Stunningly swift fall for Wachovia
Sale to Citigroup technically keeps bank from failing, but thousands of layoffs are still likely
09/30/2008 12:00 AM
09/30/2008 2:43 PM
Charlotte-based Wachovia, an N.C. banking stalwart that survived the Great Depression, 1970s economic woes and a consolidation wave that stripped many cities of their hometown banks, on Monday succumbed to a ravenous credit crunch that is upending the banking world order.
With his bank saddled with bad loans, his stock plunging and concerns mounting about the company's financial soundness, Wachovia chief executive Bob Steel essentially agreed to break the company apart to prevent it from failing, amid unprecedented turbulence in the U.S. financial system.
New York-based Citigroup is buying Wachovia's banking operations as well as most of its assets, with help from the Federal Deposit Insurance Corp. Left behind is a standalone public company, still called Wachovia and based in Charlotte, that will house the brokerage, Evergreen asset management and insurance units.
While the deal preserves much of the company, it likely means layoffs for thousands of Wachovia employees, a challenging integration with Citi and uncertainty about what will be left in Charlotte. In a transaction hammered out during marathon negotiations over the weekend in New York, many details were still unknown Monday. Analysts said what remains of Wachovia could be sold to another bank or brokerage firm.
For investors, it was a dramatic landing for a stock that has fallen from about $60 per share in the spring of 2006 to $1.84 on Monday. A company once worth more than $100billion in market value is now worth less than $4 billion. In the deal, Citigroup is paying $2.1 billion in common stock – essentially $1 per Wachovia share – for $700 billion in Wachovia assets and more than $400 billion in deposits.
“It's very, very much a body blow to the city,” said retired Bank of America chieftain Hugh McColl Jr.
The deal is a dramatic fall for an N.C. institution – the 2001 combination of Charlotte's First Union and Winston-Salem's Wachovia – that grew into a national giant by gobbling up other cities' banks. Combining Citi and Wachovia creates a third national behemoth to compete with Charlotte's Bank of America and New York's JPMorgan Chase.
Remarkably, it could have been worse, considering the failures of some institutions.
Wachovia said Citi will keep the combined retail bank based in Charlotte, and Citigroup CEO Vikram Pandit praised the know-how and customer service reputation of Wachovia's larger operation. He also said the company is considering keeping the “respected” Wachovia brand. “It's essential to have a strong presence in Charlotte, N.C.” he said in a conference call with investors.
The sale likely means big layoffs for Wachovia's work force of 120,000, which includes 20,000 here in Charlotte. In a statement, Citi said it expects to realize more than $3 billion in annual cost savings by reducing “overlapping functions.” Those cost reductions would amount to about 15 percent of Wachovia's nearly $20billion expense base in 2007. Wachovia was already cutting about 7,000 jobs, largely in the mortgage unit.
A Citi spokeswoman declined to comment on layoffs and the bank's plans for Wachovia office buildings, including a new tower and arts complex under construction on South Tryon Street.
Nancy Atkinson, senior analyst with the Aite Group consulting firm in Boston, estimated the deal could result in up to 7,000 job cuts companywide. She said the headquarters city would likely take a hit, but keeping the retail banking base here could help. Support positions such as human resources, finance and techno logy will likely suffer, as will Wachovia's Charlotte-based corporate and investment bank, she said. Citi will keep its corporate headquarters and the combined corporate and investment bank in New York. She also noted that it's possible that some of the cuts could come from Citi, which has been downsizing in recent months as well.
Early Monday, small groups of employees clustered together in the company's headquarters Atrium to discuss the stunning news. “Whatever it is, it will be gory,” one employee waiting to buy coffee told a co-worker. Outside, another employee said tersely, “There is no positive spin.”
Pressed to make a deal
The end came surprisingly quickly.
Wachovia has been battered by loan losses from its 2006 Golden West Financial acquisition, but it had been working to improve its financial condition under CEO Steel, who replaced the ousted Ken Thompson in July. But the bank's circumstances took a dramatic turn for the worse on Friday when its stock dived 27 percent following the failure of Washington Mutual. Investors worried that significant writedowns in WaMu's portfolio could translate to much bigger losses for Wachovia.
Also Friday, a Goldman Sachs analyst warned of a possible “silent run” on the bank's deposits, similar to what had occurred at WaMu. A Wachovia spokeswoman declined to provide an update on the bank's deposits on Monday. The credit markets also were becoming increasingly tight, with many banks unwilling to lend to each other.
Looking to avoid another bank failure, regulators pressed for a sale. By Sunday night, Citi and San Francisco-based Wells Fargo had emerged as the top bidders.
Pandit said the deal came together in intense talks over 72 hours. He said he has known Steel for two decades as a colleague and a competitor. Most of the talks occurred in the landmark Seagram Building in midtown Manhattan, where Wachovia has offices. Citi has offices nearby.
About 200 Citi risk managers and finance experts scoured Wachovia's $800 billion in assets to identify problem loans. Its most troubled assets were $122 billion in Pick-A-Payment mortgages inherited from Golden West. Goldman Sachs and top law firms advised Wachovia. David Carroll, a Wachovia executive who often leads merger integrations, assisted Steel.
The key to the deal was an agreement with the FDIC to absorb a big chunk of the possible losses on Wachovia's loan portfolio. Under the agreement, Citi will take losses of up to $42 billion on a pool of $312 billion in loans. The FDIC will take losses after that. Citigroup has granted $12billion in preferred stock and warrants to the FDIC to compensate the FDIC for taking on this risk.
Talks extended into late Sunday, and at 8:17 a.m. Monday, the FDIC issued a press release saying Citi was acquiring most of Wachovia's assets. Technically, the FDIC said, Wachovia had not failed.
The deal was brokered in consultation with Treasury Secretary Henry Paulson, President Bush and the Federal Reserve, officials said. Paulson said he agreed with the FDIC and the Fed that a “failure of Wachovia would have posed a systemic risk” to the nation's financial system.
In a conference call with analysts, Citi CEO Pandit said the deal was a “historic transaction” that would benefit Citi's customers and shareholders as well as the U.S. financial system. During recent market turmoil, Citi looked at buying other troubled banks but passed, Pandit said. “This was compelling,” he said.
When Steel had come onboard as CEO, the former investment banker and U.S. Treasury official had stressed plans to keep the company independent, although analysts expected he might broker a deal with the likes of JPMorgan Chase or his former employer, Goldman Sachs. He had talked with Morgan Stanley, but those talks fizzled last week. On message boards Monday, some shareholders accused Steel of over-promoting the company's prospects in a recent TV interview. He wasn't available for an interview.
“During recent weeks, the financial landscape has changed significantly and presented us with unprecedented challenges,” Steel said in a statement. “Today's announcement is the best alternative for the company, enabling a resolution on the Golden West portfolio.”
Steel remains the CEO of the company as the deal awaits shareholder and regulatory approval. The company said it was too early to speculate whether that would change. In the case of a merger or an acquisition, he doesn't receive any severance payments. Despite the poor outcome for the company, analyst Nancy Bush said Steel was likely the right person for the job, given his Wall Street dealmaking skills.
“He was dealt a bad hand,” she said. “And the hand kept getting worse.”
Questions about what's left
The deal gives Citi's undersized retail banking operation high-growth markets along the East Coast. It also gains commercial banking and private banking operations. The combined company will have more than $600 billion in U.S. deposits, about 9.8 percent of the total, and the most worldwide – $1.3 trillion.
The transaction, which is expected to close by year end, has been approved by both boards. At this time, Wachovia said there would be no changes to Wachovia's board and two Wachovia directors will join Citigroup's board.
The FDIC deal limits Citi's exposure to loan losses, but Pandit acknowledged a challenge awaits knitting together the two organizations. He noted both companies have experience with integrations. Top managers haven't been named, but Pandit indicated he wanted to keep some of Wachovia's executives. The integration is expected to be complete by the end of 2010.
Citi also comes with its own blemishes. It lost $2.2 billion in the second quarter, and CEO Charles Prince was ousted in November, one of the first casualties in the fallout from souring mortgage-backed securities. Pandit said the merger wouldn't prevent the conglomerate from focusing on fixing its problems.
One of the big unanswered questions Monday was the plans for the Charlotte-based company left behind. Wachovia didn't provide any financials or employee count. Morgan Keegan analyst Robert Patten estimated the remaining firm accounted for about $1.4 billion in annual profits and had a value of about $5 to $7 per share.
Wachovia's retail banking, wealth management and corporate and investment banking units – the parts going to Citi – have about 65,400 employees. Its capital management unit, which includes the brokerage and Evergreen, has 29,600 employees. Another 24,700 employees are counted as part of the parent company.
Evergreen CEO Peter Cieszko held a conference call with his unit that gave employees the impression that the remaining Wachovia could eventually be bought or receive an investment from outside investors, but nothing was certain. Evergreen has most of its employees in Charlotte and Boston.
Wachovia Securities is the third-largest U.S. brokerage firm, bolstered in recent years by acquisitions of Prudential Securities and A.G. Edwards. Wachovia Securities has brokers in offices around the country as well as its home base in St. Louis and significant operations in Charlotte. Brokerage president Danny Ludeman told his troops that the firm had a strong value and could consider changing its name. Its biggest asset is about 15,000 brokers, who could be lured to other firms. One broker said he spent the day assuring clients the firm was solvent and taking calls from headhunters.
CreditSights analysts said the remaining firm has a makeup similar to Charles Schwab. Interested buyers over time could be JPMorgan or Morgan Stanley, the research firm said.
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