Why UWM Holdings Stock Was Getting Mashed This Week

Mortgage company UWM Holdings Corporation (NYSE: UWMC), the indirect parent company of United Wholesale Mortgage, announced the first major acquisition in its history earlier this week.

Many investors were unhappy about this, however, and according to data compiled by S&P Global Market Intelligence, these folks were collectively trading UWM's stock down by nearly 9% week-to-date as of mid-session trading Friday.

Two into one

On Wednesday, UWM announced it had agreed to acquire mortgage real estate investment trust (mREIT) Two Harbors Investment. The deal is valued at $1.3 billion, UWM said, and will be paid for entirely in the company's stock.

The acquirer, a wholesale mortgage lender, added that the deal "represents a powerful alignment of two highly complementary organizations -- positioning the combined company for accelerated growth and enhanced outcomes for UWM, brokers, consumers, and stockholders."

UWM was surely enticed by Two Harbors's RoundPoint Mortgage Servicing subsidiary, which is a mortgage servicing rights (MSR) business. At a stroke, having RoundPoint under its umbrella will come close to doubling its existing MSR portfolio (to around $400 billion, according to UWM).

Not exactly a bargain-basement price

While it's usually advantageous to pay for a pricey acquisition with stock rather than cash, $1.3 billion is a substantial sum, regardless -- currently, UWM's market cap is under $8 billion, while its latest annual revenue figure was under $2.5 billion. So it isn't surprising that investors were skittish about the deal.

However, if the company can smoothly and successfully integrate Two Harbors into its own business, it might just prove the bears wrong. Yes, Two Harbors is a different sort of mortgage company than UWM, but the two exist in the same sphere, and I think the synergistic effect could be strong in the combined entity. I believe UWM's potential will be nicely enhanced once this transaction closes.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.