On Thursday, Wachovia and Citigroup executives and lawyers were in New York deep into outlining details for their merger. Back in Charlotte, some bank employees were slowly coming to grips with a pride-wounding, government-assisted deal brokered just days earlier.
Then came the call.
Around 9 p.m., Wells Fargo Chairman Dick Kovacevich, whose company had passed on buying the Charlotte bank over the weekend, called Wachovia chief executive Bob Steel, a source familiar with the situation said. The San Francisco-based bank's longtime leader had a $15.1 billion offer to buy Wachovia, without any government help.
Steel, who had taken over a battered Wachovia in July, brought the deal to his board, which met via phone. Late Thursday night, Wachovia's directors approved the sale, and early Friday morning, senior leaders were alerted to join a conference call: Wachovia had a new buyer.
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Wells Fargo issued a news release at 7 a.m., followed by a statement by Wachovia four minutes later. Employees who had gone to sleep thinking they were being bought by Citi awoke to the news that they were now in a marriage with Wells. Soon after, the scenario got more complicated when Citi signaled its willingness to fight for its original deal.
“Everyone is kind of numb,” said one employee. “It's been such a long few months.”
While it's still impossible to say which deal will end up being better for employees and Charlotte, many in Wachovia were embracing a Wells transaction that sells the company intact to a respected industry player, instead of breaking the company apart under government order. The new deal also seems to favor shareholders, giving them $7 per share, instead of leaving them with a fragment of a company and the equivalent of $1 per share from Citi.
On Monday, after the Citi deal was announced, frenetic CNBC “Mad Money” host Jim Cramer affixed Steel to his “Wall of Shame.” By Friday evening's show, he was apologizing and ordering his staff to gin up a “Wall of Acclaim.” “You are the Man of Steel,” he exclaimed.
The latest deal capped a frenzied, sleep-deprived nine days that saw Wachovia go from the brink of failure to a partner in not one, but two industry-transforming deals. Sources who recounted the roller coaster spoke on condition that they not be identified because they weren't authorized to talk on the record.
Steel first began talking to Citi last Thursday, Sept. 25, as his stock was falling and shortly before the failure of Washington Mutual rattled financial markets. By Friday, his stock was plunging 27 percent, and a silent run on the bank's deposits had begun, according to sources. Over the weekend, Wachovia executives in Charlotte could watch the drain on deposits on their computer screens. Frantic BlackBerry messages and phone calls would crisscross the nation.
By Saturday, merger talks would heat up in New York, with both Citi and Wells Fargo looking over Wachovia's books in a “data room” set up in Wachovia's Midtown Manhattan offices. Regulators were getting frequent updates.
Officials with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. were worried, sources said, about Wachovia's ability to get necessary financing to do business when it opened on Monday – a so-called “liquidity crunch.” Untrusting banks were no longer lending to each other. And insurance contracts known as credit default swaps, which could be used to hedge the risk of lending to Wachovia, had become exorbitantly priced.
Wells Fargo had reportedly weighed a bid to buy Wachovia in the “teens per share,” but a formal offer was never on the table, a source said. Wells ultimately got cold feet about a portion of Wachovia's commercial loan portfolio and walked.
On Sunday, the FDIC, which insures consumer deposits, took over the process and arranged a sale to Citi. For the first time, the agency triggered a “systemic risk” provision created under a 1991 law. Using the power is so serious it requires approval from two-thirds of FDIC board members, two-thirds of Federal Reserve Board members and the Treasury secretary. The president also has to be consulted.
Early Monday morning, Steel was informed of the arrangement and concurred. Citi would pay $2.16 billion in stock and absorb $42 billion in potential loan losses. The FDIC would shoulder the remaining possible losses on a $312 billion loan book in exchange for $12 billion in Citi securities.
On Monday, the news rattled the company and Charlotte. An iconic N.C. institution – formed by the 2001 merger of Charlotte's First Union and Winston-Salem's Wachovia – had been sold to a New York bank after slipping to the brink of failure. Citi CEO Vikram Pandit held a conference call and labeled it a historic transaction. He promised a major Charlotte presence but gave few details. Wachovia issued a brief statement but did not join the standard conference call with investors.
By Tuesday, a Citi executive was in Charlotte meeting with Wachovia executives and Mayor Pat McCrory. Citi liked what it saw and promised to base the combined retail bank in Charlotte, a Citi executive said. On Wednesday, Wachovia retail bank head Cece Sutton posted a recording for employees that thanked them for their dedication to customers during trying times and espoused optimism about a Citi deal that would spread Wachovia's platform to more customers.
By Thursday, the two sides still had not signed a merger agreement, but were working to hammer one out. Many of the details were onerous, a source said, including how to figure out how to separate scores of subsidiaries within Wachovia's holding company. Into the evening, Citi and Wachovia executives met face-to-face to discuss details involving leadership in the combined company and employees, a source said.
Still, with no merger agreement sealed, some employees began wondering if the deal was ironclad. Communication from Steel had been conspicuously absent after Monday's initial announcement. An e-mail circulated speculating that Steel had brilliantly forged a deal with Citi to buy the company time until a congressional bailout was approved and accounting laws changed. All shareholders had to do was vote down the Citi deal, the e-mail said.
Meanwhile, Wells Fargo had not stopped poring over Wachovia's books. Wells said it used information it had retrieved from the data room but had not had further talks with Wachovia. In a CNBC interview, Kovacevich said the extra days gave Wells time to get its arms around Wachovia's portfolio and to get clarity on a change in tax law, which could make the transaction more affordable.
“We have to be comfortable before we will ever make a decision,” Kovacevich said in a conference call with investors. “And it took this much time to be that comfortable.”
When Kovacevich called Steel on Thursday night, they had not talked since Monday morning when the Wells Fargo chairman buzzed Steel to congratulate him on his Citi deal, a source said. Wachovia had an exclusivity agreement with Citi not to talk to other suitors or enter into another deal. But Wachovia officials decided to bring the deal to the board because of a fiduciary duty to shareholders, a source said. Regulators also were informed of a possible Wells deal Thursday.
On Friday, Wells and Wachovia officials were elated if not bushed. “I've come to believe sleep is overrated,” Wells CEO John Stumpf joked in an interview. “It's been around the clock for a number of days. But it's so well worth it.”
The turnaround, however, outraged Citi executives who had been working with Wachovia officials Thursday evening on their own deal. The company issued a statement calling on Wachovia and Wells Fargo to terminate their transaction, citing the exclusivity agreement.
Citi executives felt betrayed after being asked to talk to Wachovia last weekend as the Charlotte bank and the U.S. financial system faced “dire straits,” a source familiar with the situation said. “No one was there to save Wachovia late at night other than Citi,” the source said.
For Steel, the deal appears to resurrect a legacy possibly tarnished by a forced sale to Citi. When he started the job, he expressed plans to keep the company independent, but most analysts said he was dealt a bad hand to start. One move he could have made was to raise capital early in his tenure, possibly giving Wachovia a cushion to persevere longer on its own, some analysts said. Others said recent industry turmoil left him with little choice. “The market can box you in,” said one industry executive.
Steel, who was not available for an interview, still faces a likely legal fight with Citi. He declined to comment on the situation in a conference call with investors. His role in the combined company is unclear, but a spokeswoman said he is committed to completing the Wells Fargo merger.
Steel was in Charlotte on Friday when Wells executives held a conference call at 6:30 a.m. San Francisco time. At the end, Kovacevich, whose bank is known by its Wild West logo, praised his new partner's leadership in difficult times. “We can't wait to get to know you and think you'll enjoy the stagecoach,” Kovacevich said. “Let's ride together.”