May 31 (Bloomberg) -- Wachovia Corp. agreed to buy A.G. Edwards Inc., the 120-year-old securities firm, for $6.8 billion, doubling its sales staff as regional brokers struggle to remain independent amid declining revenue from trading stocks.

The purchase is the biggest of a U.S. brokerage firm in almost seven years. Wachovia, based in Charlotte, North Carolina, will pay A.G. Edwards holders $89.50 a share in cash and stock, or 16 percent more than yesterday's closing price, the bank said in a statement today.

The takeover will create the second-largest U.S. brokerage firm after Merrill Lynch & Co., with almost 14,800 financial advisers. St. Louis-based A.G. Edwards, founded by a friend of former President Abraham Lincoln, has fallen behind in the competition for stock trades as investors turn to Goldman Sachs Group Inc., UBS AG, Merrill and Morgan Stanley, which offer better prices.

``A.G. Edwards was a special firm, Midwest-oriented, fiercely proud of that, but we are in a different era,'' said Bruce Foerster, president of Miami-based South Beach Capital Markets.

A.G. Edwards employs 6,618 financial advisers in 742 U.S. offices and two European locations. It has about $374 billion in client assets. Wachovia Securities currently has 8,166 brokers and $773 billion of client assets.

``We knew we needed scale, we knew we needed additional products as financial services continue to migrate toward a global platform,'' A.G. Edwards Chief Executive Officer Robert Bagby said on a conference call. ``We could not provide that at A.G. Edwards. We didn't have the capital base.''

Relative Value

A.G. Edwards shares rose $11.01, or 14 percent, to $88.16 in composite trading on the New York Stock Exchange at 4 p.m. The stock advanced 22 percent this year through yesterday, making it the second-best performer on the 12-member Amex Securities Broker/Dealer Index after TD Ameritrade Holding Corp. Shares of Wachovia fell 36 cents to $54.19.

Shares of Raymond James Financial Inc. and other regional brokerages surged on speculation they may be taken over as well. Raymond James, based in St. Petersburg, Florida, gained 7.3 percent to $33.31. Stifel Financial Corp., A.G. Edwards's crosstown rival in St. Louis, climbed 8 percent, to $60.21.

Wachovia said the combination will generate about $395 million in annual after-tax cost savings, some of which will come from cutting jobs and closing offices.

Golden West

The bank plans to eliminate as many as 4,000 employees who don't have full Securities and Exchange Commission qualifications, or about a quarter of the companies' combined total, David Carroll, head of Wachovia's capital-management unit, said in an interview. Wachovia will also close about 230 brokerage offices over a three-year period, he said.

Wachovia CEO Kennedy Thompson expanded the company's reach into western states in October with the bank's largest takeover, a $24.2 billion acquisition of Golden West Financial Corp. That deal doubled the size of Wachovia's interest-rate sensitive mortgage portfolio. The A.G. Edwards purchase will help Thompson boost revenue from more predictable fee income, and sell more retail bank products and investment-banking services to A.G. Edwards's brokerage clients.

Fee Revenue

Fees will now account for about 50 percent of the bank's annual revenue, up from 45 percent, ``providing insulation'' from a narrowing in the gap between short- and long-term interest rates that has driven up Wachovia's costs to hold deposits, Goldman Sachs analyst Lori Appelbaum wrote in a note today to clients.

The acquisition will be the fifth largest in Wachovia's history and the biggest for a U.S. brokerage since Zurich-based UBS bought New York-based Paine Webber Group Inc. in November 2000, according to data compiled by Bloomberg.

Wachovia is paying about 3.2 times the book value of A.G. Edwards, less than the 3.6 times that UBS paid for PaineWebber in 2000, Banc of America Securities analyst Michael Hecht wrote in a research note today.

``We're pleased,'' said Charles Bobrinskoy, vice chairman of Ariel Capital Management, A.G. Edwards's third-biggest investor with about 2.9 million shares. ``The price is not overwhelming. It's good news, but it's not a great price.''

Wachovia's Takeovers

Traditionally a bank serving the U.S. Southeast, Wachovia predecessor First Union Corp. expanded in the securities industry by merging with Wachovia Corp. in 2001 and taking its name, then acquiring Prudential Financial Inc.'s brokerage unit in 2003.

Wachovia Securities will shift its headquarters to St. Louis from Richmond, Virginia. Daniel Ludeman, 50, will continue to serve as president and CEO of Wachovia Securities, while Bagby, 63, will be chairman.

The acquisition will add to earnings per share within the first year, excluding about $860 million in related expenses, Wachovia said. The two companies plan to complete the transaction in the fourth quarter.

``This is an attractive deal for Wachovia,'' Joseph Dickerson, an analyst at Atlantic Equities LLP in London, said in a note to clients. ``Though management have not quantified any revenue synergies, we see meaningful upside from several sources.''

Thompson said on the conference call that the bank will look to sell retail banking products and investment-banking services to A.G. Edwards's clients.

``This is truly a rare opportunity,'' said Thompson, who downplayed talk of more mergers after Wachovia's Golden West acquisition. The purchase ``will make us better able to withstand the ups and downs in equity markets.''

Prudential Support

The acquisition, which is subject to shareholder and regulatory approval, will exchange 0.9844 share of Wachovia stock and $35.80 in cash for each share of A.G. Edwards.

Wachovia is entitled to a $270 million termination fee if the deal doesn't go through, it said in a regulatory filing.

Wachovia's Carroll said in the interview he wouldn't ``speculate on someone lobbing in a higher offer'' for A.G. Edwards. ``We have the normal deal protections in here,'' he said. ``But economics is not the only driver of this deal.''

Prudential Financial, which currently owns 38 percent of Wachovia Securities, said it supports the deal. The company has a range of options regarding its Wachovia stake, Carroll said on the call, including adding more capital or ``putting'' its stake back to Wachovia.

Credit Suisse and Wachovia Securities served as financial advisers to Wachovia on the transaction, while Simpson Thacher & Bartlett LP gave legal advice. Goldman Sachs and Wachtell, Lipton, Rosen & Katz advised A.G. Edwards.

To contact the reporter on this story: Will Edwards in Washington at o4 wiedwards@bloomberg.net.

Last Updated: May 31, 2007 16:19 EDT