- The Washington Times - Monday, June 6, 2005

SAN FRANCISCO (AP) — Washington Mutual Inc., the nation’s largest savings and loan, said yesterday that it is expanding into the credit card business by buying Providian Financial Corp., a once-troubled lender that bounced back from the brink of failure to become a prime takeover target.

Seattle-based Washington Mutual initially valued the stock-and-cash deal at $6.45 billion, or $18.71 per share — a modest 4 percent above Providian’s closing price last week.

Investors weren’t impressed. Providian’s shares slid 37 cents, or 2.1 percent, to $17.59 during yesterday’s trading on the New York Stock Exchange, where Washington Mutual’s shares declined $1.17, or 2.8 percent, to $40.40.

Hoping to thwart potential rival bids, Washington Mutual imposed a $245 million breakup fee as part of its agreement with Providian.

Washington Mutual, with total assets of $308 billion, plans to use San Francisco-based Providian as its springboard into the credit card industry after the deal closes late this year.

It had been preparing to launch its own credit card early next year before concluding it made more sense to buy the expertise and existing customers of a major lender like Providian, which ranks among the 10 largest issuers, with 9.4 million accountholders and $18 billion in loans.

With most of its profits tied to home lending, Washington Mutual is counting on credit cards to diversify its revenue as it strives to become more like a bank than a traditional savings and loan.

“We view this as a favorable and transformational opportunity for Washington Mutual,” Kerry Killinger, the thrift’s chairman and chief executive officer, said yesterday during a conference call with analysts.

Excluding charges incurred in the takeover, Washington Mutual expects Providian to boost its 2006 earnings by 4 cents per share and increase its 2007 earnings by 9 cents per share.

Profits could rise even higher, Mr. Killinger said, if the two companies are successful in selling more products to each other’s customers.

Providian hopes to open more credit card accounts by taking advantage of Washington Mutual’s existing relationships with 11.7 million households. The deal also should make Providian less reliant on direct marketing through the mail because it connects with prospective customers through Washington Mutual’s nearly 2,000 branches and nearly 3,400 automated teller machines.

Meanwhile, Washington Mutual hopes to sell checking accounts and home equity loans to Providian Financial’s customers.

“It’s a compelling strategic fit,” Mr. Killinger said.

Most of Providian’s 3,200 employees, including the company’s top executives, are being retained to help steer Washington Mutual’s entrance into the credit card business. Because few layoffs are envisioned, Washington Mutual expects to save relatively little — about $60 million annually — by melding the two companies together.

The Providian management team, led by 21-year industry veteran Joseph Saunders, has engineered a dramatic turnaround since 2001 as the company battled to survive heavy losses that piled up from the company’s former specialty of credit card loans to risky borrowers.

“We are moving into a new era and it’s a better era than we have seen,” Mr. Saunders said during yesterday’s conference call. “We have come a long way in three years.”

Providian’s past difficulties caused the company’s stock to plummet from a peak of $66.72 in 2000 to $2 in late 2001, right about the time federal banking regulators clamped down to prevent further problems.

Providian’s financial headaches were compounded by complaints of rampant customer abuse. The complaints spurred an investigation by government regulators and class-action lawsuits, prompting Providian to pay more than $400 million in 2000 to settle the disputes.

Since Mr. Saunders’ arrival in November 2001, Providian has weeded out the problem loans and focused its marketing efforts on households with better credit ratings — a formula that has been boosting the company’s profits. Providian earned $381 million last year.

To pull off the turnaround, Mr. Saunders shrank the company through layoffs and divestitures. The company once had more than 13,000 employees and 18.5 million customers.

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