In a dramatic showdown over the future of Wachovia, Wells Fargo prevailed Thursday evening, saying it will move forward with its purchase of the Charlotte bank after Citigroup stepped aside.
Dueling bidders Citi and Wells had been negotiating a compromise that included possibly carving up Wachovia among the two companies. But talks broke off Thursday afternoon, and Citi said it would not try to stop a Wells-Wachovia deal, although it will try to extract damages through its lawsuit against the banks.
“We are delighted to stride ahead with Wells Fargo in creating a coast-to-coast financial institution – one of the strongest financial firms in the world,” Wachovia CEO Bob Steel said in a statement.
The development, coming before a legal truce was set to expire this morning, broke an agonizing wait for employees and city leaders. But it also means a Charlotte corporate giant will now be swallowed by a San Francisco rival, bringing the death of a storied brand and likely major job cuts.
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The combined company will create a major rival for Charlotte's Bank of America and for New York's JPMorgan Chase. In backing down, Citi loses a chance to become a dominant player in retail banking, but it also avoids assuming troubled mortgage assets that battered Wachovia's profits and sealed its demise.
The merger pairs East Coast and West Coast giants that have long been seen as potential partners. It also matches struggling Wachovia with a bank that has survived turbulent times better than most.
In faltering financial condition after the stunning failure of Washington Mutual, Wachovia had agreed to sell most of its assets to Citi on Sept. 29, under pressure from the Federal Deposit Insurance Corp. But Wells swooped in four days later with an offer to buy all of the company. Wachovia's board backed the Wells deal, and it had been more warmly received by employees.
In the Wells merger, Wachovia shareholders, who need to approve the deal, would receive about a fifth of a Wells share for each Wachovia share. That was equal to $5.43 per share based on Thursday's close. In the takeover, the Wells name would prevail and San Francisco would remain the corporate headquarters of the combined company. Wells has said Charlotte would serve as the company's base for East Coast retail and corporate banking businesses.
In its deal, Citi would have paid $2.16 billion – or essentially $1 per share – for most of Wachovia's deposits and assets. Wachovia's asset management and brokerage businesses would have been left behind. The FDIC had agreed to absorb loan losses above $42 billion in exchange for $12 billion in Citi securities. Wells said its merger doesn't need any government assistance, but it would be eligible for considerable tax benefits on Wachovia's losses.
In a statement Thursday evening, FDIC Chairwoman Sheila Bair said she supported the efforts of the Federal Reserve to resolve the situation and praised Citi for letting the deal go forward. “While some outstanding issues remain, this announcement brings much needed certainty to the process,” she said.
Wells Fargo said it is seeking expedited Fed approval of the deal as well as a share exchange agreement that would give Wells 39.9 percent of Wachovia's voting power. The Fed said it will immediately begin considering filings submitted by Wells Fargo seeking approval to acquire Wachovia.
In a statement, Wells Chairman Dick Kovacevich reiterated that the two companies have a firm, binding merger agreement, and that he is confident the merger will be completed. The deal is “simply an incredible fit that will result in an immensely strong, stable financial services company that will carry on Wachovia's proud tradition of being one of the very best financial institutions in the world,” Kovacevich said.
Weeklong negotiations aided by the legal truce had continued into Thursday but apparently broke off in the afternoon. Citi cited “dramatic differences” in possible transaction structures.
A source familiar with the situation said Citi disagreed with Wells over the valuation of some of the loans that would have been parceled out as part of the separation. In its original deal, Citi had limited its risk with the FDIC arrangement and the company was intent on protecting its shareholders, the source said.
In combining the two companies, Wells said last week that it would mark down Wachovia loans of $498billion by $74 billion. Kovacevich said credit teams at Wells and Wachovia have been working together and that his company had a good handle on the assets it was buying.
“Given our broad-based operating expertise, and specific understanding of these individual businesses we believe we have adequately evaluated the risks inherent in the portfolios as of the time of this merger agreement,” he said.
Nancy Bush of NAB Research said Wells was a better partner for Wachovia. “You guys should be breaking out bottles of champagne,” Bush said. “They will be so much more careful of the corporate culture, of Charlotte, of the customers. They have more retail experience than Citigroup does.”
The fact that Citi backed down indicated that criticism from customers and shareholders had grown too much, she said. Of the legal dispute, “I'm sure (Citi) will ask for a bazillion dollars, and Wells Fargo will give them something,” she said. “There will be some kind of out-of-court settlement.”
James Early of the Motley Fool investment guide said it was “sporting” of Citi to step aside.
“Sounds like they're not going to chop the baby up in pieces,” he said. “Now is not the time to be parceling out a company 18 different ways and fighting over this, that and the other.”
The FDIC brokered Wachovia's sale to Citi with the Charlotte bank on the brink of insolvency following a silent run on its deposits and worries about its ability to get necessary financing from other banks. Although Wachovia signed an exclusivity agreement with Citi preventing it from talking to other suitors, it never sealed the deal. Negotiations had been under way on the final transaction when Kovacevich called Steel last Thursday night with a board-approved merger offer.
After being spurned by Wachovia, Citi fired back with a lawsuit seeking $60 billion in damages from Wells. Wachovia has also sued Citi. The flurry of litigation led to a legal truce urged by the Fed and negotiations over a possible split of Wachovia's banking territory and other assets. With its fate in the balance, Wachovia had little role in these talks but stood by its agreement with Wells.
When the spat first developed, analysts suspected Citi might walk away in exchange for a monetary settlement. But the New York bank took a hard line, saying its exclusivity agreement barred Wachovia from talking to other potential partners. Citi CEO Vikram Pandit in a town hall employee meeting noted that his bank was the only one willing to save Wachovia when it faced dire financial straits. He also emphasized the bank's strong legal case. “Citigroup plans to pursue these damage claims vigorously on behalf of its shareholders,” the bank said Thursday.
Citi, in announcing the deal after markets closed, said it remained willing to complete a Wachovia transaction but also signaled plans to move on. Pandit said: “We did not seek the Wachovia transaction; Wachovia brought it to us. Our focus remains on capitalizing on our global strengths.”
All three banks posted double-digit stock price declines. But news of Citi's withdrawal buoyed prices in after-hours trading. Wachovia led, jumping more than 35 percent to $4.88. Wells Fargo was up nearly 3 percent, while Citi inched up less than 1 percent.
Although either deal would certainly result in job cuts in Charlotte, Wachovia executives and employees have favored the Wells purchase. Analysts said blending the Wells and Wachovia cultures, both traditionally known as conservative retail banks, would be easier than meshing the Citi and Wachovia cultures. Splitting the company was also complicated and created ongoing uncertainty.
Citi, however, had said it would base the combined Citi-Wachovia retail bank in Charlotte and that it favored Wachovia's retail banking technology, which could have preserved more retail banking and technology jobs. Wells Fargo said last week that it expects to cut expenses of the combined company by 10percent annually, or $5 billion, by the end of 2010. The bank said it will identify these cost savings as the two companies are combined.
Thursday's announcement capped another surreal week for employees and the city. On Wednesday, Wachovia human resources head Shannon McFayden sent an e-mail to managers urging them to take care of themselves, their teams and their customers. Providence Cafe in Myers Park even began providing a special discount to workers, an offer that began making the e-mail rounds Thursday.
A little after 10 p.m., Steel sent an e-mail to employees saying “the people of Wachovia have demonstrated firsthand that we always put the interests of our shareholders, customers and clients ahead of our own – even in the most difficult of times.” He added: “While we reiterate our great respect for Citigroup and its senior management and wish them well, we are now focused on the bright future of the combined Wells Fargo/Wachovia.”