Video: Wells Fargo upends Citigroup-Wachovia deal

updated 10/3/2008 4:17:12 PM ET 2008-10-03T20:17:12

A battle broke out for control of Wachovia Friday as Wells Fargo signed a $15.1 billion agreement to buy the Charlotte, N.C.-based bank, while Citigroup and the federal regulators backing its earlier deal insisted that Citi’s takeover bid go forward.

The surprise announcement early Friday by Wachovia Corp. that it had agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal — without government assistance — upended what had appeared to be a carefully examined arrangement and caught regulators off guard.

The Citigroup deal, announced Monday, would have been done with the help of the Federal Deposit Insurance Corp., but the Wells deal would be done without it. The head of the FDIC said the agency is standing behind the agreement it made with Citigroup Inc.

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Under Wells Fargo’s deal, Wachovia shareholders would receive 0.1991 shares of Wells Fargo for every share of Wachovia stock they own, valuing Wachovia at about $7 per share. This is a nearly 80 percent premium over the stock’s Thursday closing price of $3.91. Shares closed at $10 last Friday, the last trading session before the deal with Citigroup was announced.

The fight for Wachovia comes in a turbulent time for banks and financial firms as they grapple with the ongoing credit crisis, which led to the recent bankruptcy of Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc.

Wachovia’s board approved Wells Fargo’s offer late Thursday. The deal is still subject to Wachovia shareholder and other regulatory approvals. Wells Fargo said it expects the deal to close by year-end.

“This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” Robert Steel, Wachovia’s president and chief executive, said in a statement.

Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday the agency “stands behind its previously announced agreement with Citigroup.”

The FDIC will review all proposals and work with the regulators of Wachovia, Citigroup and Wells Fargo “to pursue a resolution that serves the public interest,” Bair said.

Bair noted in her statement that “under either proposal, all banking customers of the merged institutions would be fully covered with no disruptions in service.”

The Federal Reserve, which has regulatory oversight of the three big banks, said it hasn’t had time to review the proposed sale of Wachovia to Wells Fargo but will work to ensure that all creditors and depositors of Wachovia are protected.

In a statement, the Fed said while it and the Treasury Department’s Office of the Comptroller of the Currency had conducted an extensive review of the Wachovia-Citigroup deal, it had not yet had time to review the new offer from Wells Fargo.

The Fed said regulators will be working with Wachovia and Wells Fargo “to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.”

In connection with the agreement, Wachovia is issuing Wells Fargo preferred stock representing 39.9 percent of Wachovia’s voting power. This increases the probability that the transaction gets consummated quickly and that Wells Fargo will receive a positive shareholder vote, Wells Fargo said.

Wells Fargo expects to record merger and integration charges of about $10 billion. The bank expects cost-savings of about $5 billion annually, with the majority of cost savings achievable by the end of 2010. No government assistance is part of the deal terms.

Wells Fargo has estimated that the lifetime losses on Wachovia’s loan portfolio will total $74 billion. The bank said it expects to incur the majority of credit costs over the next two years, and for the transaction to add meaningfully to earnings after that.

In its planned takeover of Wachovia, Citigroup said it would assume $53 billion worth of debt and agreed to absorb up to $42 billion of losses from Wachovia’s $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.

“Wells’ deeper and more considered due diligence has probably revealed fewer risky assets and a larger number of higher valued assets than originally thought,” said Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth College in an e-mail to The Associated Press. “Although it is still too early to tell, this could presage a significant shift in market sentiment toward the value of companies such as Wachovia, and may suggest that there has been an overreaction in the downdraft that we saw in the past few weeks. It is a huge shot in the arm for market confidence. It is also a signal that market forces are capable of resolving some aspects of the crisis without undue Congressional, and hence, taxpayer, intervention.”

Wells Fargo plans to issue up to $20 billion of stock, primarily common stock, to maintain a strong capital position.

Charlotte will be the headquarters for the combined company’s East Coast retail and commercial and corporate banking business. St. Louis will remain the headquarters of Wachovia Securities.

Additionally, three members of the Wachovia board will join the Wells Fargo board when the transaction is completed.

The combined company will have total deposits of $713 billion and more than 6,500 locations — more than any other bank in the U.S.

In terms of total assets, a combined Wells Fargo-Wachovia would have $1.37 trillion in estimated pro forma assets as of the end of this year. As of June 30, Bank of America Corp. had $2.72 trillion in assets including those of Merrill Lynch & Co., which it is acquiring. Citigroup had $2.10 trillion and J.P. Morgan Chase & Co. had about $1.78 trillion, including WaMu’s assets.

“This is the transaction that we thought should have been done and makes sense,” wrote Deutsche Bank analyst Mike Mayo in a note to clients. “The biggest loser, in our view, is Citi, and we suspect that there is no break-up fee since their agreement with Wachovia was not finalized.”

The failure of the government’s proposed $700 billion bailout for financial institutions Monday afternoon had cast doubt on whether Citigroup would be able to rid itself of some of Wachovia’s bad debt.

While the proposal would have prevented most banks from profiting on the sale of troubled assets to the government, an exception would have been made for assets acquired in a merger or buyout.

That would have allowed Citigroup to sell Wachovia’s distressed mortgage-related assets to the government for a profit.

A revised version of the bailout plan was passed on Wednesday by the Senate and by the House in a second vote on Friday afternoon. The plan still centers on enabling the government to spend billions of dollars to buy bad mortgage-related securities and other devalued assets from troubled financial institutions.

Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That’s the most write-downs of any U.S. bank.

While Wells Fargo has logged three straight quarters of profit declines, the bank has been weathering one of the nation’s worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector.

That means it hasn’t been forced to take the huge number of write-downs that other banks have needed. Under Stumpf the bank also has continued raising its dividend at a time when many other financial institutions are slashing theirs to preserve capital.

John G. Stumpf, Wells Fargo president and CEO, took over in June 2007 — near the start of the credit crisis — from Dick Kovacevich, who remains chairman. Both men worked since the 1980s at Norwest Corp., Wells Fargo’s predecessor.

Wachovia has been a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.

This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs — mostly in its mortgage business — and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.

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