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THE FINANCIAL CRISIS / MERGERS

Investors, banks shaken up

Wells may face fight for Wachovia

October 04, 2008|E. Scott Reckard | Times Staff Writer

Wells Fargo & Co.'s agreement to acquire troubled Wachovia Corp. for $15 billion is a dream deal that bank analysts have discussed for years: a marriage of the strongest regional bank west of the Mississippi with a powerhouse in the Eastern and Southeastern United States.

The only problem: Wachovia already pledged its hand to another.

The Wells Fargo agreement, disclosed in a surprise announcement Friday, would give Wachovia shareholders $7 a share in Wells Fargo stock.

It came four days after Citigroup Inc. agreed to buy most of Wachovia for $1 a share.

The Citigroup deal was engineered by federal regulators, who deemed it necessary to avert a collapse of Wachovia that could have jeopardized the nation's financial systems.

The Citigroup deal would leave the Federal Deposit Insurance Corp. on the hook for any losses above $42 billion incurred by Citigroup as a result of taking over Wachovia.

The Wells deal would require no support from the government.

Which suitor would ultimately prevail remained unclear Friday, as the middleman role of federal regulators complicated what normally would have been a run-of-the mill corporate takeover battle.

Citigroup accused Wachovia of a "clear breach" of contract and Wells Fargo of illegally interfering with the pact, and raised the prospect of suing.

The FDIC said it stood behind the Citigroup agreement but suggested Wells Fargo's deal might be acceptable as well, after a regulatory review.

"This could very well wind up a law school case," said Len Rushfield, a Pepperdine University expert in banking and acquisitions.

Wells Fargo is known for its aggressive sales culture, and Wachovia for top-notch customer service, a combination the banks said would make them hard to beat. But the biggest motivation was geography -- the combined bank would have retail offices in 39 states.

"Just look at the map," said RBC Capital analyst Joseph Morford. "It would give Wells basically 20% of the deposits in California, Texas and Florida, the fastest-growing markets in the country."

There are just six states in which Wells and Wachovia both currently operate. One is California, raising the possibility of branch closures and job cuts. San Francisco-based Wells Fargo has 1,016 offices in California; Charlotte, N.C.-based Wachovia has 176, according to the FDIC's website.

Wells officials wouldn't discuss details of cost cuts, but the bank said that within a couple of years it expected to shave $5 billion in annual expenses off the combined operating costs of the two institutions.

Wells Fargo agreed to buy all of Wachovia, whereas the Citigroup deal would have excluded Wachovia Securities, a big brokerage arm, and its mutual fund units.

Wachovia investors celebrated the deal, bidding up the bank's shares by $2.30, or 59%, to $6.21. Citigroup stock tumbled $4.15, or 18%, to $18.35. Wells Fargo slipped 60 cents, or 1.7%, to $34.56.

Wells said merger costs would total $10 billion. It estimated that it would take $74 billion in immediate write-downs and gradual increases to credit reserves to reflect the problems in Wachovia's nearly $500-billion hoard of loans.

The portfolio includes $122 billion in adjustable-rate mortgages originated by World Savings, a thrift once owned by Oakland's Golden West Financial Corp., which Wachovia acquired in 2006. Wells Fargo estimated that losses on those loans would total $32 billion.

Despite such heavy costs, Wells Fargo said it expected the Wachovia deal would begin to add at least 15% to its per-share earnings after two years.

Wells Fargo had been a participant in an auction for Wachovia run by the FDIC last weekend. Wells said it dropped out because it needed more time to crunch numbers.

That left Citigroup sitting alone with Wachovia and FDIC officials in New York on Sunday, with the regulators insisting that a deal had to be struck to avoid "systemic risk" to the financial system, according to two people close to the bidding, who were not authorized to speak publicly about it.

As part of the Wachovia-Citigroup accord, Wachovia signed a three-page "no shop" agreement pledging not to discuss deals with any other potential bidders -- an agreement that Citi said the Wells deal "clearly breached."

In a call with analysts, Wachovia Chief Executive Robert Steel declined to talk about the exclusivity agreement. But Wells Fargo Chairman Richard Kovacevich suggested that it had not been breached because Wells did not have any more discussions with Wachovia and instead just finished its analysis of the data it already had been provided.

One person close to Citigroup said the big New York bank already had begun discussions this week with Wachovia over the nuts and bolts of merging the two operations.

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