Federal regulators are pressing Wachovia Corp. to sell itself, and Citigroup and Wells Fargo have emerged as the leading candidates to buy the Charlotte bank amid intensifying talks, according to reports late Sunday.
Even as Congress unveiled a bailout plan to help banks offload troubled assets, Federal Reserve and U.S. Treasury Department officials were pushing for a more dramatic solution for Wachovia, the New York Times reported. A sale would mean that an N.C. institution that became a nationwide banking giant by buying up other banks would be taken over itself. That would be a blow to Charlotte's status as a banking center and pose the possibility of layoffs among the bank's 20,000 employees here.
The possibility of a takeover surfaced Friday as Wachovia's shares plunged 27 percent following the failure of Washington Mutual a day earlier. The Seattle-based savings and loan's demise raised concerns that Wachovia may face bigger losses in its troubled Pick-A-Payment loan portfolio, amid general worries about weaker players in the financial industry. Wachovia officials have stressed the bank has a large and stable deposit base and strong core businesses.
If Citi or Wells Fargo pair with Wachovia, it would create a third financial behemoth to join Charlotte's Bank of America and New York's JPMorgan Chase, which have been taking advantage of troubled financial times by buying weakened rivals. The Times said the bidders are unlikely to offer Wachovia investors more than a few dollars per share, below Friday's $10 closing price. It's possible Wachovia might be carved up, with the company's large retail bank the main prize, the Times said. Wachovia CEO Bob Steel and Wachovia's top dealmaking executive, David Carroll, were leading talks in New York this weekend, the Times reported.
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While federal officials are involved in the talks, the government is leery of providing any direct financial assistance. After aiding JPMorgan's purchase of investment bank BearStearns this spring, officials have balked at propping up Lehman Brothers and Washington Mutual. Citi and Wells are pressing regulators to seize Wachovia and let them buy the bank's assets and deposits, as JPMorgan did with Washington Mutual. That scenario would likely mean Wachovia shareholders and bondholders would also be big losers.
The timing of any possible deal is uncertain. Just a weekend ago, Wachovia appeared headed toward a merger with Morgan Stanley, but the talks apparently fizzled last week after the New York investment bank converted to a bank holding company and lined up an investment from a Japanese bank. Other banks also have been seen as possible bidders, including Banco Santander of Spain and Toronto Dominion of Canada.
Wachovia spokeswoman Christy Phillips-Brown said the bank doesn't comment on merger speculation. Spokespeople for the other banks could not be reached.
The $700 billion government bailout is believed to be a factor in any takeover because potential bidders don't want to be stuck with the bank's $122 billion in Pick-A-Pay loans, which Wachovia inherited in its 2006 Golden West Financial acquisition. The bailout could provide a way to offload these distressed mortgages, which have contributed to Wachovia's nearly $10 billion loss in the first half of this year.
Analyst Nancy Bush of NAB Research in New Jersey said restrictions on executive compensation added to the bailout plan, including a ban on so-called “golden parachutes” for departing executives, could be a deterrent to banks who want to participate. “I don't see it as a good thing as far as encouraging mergers,” she said.
On Wall Street, Bush did not expect an overwhelmingly positive response to the bailout plan, but she said it's possible the selloff in Wachovia's stock could subside. The bank's stock ticked up late Friday after word leaked of a possible sale. “If things calm down because of the bailout plan, (Wachovia) can proceed at a more reasonable pace and not undertake a shotgun deal,” she said.
Sunday's news about the bailout plan will likely push Wachovia's stock price a little higher today, said Steven Mann, finance professor at the University of South Carolina. He thinks the bank is technically able to stay independent, but “the momentum is such that it's highly unlikely,” because investors know Wachovia has been shopping itself to potential buyers.
Phillips-Brown, the Wachovia spokeswoman, said “the action by Congress this weekend is a constructive and important step toward restoring confidence in and stability to the entire U.S. financial system.”
The bank has been working to reduce the size of its Pick-A-Pay portfolio by contacting borrowers and offering to refinance them into more traditional loans. In the early going, the initiative has not been that successful, sources have said. A bailout plan could help it unload these assets more quickly, but if the price the government pays is too low, it could require the bank to take big writedowns.
Wachovia CEO Steel, a former U.S. Treasury official and Goldman Sachs investment banker, took the helm in July after the ouster of longtime CEO Ken Thompson, who forged the $24billion Golden West deal. Steel had stressed plans to keep the bank independent but reportedly initiated talks with Citigroup of New York, Wells Fargo of San Francisco and Banco Santander as the bank's stock came under pressure.
Steel's employment agreement does not provide him with severance payments if he loses his job. In the case of a merger or acquisition, 1.5 million options to buy company stock he was granted in July would immediately vest. Restricted stock he has been granted would remain subject to certain performance criteria, which include hitting price benchmarks of $20 per share and higher within six years.
Wachovia would give Citigroup a much bigger retail banking franchise, but it's also likely wary of taking on bad mortgages after suffering its own massive subprime-related writedowns. Wells Fargo and Wachovia have long been envisioned as potential partners because that would pair massive East and West Coast banking franchises, creating a more formid able competitor for Charlotte's Bank of America and New York's JPMorgan Chase. But Wells has long eschewed big deals in favor of organic growth.
Banco Santander would likely be the best option for Charlotte because it might keep the city as the bank's U.S. headquarters. Citigroup and Wells likely would slash duplicative staff positions.
A sale would reverse the traditional course followed by Wachovia and Bank of America, which have expanded nationwide by gobbling up other cities' banks.
Wachovia is a major civic and economic engine in Charlotte and helps solidify the city's claim as the country's No. 2 financial center behind New York. The bank is the city's second biggest employer behind Carolinas HealthCare.
“In the past, Charlotte's always landed on its feet with these mergers and acquisitions,” Charlotte Mayor Pat McCrory said Sunday. “But we always have to anticipate change and not take for granted our current status.”
He said he has been talking to Wachovia representatives throughout the week, though he declined to elaborate on the discussions. He said he had a call in to Lanty Smith, Wachovia's chairman, and that he had talked to Charlotte Chamber president Bob Morgan late Saturday about the possibility of a Wachovia buyout.
“He and I are both ready to sell Charlotte at a moment's notice,” McCrory said. “If there is a change, we're going to try to convince whoever the change agent is that Charlotte is still an excellent home base.”