Wells Wins Battle over Wachovia

Oct 10, 2008

Wells Fargo & Co. has won the battle for Wachovia Corp. Citigroup Inc. has withdrawn from negotiations brokered by federal regulators that sought a compromise to the competing bids from Wells and Citigroup. The issue is likely to go to court. But New York-based Citigroup (NYSE:C) says it will no longer seek to block Wells? proposed $15.1 billion purchase of Wachovia, the third-largest bank in the Orlando area based on local deposits. Wells Fargo Chairman Dick Kovacevich welcomed the announcement and said Wells would go ahead with the proposed, all-stock purchase of Wachovia. He said he was pleased that Citigroup will not seek to stop the merger. ?We believe that is the correct and right decision for our country and our citizens and the health of our already stressed financial system, as well as our and Wachovia?s respective shareholders and stakeholders,? Kovacevich said in a prepared statement. He did not address the pending action for damages. But he did address, at least indirectly, press reports Thursday indicating that Wells and Citigroup had both found more problems in Wachovia's mortgage portfolio than expected. ?Credit teams at Wells Fargo have had an opportunity to work with their counterparts at Wachovia,? Kovacevich said. ?Given our broad-based operating expertise, and specific understanding of these individual businesses we believe we have adequately evaluated the risks inherent in the portfolios as of the time of this merger agreement.? The combined company will have $1.42 trillion in assets, $787 billion in deposits, 48 million customers, $258 billion assets under management in mutual funds, 10,761 stores, 12,227 ATMs and 280,000 employees. Citigroup still plans to seek damages for Wachovia?s decision to choose San Francisco-based Wells (NYSE:WFC) over an earlier agreement it had made to sell its banking operations to Citigroup for $2.1 billion. ?We did not seek the Wachovia transaction; Wachovia brought it to us,? Citigroup Chief Executive Vikram Pandit said in a prepared statement. ?Our focus remains on capitalizing on our global strengths. We will continue to apply the same discipline we employed in this and other recent transactions to future acquisition opportunities.? In a statement Thursday evening, Charlotte, N.C.-based Wachovia (NYSE:WB) said: ?We look forward to completing our merger with Wells Fargo, which we have always believed is in the best interest of shareholders, employees, creditors and retirees as well as the American taxpayers, and it imposes no risk to the FDIC fund. Our board made the right fiduciary decision for all of our constituents, and we look forward to consummating our merger with Wells Fargo.? Under Citigroup's agreement with Wachovia, Citigroup would have absorbed up to $42 billion of losses on a $312 billion pool of loans. The Federal Deposit Insurance Corp. would have absorbed losses beyond that. Christina Pretto of Citigroup said the bank will seek the $60 billion in damages it has claimed from the deal gone sour. That case will proceed, she said, in New York Supreme Court. She could not say when hearings might be held on Citigroup?s claims. But with Citigroup no longer trying to enjoin Wells and Wachovia from going ahead with their deal, the case will no longer be on the fast track. And cases in federal court and N.C. state courts over efforts to block Citigroup?s interference with the Wells deal appear unnecessary following Citigroup?s announcement. The Wachovia-Citigroup deal announced Sept. 29 included an exclusivity agreement that prevented Wachovia from negotiating an acquisition by anyone else. On Oct. 2, Wachovia got an offer from Wells. That deal called for the sale of the entire bank holding company to Wells for $15.1 billion. The Wachovia board approved that deal early Oct. 3. Wells had insisted there is no bar to its deal with the Charlotte bank. Wachovia spokeswoman Christy Phillips-Brown released a statement Sunday defending the Wells deal. Wachovia insisted the agreement, which involved no federal guarantees, was proper and valid. And Wachovia said it remained open to a new offer from Citigroup. Federal regulators first stood by the original deal. Citigroup went to the New York Supreme Court on Oct. 4, getting a temporary injunction blocking the Wells deal. Additional actions were filed in state and federal courts over the next two days. On Oct. 6, the banks agreed to suspend the legal battle to try and work out an agreement among all the parties. Wells has not been hit as hard as many of the nation's large banks by the mortgage crisis. And it's generally on firmer financial ground, said Tony Plath, who follows the banking industry at UNC Charlotte's Belk College of Business.. He believes one reason federal regulators were so eager to pair Citigroup with at least a part of Wachovia was to shore up the New York bank and give the markets confidence about its operations. And Plath said Wells has better retail banking operations than Citigroup. Citigroup has been a large investment bank that got into branch banking to strengthen its capital base with deposits, which are an inexpensive source of cash for its investment-banking operations. Wells and Wachovia both have investment-banking arms. But both are primarily branch banks. If Wells combines with Wachovia?s 3,300 branches across the nation, it would rival, if not surpass, Bank of America Corp. (NYSE:BAC) as the country?s largest retail bank. Analysts generally trace Wachovia?s troubles to its 2006 purchase of Golden West Financial Corp., a thrift based in California. That deal gave Wachovia a coast-to-coast franchise similar to, though smaller than, Bank of America. Golden West was a major player in a class of adjustable-rate mortgages that have proved particularly troublesome in the credit crisis. Wachovia had about $122 billion, or 70 percent of its mortgage portfolio, in those mortgages, analysts recently said. Wachovia?s troubles became acute on Sept. 25, after the Federal Deposit Insurance Corp. took over Washington Mutual Inc. Fearing Wachovia might be the next big bank to fail, depositers began a ?silent run? on Wachovia, moving deposits out and drawing down lines of credit. Wells and Citigroup both participated in negotiations with federal regulators in late September on buying out Wachovia. On Sept. 26, regulators threatened to close down Wachovia the following Monday unless it agreed to be bought by another bank, according to a Wachovia court filing. Wells dropped out, and Wachovia reached a preliminary agreement with Citigroup. Wachovia has 63 branches, nearly $4.82 billion in deposits and a market share of 15.29 percent, according to the latest report from the FDIC.
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