That's one way to view its decision to purchase retail broker A.G. Edwards. Fourth-place wirehouse Wachovia Securities is set to bump Citigroup's Smith Barney and Morgan Stanley to become the biggest retail brokerage house in the U.S. by number of brokers after Merrill Lynch. That's the headline result from Wachovia's plan to buy A.G. Edwards. A subtler outcome, say observers, is the potential for Wachovia Securities to reposition itself as a truly national brokerage with an unusual affinity for Main Street U.S.A.

In a deal expected to close this fall, Charlotte, N.C.-based Wachovia will pay $6.8 billion in cash and stock for A.G. Edwards and fold it into Wachovia Securities. The combined brokerage will take Wachovia Securities' name but make A.G. Edwards' St. Louis base its headquarters. Wachovia Securities' president and CEO Daniel Ludeman will become president of the combined business and A.G. Edwards' chairman and CEO Robert Bagby will become its chairman.

Expansion

"This combination with A.G. Edwards, which is widely considered one of the most highly regarded remaining independent brokerage firms in the industry, will further enhance our scale and relevance," says Wachovia's chairman and CEO Ken Thompson, bolstering a view of the combination as a straightforward expansion play.

That's the lens through which Alois Pirker, a senior analyst with Boston-based business consultancy Aite Group, sees it.

"With this deal, Wachovia Securities solidly places itself among the bulge-bracket brokerage firms in the U.S.," says Pirker. "[It has] used this unique opportunity to catch up to Merrill Lynch and Smith Barney, leaving other firms like UBS and Morgan Stanley behind them."

But Pirker qualifies Wachovia's post-merger standing, noting that it isn't set to emerge as the second-biggest brokerage by every measure.

Adding A.G. Edwards' 6,618 financial consultants in 744 offices will give Wachovia Securities a total of around 15,000 advisors -- Wachovia isn't counting another 2,300 Wachovia Bank-based Series 6 holders -- in 3,400 locations (including 1,850 bank branches) with around $1.1 trillion in client assets. But Merrill's "thundering horde" of around 16,000 brokers in about 700 offices accounts for about $1.6 trillion in assets. Meanwhile Smith Barney has 13,000 brokers in 640 offices and $1.2 trillion in client assets.

Big question

Put bluntly, Wachovia Securities brokers have smaller books on average than Merrill or Smith Barney brokers, and adding A.G. Edwards to the mix only diminishes their comparative average productivity -- initially at least.

Elizabeth Nesvold, a managing director with New York-based investment bank Cambridge International Partners, says the deal between Wachovia and A.G. Edwards "is about size, scale and geography; it's not necessarily about moving up market on average productivity."

Ben Phillips, head of strategic analysis at New York-based investment bank Putnam Lovell NBF Securities, agrees that Wachovia needs better penetration of U.S. hinterland markets. "They're close to being a national brokerage in that sense, but they're not one yet," he says.

But Phillips thinks that Wachovia may be doing more than just bulking up its retail brokerage and deepening its presence in the Midwest and West, as UBS did with its 2006 acquisitions of Piper Jaffray's and KeyCorp's retail brokerage business.

Despite Wachovia's insistence that its brokerage and A.G. Edwards are culturally compatible out of the gate, Phillip says they're in fact quite different. "Wachovia wishes it knew its clients needs better," he says. "A.G. Edwards has invested a lot in the delivery of holistic wealth management and they're good at staying close to their clients as sort of all-encompassing advisors, but it wishes it had access to more sophisticated private-banking and investment-banking products," says Phillips. "It's case of Wall Street wanting to be closer to Main Street and vice versa."

In any case, Wachovia needs to do something, according to Aite's Pirker. "Wachovia has not really been able to transition its brokerage business into a successful wealth-management business," he says. "Size is not everything, but assuming Wachovia will be able to master the challenges mentioned above, the firm has the potential to become the benchmark for a new breed of retail brokerage-and-banking firms."

But whether Wachovia can make a sum that's greater than its parts is, says Phillips, "the $6.8-billion question."

Prudential Financial has a 38% stake in Wachovia Securities. -FWR

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