A banking brawl broke out over the surprise announcement Friday that Wells Fargo plans to buy Wachovia for $15 billion, an agreement that upsets the previously stunning Wachovia-Citigroup deal announced Monday.
In an interview, Wells Fargo chief executive John Stumpf said Charlotte-based Wachovia and San Francisco-based Wells have signed a merger agreement and that “we're very confident that this will lead to a combination.” Wells said it expects the deal to be completed by year's end.
Citigroup shot back with a statement demanding Wachovia and Wells terminate the transaction.
It seems likely that one of the banks will win Wachovia. But there is no consensus on what that new presence would look like or how many jobs would be lost. Each side promises to base headquarters of some operations here but is not specifying job cuts, which typically come with mega-mergers.
The three-sided fight is the latest twist in a season that has turned the financial world upside down, with broad new economic powers for the government, the collapse of century-old financial firms, and a week of pinballing emotions in Charlotte, the country's second-biggest banking city.
“There's going to be a legal and a bidding battle,” predicted Ken Thomas, a Miami-based banking consultant. “Because in the end, only one of these banks is going to be a truly national bank.”
On Monday, Charlotte shuddered when news came that one of its longtime banking heavyweights intended to sell most of itself to New York-based Citigroup. Citi and Wachovia had not signed a final merger agreement, but signed an “exclusivity agreement” that forbade Wachovia from soliciting or otherwise assisting in a merger with another company.
That agreement does not appear to specify the penalty for breaking the contract, but Citi says that Wachovia is clearly violating it.
Citi said Friday it has not decided whether to file a lawsuit but is exploring all options.
Last weekend, Wachovia appeared headed toward insolvency and had huddled with federal regulators in New York to talk about a rescue deal with another bank. Wells emerged as the favorite in those talks but reportedly backed out at the 11th hour, making Citi the winning bidder for the bulk of Wachovia's operations.
Citi, which has been hammered by losses on subprime mortgages, is eager for the stability of Wachovia's well-known retail bank. Wells is keen on expanding into fast-growing areas of the East Coast.
Either takeover must meet the approval of Wachovia shareholders, some of whom have expressed ire over the bargain-basement price afforded by the Citi deal. The New York bank planned to pay $2.16 billion in Citi stock for Wachovia's banking operations, amounting to about $1 per share. The deal also required the federal government to take responsibility for some of the potential losses on Wachovia's most troubled portfolios.
And it would have divided the intertwined components of Wachovia, because Citi did not plan to buy Wachovia's large brokerage or asset management business. It is not clear if the new company would include the Wachovia name.
Wells, by contrast, says it would pay the equivalent of about $7 per share for all of Wachovia. It also says that Charlotte would be the headquarters for the combined company's East Coast retail and corporate banking businesses, all of which would operate under the Wells Fargo name.
Although either deal would certainly result in job cuts in Charlotte, Wachovia employees said that the mood inside headquarters lightened considerably on Friday, after the early-morning announcement of the Wells deal. Shareholders expressed guarded favoritism for the Wells deal, and many Charlotte residents seemed to think that a Wells deal would result in fewer job cuts for Charlotte, since those two banks have fewer overlapping operations.
Analysts said blending the Wells and Wachovia cultures, both traditionally known as conservative retail banks, would be easier than blending the Citi and Wachovia cultures.
Citi pushed back on Friday morning, touting the benefits of its deal for Charlotte. A senior Citi executive told the Observer the global financial firm would headquarter the combined new retail bank in Charlotte, and planned to eventually move more of its business units to the area. Citi also would not cut other retail banking jobs in the area, a source familiar with the situation said.
Citi had previously committed only to maintaining “a strong presence” in Charlotte. The executive said the decisions regarding the area were not influenced by Wells Fargo's announcement.
“It's not just the cost of living, it's the quality of the people,” he said. Stumpf, the CEO of Wells, said in an interview it was too early to say what the impact on Charlotte would be. He said executives will get to know each other and decide which businesses to grow or not grow. He noted that when Minneapolis-based Norwest merged with Wells in 1998, Norwest had about 13,000 employees in Minnesota and now it has about 21,000. But, he added: “That doesn't mean there won't be changes.”
Wells Fargo said it expects to cut expenses of the combined company by 10 percent annually, or $5 billion, by the end of 2010. The bank said it will identify these cost savings as the two companies are combined.
Which is the better deal?
Friday, UNC Charlotte professor Tony Plath said a takeover by Wells Fargo is “hands down” a better deal for Charlotte jobs, considering the small amount of overlap between the two companies.
But he still predicted that, with a Wells deal, Charlotte would lose as many as 2,500 of the 20,000 local Wachovia jobs. He predicted Charlotte would lose as much as 4,000 with a Citi deal. Most of the jobs, he said, would be lost in headquarters operations such as marketing and human resources
“The Charlotte side's gonna come out a loser on that,” Plath said. “But we've got to give up something.”
Not everyone, however, thought the Wells deal was best for Charlotte. A knowledgeable industry source noted that Wachovia has a better retail bank and technology platform than Citi, so Citi might be more inclined to keep it intact. Wells, however, is a large retail bank that might preserve its own systems. Wells is also not a big fan of corporate and investment banking, so it's not certain if Wells would keep Wachovia's Charlotte-based investment bank, the source said. In both cases, Wachovia would likely lose corporate headquarters staff.
Wells touted how its deal would not require a complicated separation of Wachovia's units, like that announced in the Citi plan. Citi would buy Wachovia's retail, investment and wealth managements units, but not its brokerage or asset management. But in recent years, Wachovia has worked to increase cooperation and cross-selling between divisions, encouraging referrals between bankers and brokers, for example.
Wells also said repeatedly that its deal would not require financial assistance from any government agency. Also, in analyzing the Wachovia deal, Wells Fargo assumed it would not sell any of the distressed loans to the government, under the banking bailout bill, said Wells chairman Dick Kovacevich.
“We couldn't assume that they would necessarily give us prices equal to what we think the values are,” he told The Associated Press. Taking advantage of the bailout would also subject Wells to a number of government controls.
“Wells Fargo can deal with the bad loans of Wachovia,” said Thomas, the banking consultant. “It's one of the few banks that can.”
However, experts in tax law said the Wells deal actually was likely to be more expensive for the government, according to the Washington Post. Losses on Wachovia's portfolio of bad loans would have been absorbed by the FDIC, which is funded by the banking industry. Under the tax law change, those losses instead will allow Wells Fargo to reduce its taxable income.
Under Citi's plans, the New York bank would be responsible for the first $42 billion in losses on $312 billion of Wachovia's most troubled loans. The Federal Deposit Insurance Corp. would be responsible for any further losses, in exchange for $12 billion in shares.
The FDIC issued a statement reminding people that under either proposal, “all banking customers of the merged institutions would be fully covered with no disruptions in service.”
The FDIC also said it would be reviewing “all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest,” adding that it “stands behind its previously announced agreement with Citigroup.”
The deal capped a whipsaw week for employees. On Thursday, Wachovia general bank executives were trying to rally employees around the Citi deal. On Friday, they awoke to news they were merging with Wells.
“I'm jubilant,” said one employee. “On Monday, I was suicidal.”
Wachovia shares jumped 59percent Friday to $6.21, while Wells shares fell 2 percent to $34.56. Citi shares fell 18 percent, to $18.35.
Under normal circumstances, Wachovia would be loath to be bought out by another bank, but it has struggled under a toxic mortgage portfolio since its 2006 purchase of Golden West Financial, and last weekend it appeared headed toward insolvency.
Bob Steel, the Wachovia CEO brought on in July, said in a statement that he and the rest of Wachovia “have great admiration and respect for the people and businesses at Wells Fargo and we are extremely pleased to join forces with this outstanding company.”
“This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” he continued. “The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth.”
Union previously discussed
Steel's assessment was cheerier than the statement he released Monday to accompany the Citi deal. He spoke during the Wells Fargo call with analysts on Friday, but not during the Citi conference call on Monday.
A partnership between Wells Fargo and Wachovia has long been talked about, since it would bring together two top West Coast and East Coast franchises. The combined company would create a coast-to-coast giant to rival Bank of America and JPMorgan Chase. Wells says the combined company would be No. 1 in deposits in 17 states including California, traditionally a stronghold of Bank of America.
While Wachovia has been battered from loan losses from its 2006 Golden West acquisition, Wells has fared better, helped by higher loan underwriting standards. Over time, it has largely eschewed big deals for smaller purchases west of the Mississippi. While Wachovia lost $9.1billion in the second quarter, Wells made a profit of $1.7billion.
In combining the two companies, Wells said it will mark down Wachovia's loan book of $498 billion by $74 billion. It's marking down the value of Wachovia's $122 billion in Pick-A-Payment loans, which it inherited from Golden West, by $32 billion. Wachovia had estimated that it would lose about $14 billion on that portfolio.
Wells expects to incur merger and integration charges of about $10 billion, and plans to raise up to $20 billion from investors to help pay for the Wachovia deal. It says that, including charges, the acquisition would add to earnings by the third year.
CEO Stumpf said the complete integration could take as long as three years to avoid disrupting customers and employees. Wells Fargo is famous in the banking world for taking about three years to meld together Norwest and Wells Fargo. In fact, Kovacevich said, former Wachovia CEO Bud Baker called him to get advice on how to merge Wachovia and First Union in 2001.
The Wells-Wachovia deal includes a clause that could make it difficult to break up. Wachovia is issuing to Wells preferred stock that will give it 39.9 percent of Wachovia's voting power.