if JPMorgan bought it, but it's not clear how.
JPMorgan has changed so much in recent years that its corporate culture remains in flux.
In 2000, the company was formed by the combination of JPMorgan and Chase Manhattan. Then, almost two years ago, it acquired Bank One, where Dimon was CEO.
Regulators probably would not stand in the way of a JPMorgan-WaMu marriage, although they would require the merged bank to shed some deposits to keep it from breaking deposit limits.
The banks could expect an outcry from consumer advocates, who often protest big-bank purchases but such critics seldom scuttle a major deal.
If a WaMu-JPMorgan marriage were to take place next year, the merged company would be roughly the same size as Citigroup, the country's largest bank with $1.5 trillion in assets.
The deal would give JPMorgan a solid foothold in California, where it has no retail branches and where WaMu has the second-highest market share, 16.7 percent.
It also would flesh out Florida for JPMorgan, which has a measly 0.1 percent of deposits there compared with WaMu's 3.43 percent.
The only significant overlap would occur in the New York metro area, Dallas and the Houston area, said Pri de Silva, analytics product manager for SNL Financial, a Charlottesville, Va.-based information and research company.
There's some overlap in the Chicago area, de Silva said, but little duplication of branches in five other states: Arizona, Colorado, Connecticut, Florida and Utah.
In Chicago, JPMorgan probably would close some WaMu branches that don't appear to perform well.
WaMu has 147 branches there but only 0.3 percent of the market based on deposits. Another out-of-towner, Fifth Third Bank of Cincinnati, has 123 branches and 3.4 percent of the market, according to the Federal Deposit Insurance Corp.
Most of WaMu's 2,000-plus branches would remain intact.
Vulnerable positions would include human resources, accounting and other headquarters jobs that likely would go to New York.
Behind-the-scenes work for branches, such as marketing for the retail bank, probably would move to Columbus, Ohio, where JPMorgan does much of that work.
There also would be layoffs in the mortgage area, where WaMu and JPMorgan both have a large presence.
Michael Moebs, CEO of Moebs Financial Services, a research firm in Lake Bluff, Ill., said a deal would be bad for WaMu employees and customers.
"Somebody like Morgan Chase stepping in just to fulfill their national geographic strategy goal, that's all they're thinking. They're not thinking about how the people are going to be treated," Moebs said.
"They'll talk a good line about how there's going to be service and things, but the Dimons of the world are basically interested in only dealing with the upper-middle class and beyond."
The name JPMorgan has the ring of money, but about half of JPMorgan's profit comes from its 96 million credit-card holders and 10 million consumer-bank customers, many of whom are not wealthy.
Most big-bank mergers are done with stock. WaMu investors expecting a huge payout could be disappointed.
De Silva figures JPMorgan could pay $44.5 billion in stock — or $49.82 a share, a respectable 12 percent premium over WaMu's closing price Tuesday — for WaMu without cutting into 2007 profit. That assumes JPMorgan could find 25 percent fat to cut from WaMu's general and administrative expenses.
The price represents a much smaller gain than bank stockholders typically see with blockbuster acquisitions.
Prices from the biggest four bank buyouts in recent years suggest WaMu would garner something closer to $61 a share, de Silva said.
"That's unlikely," he said. "I don't think anyone would want to pay that great a premium."
Long an allure
For years, WaMu has been seen as an attractive acquisition for several large banks, including Citigroup.
Although Citi has a major presence overseas, it has a relatively small U.S. branch system and has said for years it wants to expand domestically.
But CEO Charles Prince told BusinessWeek recently he has renounced big deals until at least late 2006 or early 2007.
Chuck Hill, CEO of the Boston-area investment-research firm Veritas et Lux, says he thinks 2006 might be a good year for WaMu to consider selling, particularly if it is concerned about where the mortgage business is headed.
"If I were WaMu ... maybe it's a good time to be acquired, because if things do start to sour on the housing market, then they would be bought at what might turn out to be a pretty good price."