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The fight for Wachovia
Citigroup warns of legal challenge, but analysts doubt it will be successful
Journal Illustration by Richard Boyd II
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Published: October 4, 2008
For the second time in seven years, Wachovia Corp. is the prize at the center of a heated -- and potentially lengthy -- financial dispute.
This time, the fight is between Wells Fargo & Co. and Citigroup Inc.
In a stunning twist in an unprecedented week in North Carolina banking, Wells Fargo entered the fray yesterday with a $14.8 billion stock offer for Wachovia that doesn't require government assistance. The offer initially was worth $15.1 billion, but Wells Fargo's share price closed down slightly yesterday.
On Monday, Citigroup made a $2.2 billion offer for Wachovia's banking divisions, along with $95 billion in assumed debt and loan losses. Its offer requires significant government assistance.
The possibility of a legal battle and bidding war has some shareholders hoping that it will provide salve for the open wound in their investment portfolios and make the collapse of Wachovia a little more palatable.
During the bitter 2001 contest for Wachovia between First Union Corp. and SunTrust Banks Inc., in which both sides filed lawsuits, the banks sweetened their offers to woo shareholders.
Analysts cautioned yesterday that shareholders should not count on a much higher offer than Wells Fargo's $7 a share.
By comparison, Citigroup's offer is worth $1 a share.
Analysts also said they are not sure whether Citigroup's threat of legal action -- to enforce an agreement for exclusive negotiations with Wachovia -- will prove effective.
"I'm sure there will be a fair amount of legal wrangling over how Wells Fargo got back involved with Wachovia," said Michael Nix, who manages shares of Wachovia for Greenwood Capital Associates LLC of Greenwood, S.C.
Wells Fargo management said that the bank ended the talks for Wachovia on Sunday primarily because it wasn't comfortable with the speed of the negotiations.
"Any deal of this size, or even exploring, is either very difficult or impossible to do in a short time frame," said Dick Kovacevich, the chairman of Wells Fargo. "We will not do any deal that we are not comfortable with the financial and addressing shareholder value."
Citigroup was apparently unaware that talks had been revived with Wells Fargo. Citigroup ran a full-page ad yesterday in area newspapers, including the Winston-Salem Journal, about its plans for Wachovia.
Nix said he doubts that Citigroup can afford to raise its offer for Wachovia.
"If you count Wachovia's securities and asset-management subsidiaries as worth $2 to $5 a share, Wells Fargo's bid still is worth more. And Citi's deal is predicated on assistance from the FDIC."
The Federal Deposit Insurance Corp. weighed in on the dispute with a brief statement, saying that it "stands behind its previously announced agreement with Citigroup."
U.S. Rep. Robin Hayes, R-8th, said he is wary of the FDIC's motives regarding Wachovia. He said that the regulator may favor the bank, as an institution, over the interests of shareholders.
"Like everyone in North Carolina, my goal for Wachovia is to achieve the best outcome for employees, shareholders, customers and the community," Hayes said. "If the FDIC is going to push against that outcome, then we are ready to push them back -- and it's going to be a hard push."
Nix said that even if the exclusivity agreement is legally binding, the Citigroup deal still requires approval from Wachovia's shareholders, of which 72 percent are institutional investors.
Wells Fargo said it has the commitment of nearly 40 percent of Wachovia's preferred shares.
"Management will vote shares they own or control, institutional investors usually side with management, and that should be more than enough to pass the merger," said Robert Bliss, a business professor at Wake Forest University.
A combined Wells Fargo and Wachovia would have the largest deposit base in the country at $787 billion. The combined bank would have a strong presence in Charlotte, including serving as the headquarters for the East Coast retail, commercial and corporate-banking business. Wells Fargo is based in San Francisco.
"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," said Robert Steel, the chief executive and president of Wachovia.
"The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary, and this combination creates great potential for sustained stability and growth."
There were no immediate integration details provided, including potential job cuts in a proposed Wells Fargo deal. The banks have overlapping branches in several states, but not in the Carolinas.
"Our strategy is to work with whoever is successful to make the business case for jobs in Winston-Salem," said Gayle Anderson, the chief executive and president of the Greater Winston-Salem Chamber of Commerce. Wachovia has about 3,000 employees in Forsyth County in its wealth-management division, information-technology department and in its general bank.
Kovacevich said that Wells Fargo's offer "represents a compelling value for Wachovia shareholders."
"We understand the opportunities involved here," Kovacevich said. "It provides superior value compared to the previous offer to acquire only the banking operations of the company.
"Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial-services companies."
Citigroup responded to the Wells Fargo bid with a sharply worded statement rebuking the two banks.
"Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia," Citigroup said. "Citi has demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the exclusivity agreement. Citi has substantial legal rights regarding Wachovia and this transaction."
Kovacevich said after the Citigroup response was issued that he is confident that regulators will approve the Wells Fargo deal, and that his bank had a definitive agreement with Wachovia and Citigroup didn't.
The best that Citigroup may be able to accomplish with legal action is negotiating a break-up fee from Wachovia or Wells Fargo, said Peter Tourtellot, the managing director of Anderson Bauman Tourtellot Vos & Co., a turnaround-management company from Greensboro.
Mike Mayo, an analyst with Deutsche Bank, said that the proposed deal for Wachovia carries some credit risk to Wells Fargo.
Wells Fargo said it will record Wachovia's credit-impaired assets at fair value, but it provided no estimate of what that would be.
In its planned takeover of Wachovia, Citigroup said it would write down those assets by $30 billion at the close of the deal and be responsible for the next $12 billion in losses over a period of three years. If the total exceeded that, the FDIC would cover the difference.
Wells Fargo plans to issue as much as $20 billion of stock, primarily common stock, to maintain a strong capital position.
"Wells gets more exposed to the U.S. consumer and housing, and has no government protection for losses in Wachovia's option ARMs if home prices decline more than expected," Mayo said. "Nevertheless, this is the transaction that we thought should have been done and makes sense.
"The biggest loser, in our view, is Citi," Mayo said. "We suspect that there is no break-up fee since its agreement with Wachovia was not finalized."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
■ The Associated Press contributed to this article.
WELLS FARGO SWOOPS AND SCOOPS WACHOVIA
By Eric Dash and Ben White
The New York Times
The bold gambit that could reorder American banking began with the chirp of a cell phone in Charlotte, N.C.
It was just after 9 p.m. on Thursday, and Robert K. Steel, the chief executive of Wachovia Corp., listened to startling news on his phone as he stepped off a plane from New York: Wells Fargo & Co. was plotting to wrest his stricken bank from Citigroup.
Only four days earlier, assisted by federal regulators, Steel had agreed to sell Wachovia to Citigroup for a fire-sale $1 a share. Wells Fargo had walked away, and Richard M. Kovacevich, its chairman, had called to wish Steel good luck.
But now Kovacevich was on the line with a far sweeter deal, one worth about $15 billion — seven times what Citigroup was offering.
The call set in motion another game of brinkmanship in a year of extraordinary Wall Street showdowns. At stake is the control of one of the nation’s largest retail banking businesses — a prize that will transform the winner into one of the few giants to emerge from the wreckage of the industry. For Wells Fargo, which is based in San Francisco, Wachovia would expand its reach across the nation. Citigroup, which is based in New York, wants the bank for its large retail operations.
The battle has also drawn in federal regulators, who had pushed the teetering Wachovia into the arms of Citigroup but are seeking to limit taxpayer exposure. The reversal might make it more difficult for the government to broker future rescues. Citigroup is weighing a lawsuit that would claim a breach of contract.
The cast of characters include some of the most powerful executives in the industry: Vikram S. Pandit at Citigroup; Steel, a former confidante of Henry M. Paulson Jr. at both the Treasury and Goldman Sachs; and Kovacevich, a legendary banker and former Citigroup executive who, until now, has largely shunned the empire-building practiced by his rivals.
In the wings is Warren E. Buffett, the largest shareholder of Wells Fargo, who has emerged as the go-to financier for several prominent companies that have come under siege during the credit crisis.
For Steel, the latest chapter began Thursday night with the call from Kovacevich, who told him to consider the new offer or he would go public with it on Yesterday morning.
About 10 minutes later, Steel’s BlackBerry buzzed. It was a merger proposal from Wells Fargo, bearing the approval of that bank’s board.
Wachovia executives were stunned. The bank had not heard from Wells for days, and had been working nonstop to clinch the deal with Citigroup.
Steel called one of his Wall Street advisers, who was at home watching the vice presidential debate. “Fasten your seat belt,” Steel told him.
At about 11:30 p.m., Steel convened an emergency meeting of Wachovia’s board, where he described the new offer and a serious potential roadblock. Accepting might involve breaking an agreement with Citigroup that appeared to block a rival bid.
After two hours of debate, the board concluded that Wells Fargo’s offer was too good to pass up. Wells Fargo was offering to buy all of Wachovia, whereas Citigroup had only proposed buying part of it. Also, Wells, unlike Citigroup, was not seeking government support. And then there was the money.
The board voted in favor of the offer, and, at approximately 2:15 a.m., Steel placed an awkward call to Pandit at Citigroup. The deal, he told him, was off.
Fifteen minutes later, Pandit alerted his lawyers and top lieutenants and summoned them to Citigroup’s Park Avenue headquarters to prepare for battle. Groggy-eyed, one Citigroup executive forgot his corporate ID.
In the early hours of Yesterday morning, Wachovia executives learned that Sheila C. Bair, the head of the Federal Deposit Insurance Corp., which had pressed for the Citigroup deal, would not stand in the way of the new agreement with Wells Fargo, as it would involve no risk to taxpayers.
“Neither Chairman Bair nor any person at the FDIC in any way initiated or solicited this bid from Wells Fargo,” an FDIC spokesman said Yesterday. “When asked for our views, we said that we would not object” because the agency does not have the authority.
Other federal regulators said that they would not block Well Fargo’s offer while they reviewed the proposal.
By Yesterday morning, the Fdic said it stood behind the original deal with Citigroup. Bankers working on the deal were mystified by the statement, and said they had assumed the government would ultimately back a deal that did not involve public money.
News of the deal reached Wall Street trading desks at 7 a.m. A few hours later, Wells Fargo went public with its offer. Citigroup, its stock sinking, quickly fired back.
The Wells-Wachovia deal is “in clear breach” of an exclusivity agreement between Citigroup and Wachovia, Citigroup said. Citigroup claimed it had been irreparably harmed and was demanding that Wachovia and Wells Fargo halt their proposed transaction, and that it follow through with the Citigroup-Wachovia deal.
Kovacevich told investors in a conference call Yesterday morning that he was confident the deal would go through. “We think this deal is solid,” he said.
When an analyst asked Steel if he could discuss whether Wachovia had a binding agreement with Citigroup, he replied with one word: No. But Buffett, in an interview on CNBC, endorsed the Wells Fargo bid on Yesterday afternoon, calling it superior to Citigroup’s offer.
Well Fargo’s reversal came after a little-noticed move on Tuesday by the Internal Revenue Service, which restored tax breaks for banks that take big losses on bad loans inherited through acquisitions. The rule had been viewed as a impediment to bank consolidation. With Wachovia, Wells Fargo estimates that it will absorb about $74 billion in losses.
The marketplace passed swift judgment on Yesterday. As its hold on Wachovia appeared to slip away, Citigroup stumbled in the stock market. Its shares fell nearly 18.5 percent, while shares of Wells Fargo slipped just 1.7 percent. Wachovia was the big winner. Its shares soared nearly 59 percent.
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