In the fight for all or part of Wachovia, the three battling banks on Wednesday extended their legal truce until Friday at 8 a.m., as Citigroup and Wells Fargo continued to negotiate a possible carving up of the Charlotte financial giant.
In this wrangling, Citi, led by chief executive Vikram Pandit, has emerged as a fierce defender of its original deal to buy most of Wachovia, despite being spurned for a rival offer from Wells. A source familiar with the situation said Citi would prefer Wells “go away” and has shown how serious it is by filing a suit that seeks $60 billion in damages from the San Francisco-based bank.
Talks were ongoing Wednesday and “all options” are on the table, including splitting up Wachovia between Citi and Wells, the source said. In particular, New York-based Citi covets Wachovia's retail banking technology and would keep those systems over its own, preserving jobs in Charlotte, the source said. Another source said the parties were “getting close” to an agreement, but noted talks were fluid.
Although Wachovia is saddled with a toxic mortgage portfolio inherited in its 2006 Golden West Financial purchase, the scrap highlights the bank's valuable network of 3,300 branches from Connecticut to California. Citi has said it didn't seek the deal, but Wachovia's stable deposit base could be the medicine Citi needs for its own mortgage-related ailments, analysts said.
Soon after Wells upstaged Citi's bid for Wachovia on Friday, a flurry of litigation hit at least three courts in New York and North Carolina. On Monday, the Federal Reserve, worried about the reaction of financial markets, helped broker a ceasefire that was set to end Wednesday at noon. That truce was extended after Wachovia and Citi lawyers met by teleconference before U.S. District Court Judge Lewis Kaplan in Manhattan.
“There are negotiations between Wells Fargo and Citigroup about a possible grand solution that would preserve the shareholder value for Wachovia as represented by the Wells Fargo deal,” Wachovia lawyer David Boies said during the teleconference, according to a transcript obtained by Bloomberg News. Such a deal “would involve not a single choice between Citigroup and Wells Fargo,” Boies said, without providing details.
Kaplan canceled a hearing scheduled for Wednesday, but other proceedings remain tentatively on the calender, including a hearing Monday in Charlotte on a complaint filed by former Wachovia chairman Bud Baker in N.C. Business Court. In that case, Baker and shareholder Mary Louise Guttman argue that Citi cannot enforce an agreement that prevented Wachovia from talking to other suitors because it prevents the bank's board from carrying out its duty to investors.
With Wachovia in faltering financial condition, Citi last Monday agreed to buy most of the bank for about $1 per share, with assistance from the Federal Deposit Insurance Corp. Left behind would be the bank's brokerage and asset management businesses. On Friday, however, Wells came in with an offer to buy the whole company for $7 per share, which Wachovia accepted.
Citi executives have reacted sharply to Wachovia's about-face and have signaled their willingness to fight for their initial transaction. In an employee town hall meeting Monday before the truce was declared, Citi CEO Pandit said his bank was the only one to step up to save Wachovia after Wells had previously passed on a takeover.
“Our claims are large, they are rightful, and we will go after them with every bit of strength we have,” Pandit said, although he did not rule out a compromise that was in the “best interest” of shareholders.
Pandit said he doesn't know why Wachovia considers the Wells deal better. But he suggested the Wells merger triggers “change-in-control” payments for Wachovia executives, while the Citi deal may not.
Wachovia, however, said both deals would trigger the payments, but noted that hasn't happened yet. Under his contract, Wachovia chief executive Bob Steel doesn't receive any severance if any deal occurs, but other executives would be eligible.
Wachovia has said it backs the Wells transaction because it's in “the best interests of shareholders, employees, creditors and retirees, as well as the American taxpayers, and it imposes no risk to the FDIC fund.” In the Citi deal, the FDIC would assume Wachovia loan losses above $42 billion in exchange for $12 billion in Citi securities.
Although the FDIC directed Wachovia to do a deal with Citi, according to court filings, some analysts have suggested Citi may need Wachovia as much as Wachovia needs Citi. Before Wachovia's woes escalated last month, Citi had been one of the nation's more downtrodden banks, suffering billions in writedowns from mortgage-related investments. Without Wachovia, Citi would have to forge multiple deals to assemble the same expansive branch network.
“This transaction would allow the company to quickly move from sub-scale in domestic branch banking to being a market share leader,” Sandler O'Neill analyst Jeff Harte said in a report after the Citi deal was announced.
The 51-year-old Pandit also may be loath to appear the loser. He became Citigroup's CEO in December, charged with turning around a company that is still reporting big losses. He left Morgan Stanley in 2005 after being passed over for a promotion that would have put him in line to be No. 1 there. And the hedge fund he co-founded and sold to Citi, Old Lane, was shuttered this summer, due to middling returns and a run on investments.
Joe Gordon, managing partner of Gordon Asset Management in the Raleigh area, thinks Citi needs the Wachovia deal to survive, which is why it's fighting so hard. “If they don't get (Wachovia), I don't know what they're gonna do,” he said. “They can't raise capital on their own – it's too expensive anymore.”
Nancy Atkinson, a senior analyst at the Aite Group, said that Citi is playing the part of the wronged suitor, but she considers it the spoiler. If Citi is not going to offer a better price than Wells Fargo, then “it should say, ‘Gee, we tried,' and bow out gracefully,” she said. Since Citi's offer kept Wachovia from failing, she added, Citi could be able to exact a payment from the government.
Citi, in particular, doesn't want a strong competitor such as Wells moving into its Northeastern turf, said Miami-based banking consultant Ken Thomas. In one carve-up scenario, Citi could get Wachovia's Northeastern and mid-Atlantic branches, while Wells grabs locations in the Southeast and in California. One advantage of a carve-up for Citi would be that the bank faces a less difficult integration of operations, the source familiar with the situation said.
In the town hall meeting, Pandit made it clear which bank he thought was in need of a rescue.
“Friday morning (Sept. 26) at 5 a.m., I get a call from the CEO of Wachovia . . . he was concerned about his bank,” he said. “Rightfully so, in my view. I said, look, let me think about this. Let me go back to my people, we'll look at it. Yes, this is just one more of many opportunities I've seen. I've got to tell you, I don't like your portfolio, the assets that you took, Golden West, all those things, they don't make any sense for us, but I like your branches. I don't need them, but it would be great to have them.”