NEW YORK: In a stunning reversal, Wachovia said Friday that it planned to be acquired by a rival bank, Wells Fargo, for about $15.1 billion in stock.
The announcement came four days after Citigroup believed that it had cemented a deal with Wachovia to buy most of its banking operations for $1 a share, or $2.2 billion, in a deal brokered by federal regulators. With Wachovia on the brink of collapse, the government agreed to cover any losses above $42 billion, an indication of the urgency of regulators to get a deal done.
But Wachovia has now apparently rejected Citigroup in favor of Wells Fargo in a deal that calls for Wells Fargo to buy all of Wachovia for $7 a share and requires no assistance from the federal government. Wachovia customer deposits would be protected in both deals.
Still, the agreement requires the approval of Wachovia shareholders and regulators. The Federal Deposit Insurance Corp., which brokered the Citigroup-Wachovia deal, said Friday that it “stands behind its previously announced agreement with Citigroup.”
Officials from the Federal Reserve, the Treasury Department and the Office of the Comptroller of the Currency were all involved in original Citigroup-Wachovia deal. It is unclear how they will respond.
Citigroup executives learned that its deal was being scuttled on Friday morning after Wachovia’s advisers stopped taking their telephone calls, said people briefed on the transaction. The move left Citigroup executives fuming, and they are weighing their legal options.
Citigroup said the Wells-Wachovia deal was “in clear breach” of an exclusivity agreement between Citigroup and Wachovia. Citigroup demanded that Wachovia and Wells Fargo halt their proposed transaction and that Wachovia follow through with the original deal.
If Citigroup decides to take legal action, its case would have some striking parallels to the landmark case between Pennzoil and Texaco in the mid-1980s. The two sides engaged in a nasty, long-running legal battle when the Texaco oil company swooped in with an offer for Getty Oil after it appeared to have landed in Pennzoil’s arms. That case led to more than $10.5 billion in damages.
In Friday afternoon trading in New York, shares of Wells Fargo were up $3.21, or 9.1 percent, at $38.37. Citigroup shares were down $1.91, or 8.5 percent, at $20.59. Wachovia shares were up $3.03, or 77.5 percent, at $6.94.
Under the agreement that has been approved by directors of each company, Wachovia shareholders would receive 0.1991 shares of Wells Fargo stock in exchange for each share of Wachovia stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on Thursday, is valued at $7 a share. To pay for the deal, Wells Fargo will have to raise up to $20 billion in capital by issuing new common shares.
Wells Fargo and Wachovia executives asserted that their new deal was better for shareholders and taxpayers. “This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” said Wachovia’s chief executive, Robert Steel.
Under the Citigroup deal, Wachovia would retain parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises, and Citigroup would receive the banking subsidiaries. In addition, the Federal Deposit Insurance Corp. had agreed to guarantee losses above $42 billion in exchange for preferred stock and warrants worth about $12 billion.
Wachovia’s deal with Wells Fargo will further concentrate Americans’ bank deposits in three banks: Bank of America, JPMorgan Chase and Wells Fargo. Together, those three would dominate the industry, and given their size, they would probably come under greater scrutiny from federal regulators.
For Wells Fargo, a deal would extend its reach east of the Mississippi River, creating a coast-to-coast branch network to compete with Bank of America and now JPMorgan Chase.
Wells and Wachovia have been the subject of merger speculation for years. But Wachovia, like Washington Mutual, has been hobbled by bad mortgages, which had made a merger more urgent and had prompted federal regulators to push for a quick sale.
With a big presence along the California coast, Wells Fargo has racked up big losses on mortgages and credit card loans as the housing market has melted down. But it has not been crippled by the bust like many of its big competitors, and maintained relatively strong finances.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The effect will be felt on Main Street, Wall Street and in Washington. While the tie-ups might restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks might be unable to compete with these behemoths.