Wells Fargo, Citigroup fighting for Wachovia; FDIC reviewing offers
Posted on Saturday, October 4, 2008
NEW YORK — A battle broke out Friday for control of Wachovia, as Wells Fargo agreed to pay $ 15. 1 billion for the struggling bank, while Citigroup and federal regulators insisted that Citi’s earlier and lower-priced takeover offer go forward.
The surprise announcement that Wachovia Corp. agreed to be acquired by San Franciscobased 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.
Only four days earlier, Citigroup Inc. agreed to pay $ 2. 1 billion for Wachovia’s banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.
The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks ’ regulators “to pursue a resolution that serves the public interest.”
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.
Barring legal action, the future of Wachovia will be determined by the bank’s shareholders and regulators, which both have to approve a final deal.
It was clear which they preferred Friday, as Wachovia shares climbed 61 percent.
The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay’s financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn’t been rejected yet, he said. “But at the same time, they are saying they are reviewing all proposals.”
By law, he said, the FDIC is required to find the leastcostly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.
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.
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.”
Under Wells Fargo’s deal, Wachovia shareholders would receive 0. 1991 shares of Wells Fargo for every share of Wacho- via 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 on Sept. 26, the last trading session before the deal with Citigroup was announced.
“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.
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 email 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.”
The f ight for Wachovia comes at 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.
It also comes at a time of unprecedented government intervention in the financial markets.
Wells Fargo may have decided to make a move as the passage of the government’s financial bailout plan seemed imminent, said Donn Vickrey, co-founder and chief analyst at Gradient Analytics.
“At the time they made the decision, it looked a lot more likely that it would pass,” he said.
“You have the possibility of offloading these loans at a price that is higher than current values.”
Wachovia shares rose $ 2. 30, or 58. 8 percent, to close Friday at $ 6. 21. Wells shares fell 60 cents to $ 34. 56, and Citigroup shares dropped $ 4. 15, or 18. 4 percent, to $ 18. 35. Information in this article was contributed by Jennifer Malloy Zonnas, Martin Crutsinger and Marcy Gordon of The Associated Press.
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