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Posted: Thursday, Oct. 02, 2008

Shareholders talk of fighting Citi deal

By Christina Rexrode and Jen Aronoff
Published in: Business

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The bargain-basement price that Citi is paying for the bulk of Wachovia has plenty of the Charlotte bank's shareholders threatening to vote against the takeover.

Charlotte businessman Mark Beck was so upset he started a Web site, www.wachoviavoteno.com, to urge fellow shareholders to register their displeasure.

“I'm mad as hell,” said Beck, 52, who has had Wachovia shares in his family for 60 years. “That deal is so abusive. … They have apparently made a bad decision or were forced into it.”

He and others believe that if they can vote down the deal, they can force Citi to offer a better price, or perhaps prompt Wachovia to find a way to survive on its own. But experts in corporate dealmaking say that strategy carries risks, given that federal regulators brokered the deal. If shareholders torpedo the Citi deal, the government could force an agreement in a way that leaves shareholders with nothing.

Institutional investors, such as pension and mutual funds, hold most of the stock, and their views in large part will determine the outcome. No date has been set for a vote.

Wachovia, struggling under the weight of rising mortgage defaults, shocked much of the financial world when it said it would sell most of its operations to Citi, the New York-based financial services giant. The agreement was completed early Monday, just hours before the stock market opened, after a frantic weekend of deal-making. The government's involvement suggests Wachovia was pressured into selling itself.

Citi said Monday that it will pay the equivalent of about $1 per share. That's a pittance, considering that Wachovia closed at 10 times that amount on Friday, say many investors who watched their savings drain away in a weekend.

“How can you just come out (and) buy a part of a company that's as large as Wachovia's banking is … for a dollar a share?” said Richard DeLello, 64, a Wachovia shareholder and former employee from suburban Philadelphia. “I know there's offsetting losses, but I think the shareholders can get a little better deal. A dollar? That's symbolic. What's wrong with $5 a share?”

Citi won't be paying individual shareholders; instead, it will pay $2.16 billion in stock to Wachovia, the company. Shareholders will be left owning a shadow of the former bank – the brokerage and asset management businesses that Citi didn't want.

Melanie Slade, 45, a former Charlotte resident who lives in Knoxville, Tenn., has more than 400 shares that date to when she worked for First Union in the early 1990s. She's unsure of how to vote.

“I know the losses are just huge, and my guess is they had no option,” she said. “The question is, if you vote no, then what? What do I have, a penny stock?”

Institutional investors own 73 percent of Wachovia shares, and it's still unclear where they stand on the proposed deal. Several major shareholders contacted this week declined to comment, saying they do not discuss deals related to their holdings, especially before a shareholder vote. In addition, Institutional Shareholder Services, which advises large investors on how to vote, does not release its voting recommendations until a shareholder meeting is scheduled.

Fighting a company-backed recommendation can be expensive and difficult. The odds of defeating the Citi takeover are especially slim, according to several experts in corporate governance.

“When the federal government is behind a deal, that's a pretty tall hill to climb,” said Howard Sherman, chief executive of GovernanceMetrics International in New York.

Even if shareholders are able to reject the deal, that move could backfire.

Wachovia was headed toward insolvency this weekend until Citi, with the help of the FDIC, extended it a lifeline. Without Citi or another buyer, the FDIC would be on the hook for Wachovia's deposits, so it's loath to let the deal fall through.

Tony Plath, a finance professor at UNC Charlotte, suspects that if shareholders vote down the deal, the government would declare Wachovia insolvent, seize control of it, and immediately sign a deal with Citi – though perhaps without the $2.16 billion for the remnants of the company, which shareholders still own. When a bank fails, its shareholders generally get nothing.

But shareholders who plan to vote against the deal say that doing so would not force Wachovia to fail but rather prompt Citi to offer a higher price. They cite the relative success of their counterparts at Bear Stearns, who complained when JPMorgan Chase offered $2 per share for the failed investment bank. They forced JPMorgan to agree to $10 per share – though that was still paltry compared with Bear Stearns' previous highs.

Some hope that if the deal were to be defeated, San Francisco-based Wells Fargo would step back into the bidding. Wells Fargo had reportedly been willing to pay a higher price than Citi, before backing out at the last minute over concerns about a loan portfolio.

Still others hope that, if Wachovia defeated a Citi takeover, it would be able to save itself by taking advantage of the $700billion bank bailout that could be passed in Congress.

Chris Cernich, a senior research analyst at Proxy Governance, which advises institutional investors, acknowledged that Wachovia's shareholders are sure to be upset. But, he pointed out, they'll still hold shares in a new, slimmed-down Wachovia. And even though it has lost its crown jewel – the retail bank – it will still have a major retail brokerage, minus its troublesome portfolio of nontraditional mortgages.

Though the equivalent of $1 per share is a pittance – it was trading around $50 a year ago – “who knows what it was worth? It's possible it was worth a negative amount,” Cernich said.

Wachovia said it will provide details to shareholders to help them evaluate the transaction but didn't disclose the timing.

Citi says the deal is contingent on its closing by Dec. 31.

Staff writer Rick Rothacker contributed.

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