Wells Fargo, based in San Francisco, and Wachovia said late yesterday they will stick to the terms of the all-stock deal they struck October 3, four days after Citigroup's offer. The bid values the Charlotte, North Carolina-based lender at about $5.43 a share, 51 per cent more than Wachovia's closing price of $3.60 in New York trading.
The deal marks Wells Fargo Chairman Richard Kovacevich's biggest takeover since he led Minneapolis-based Norwest Corp's purchase of Wells Fargo, founded in 1852, 10 years ago. Like JPMorgan Chase & Co, which last month acquired Washington Mutual Inc, he took advantage of the worst financial crisis since the Great Depression to extend his geographic franchise.
"They are going from being a mainly West Coast bank to rivalling Bank of America with a national retail franchise," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "There will never be another Wells Fargo- Wachovia transaction. This was a defining moment for Kovacevich."
Citigroup, based in New York, dropped the legal battle it waged to prevent the merger. The bank, led by Chief Executive Officer Vikram Pandit, still plans to sue Wells Fargo for $60 billion in damages, saying news of the competing bid caused its own share price to tumble.
Fed Cease-Fire: A torrent of back-and-forth court filings over the deal generated so much publicity that the Federal Reserve, concerned about its effect on US financial markets, insisted on a cease-fire to allow the two suitors to settle their differences. The pause lasted until late yesterday, when Citigroup said it had ended talks with Wells Fargo.
Pandit, who initially called the deal "compelling" and "one of those high-return acquisitions in which we have contained the risk", said in yesterday's statement that the bank's willingness to walk away was a sign of "discipline".
"Following several days of negotiations, we continued to have dramatically different views regarding risks involved in the transaction," Pandit said in a memo to employees. "As I said from the beginning, Citi does not need to do this transaction. We were willing to pursue it only if we could limit the risk and generate value for shareholders."
Missed Opportunity?: Citigroup missed out on an opportunity to keep pace with rivals that have expanded through acquisitions of troubled institutions, said Charles Carlson, a money manager at Horizon Investment Services LLC in Hammond, Indiana. In addition to New York-based JPMorgan's takeover of WaMu and Bear Stearns Cos, Bank of America Corp acquired Countrywide Financial Corp and Merrill Lynch & Co.
The more Citi could beef up its operations and be part of the big bank club, the better," Carlson said. "I'm not sure this is going to be viewed as good for Citi."
Wells Fargo gains control of a bank with $448 billion of deposits in 21 states. It would have 6,675 branches, compared with Bank of America's 6,139. More than half of Wachovia's branches are on the US East Coast, while Wells Fargo's reach from California to Texas and Minnesota.
Kovacevich said yesterday in a statement that the combination would "create significant value for Wachovia and Wells Fargo shareholders". He added that his management team has "adequately evaluated the risks inherent" in Wachovia's loan holdings.
Option ARMS: Wachovia's $498 billion loan portfolio includes about $122 billion of option adjustable-rate mortgages. The home mortgages are prone to default because they allow borrowers to defer part of interest payments, boosting the principal. After housing markets weakened, borrowers were left with loans larger than the value of their homes.
"Credit teams at Wells Fargo have had an opportunity to work with their counterparts at Wachovia," Kovacevich said.
Wachovia gained 29 per cent in German trading to $4.63 today. Wells Fargo fell 5 per cent and Citigroup was down 2 per cent at $12.69 after dropping 10 per cent yesterday in New York.
The Wells Fargo deal was originally valued at $7 a share, or $15.1 billion. It declined this week as the bank's share price fell. Each Wachovia share will be exchanged for 0.1991 Wells Fargo share, based on the terms announced October 3.
Emergency Funds: Wells Fargo said it expects expedited approval of the merger application by the Federal Reserve. The Fed said in a statement yesterday that it will immediately begin reviewing terms of the Wells Fargo offer.
Citigroup on September 29 signed an agreement in principle to pay almost $2.2 billion for Wachovia's banking operations, leaving behind its securities brokerage and asset management businesses.
At the time, Wachovia was on the verge of collapsing into receivership, and Citigroup began plying it with emergency funding. Citigroup also agreed to pay $12 billion to the Federal Deposit Insurance Corp in exchange for a guarantee that the agency would absorb any losses beyond $42 billion on a $312 billion pool of Wachovia loans.
Later last week, as Congress considered bailout legislation that included tax breaks for buyers of troubled banks, FDIC Chairman Sheila Bair encouraged Wachovia CEO Robert Steel to "give serious consideration" to a new offer from Kovacevich, according to court filings submitted by Wachovia in the legal battle with Citigroup.
Breaking the News After the Wachovia board approved Wells Fargo's bid on October 3, Steel called Pandit to inform him that Citigroup had been trumped and refused to engage in further discussions with his bank, according to a Citigroup court filing. Bair was on the call, according to an affidavit submitted by Steel.
The FDIC said in a statement this week that "neither Chairman Bair nor any person at the FDIC in any way initiated or solicited the bid from Wells Fargo".
Bair said yesterday she wanted to "acknowledge" Citigroup's willingness to let the acquisition by Wells Fargo proceed. "While some outstanding issues remain, this announcement brings much needed certainty to the process," Bair said.
Wells Fargo may benefit from a notice by the IRS that makes Wachovia's loan losses more valuable as deductions. The new rule means Wachovia's losses can be used to offset an unlimited amount of Wells Fargo's taxable income over 20 years.
The rule change may save Wells Fargo $25 billion in the coming years, said Robert Willens, a former Lehman Brothers Holdings Inc. accounting analyst who teaches at Columbia Business School in New York.
