In a stunning reversal, the Wachovia Corporation said early Friday that it planned to be acquired by a rival bank, Wells Fargo & Company, 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 the Citigroup deal in favor of Wells Fargo. That deal 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. In an announcement Friday, the Federal Deposit Insurance Corporation, which brokered the Citigroup-Wachovia deal, said that it "stands behind its previously announced agreement with Citigroup."
Officials from the Federal Reserve, Treasury Department and the Office of the Comptroller of the Currency were all involved in original Citigroup-Wachovia deal. The Fed and the comptroller’s office said in a joint statement that they had not yet reviewed the proposal "and the issues that it raises."
Citigroup executives learned that its deal was being scuttled early Friday morning after Wachovia’s advisers stopped taking their phone calls, according to people briefed on the transaction. The move left Citigroup executives fuming, and they are weighing their legal options.
In a statement Friday, Citigroup said that 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 the Pennzoil and Texaco oil companies 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 the Getty Oil company after it appeared to have landed in Pennzoil’s arms. That case led to more than $10.5 billion in damages.
Shares of Wells Fargo rose 5.5 percent, to $37.12 , in morning trading on Friday. Citigroup shares fell 8 percent. Wachovia shares rose 69 percent, to $6.62 a share.
Under terms of the agreement, which has been approved by directors of each company, Wachovia shareholders will 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.
Both Wells Fargo and Wachovia executives stressed that the 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," Wachovia’s chief executive, Robert K. Steel, said.
Richard M. Kovacevich, the chairman of Wells Fargo, highlighted that his offer keeps the Wachovia fully in tact.
"Wachovia’s brokerage and asset management businesses, which would have been left behind in the prior proposal," Mr. Kovacevich said, "are tightly interwoven with Wachovia’s core banking business — and this agreement avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia’s team members and customers."
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 F.D.I.C. 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 the hands of three banks: Bank of America, JPMorgan Chase and Wells Fargo would control more than 30 percent of the industry’s deposits. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
For Wells Fargo, a deal will extend its reach east of the Mississippi River, creating a coast-to-coast branch network that will compete with Bank of America and now JPMorgan Chase. It would also give Wells Fargo an important foothold in New York, Florida, and other big markets along the Atlantic Coast, ramping up its ability to sell mortgages, checking accounts and other consumer loans.
On the surface, Wachovia and Wells Fargo, the country’s fourth- and fifth-largest banks by assets, appear to be almost mirror images of each other. Both were oversize regional banks that never seemed to have national ambitions. Both emphasized consumer banking over lending to big institutional clients. And both had strong sales culture and a focus on nuts-and-bolts operations.
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. Wachovia’s share price has plunged nearly 74 percent this year.
With a big presence along the California coast, Wells Fargo has accrued 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.
Wells Fargo kept its lending standards relatively high, even as other big mortgage lenders barreled into California as the housing market boomed. It held many of its loans, rather than packaging and selling them to outside investors. And without a big investment bank, it never suffered the huge write-offs of its big Wall Street rivals. It also bolstered its results with aggressive accounting.
Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.
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 impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may 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 may be unable to compete with these behemoths.
But a Wells-Wachovia deal also could shift the center of power in the banking industry further from New York. JPMorgan, which bought Seattle-based Washington Mutual, is based in Manhattan. But Bank of America, which recently acquired Merrill Lynch, is based in Charlotte, N.C. And Wells Fargo, which is seeking to buy Wachovia, also based in Charlotte, is based in San Francisco. In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to people close to the situation.
Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interest cooled.
