Wells Fargo & Co. and Citigroup Inc.'s dispute over their competing agreements to acquire Wachovia Corp. became a battle of dueling state and federal judges Sunday.
In a ruling late Saturday, New York state Judge Charles Ramos put the Wells-Wachovia deal on hold until a hearing Friday. Ramos ruled over objections from Wachovia, which accepted Wells Fargo's $7-a-share offer Friday for the entire bank, brushing off Citigroup's agreement in principle earlier in the week to buy most of Wachovia's operations for $1 a share.
But Ramos' order was temporarily blocked Sunday by U.S. District Judge John Koeltl, who scheduled a hearing on the clash Tuesday in his New York courtroom.
In a statement Sunday before the federal judge's ruling, Wachovia indicated it would continue to stand by the Wells Fargo deal -- unless a better proposal emerged.
"Wachovia believes its agreement with Wells Fargo is proper, valid and is in the best interest of shareholders, employees and the American taxpayers," it said. "Under that agreement, Citigroup is always free to make a superior offer to Wachovia."
The dispute clouds the outcome of one of the hasty shotgun marriages imposed by the Federal Reserve and bank regulators, who say they are acting to prevent a meltdown of the U.S. financial system.
What is emerging as a classic takeover battle can also be seen as a vote of confidence in the long-term prospects for that system.
Charlotte, N.C.-based Wachovia has been socked by losses, especially on exotic mortgages acquired in its 2006 purchase of Oakland's World Savings. Wachovia was put up for sale just over a week ago by the Federal Deposit Insurance Corp., which feared it could collapse any day.
New York's Citigroup and San Francisco's Wells Fargo, coveting Wachovia's sprawling retail operations in the East and Southeast, were the leading suitors, poring over Wachovia's books to evaluate the toxicity of its mortgages, loans to home builders and securitized commercial real estate loans.
But Wells Fargo walked away from the auction, saying it needed more time to analyze the data. Wachovia's board tentatively accepted Citigroup's offer Sept. 29, with details to be worked out and a final agreement signed later.
The pact, worth $2.2 billion to Wachovia shareholders, called for Citigroup to buy Wachovia's bank operations but not its brokerage firm, mutual funds or certain other assets.
Citigroup also agreed to assume the first $42 billion in losses on the bank's loans. The FDIC, in return for accepting any additional losses, was to receive $12 billion in Citigroup preferred stock and warrants to buy shares.
On Thursday, Wells Fargo returned with its all-stock offer, worth about $15 billion, which involved no exposure to losses by the government and would have maintained the tight relationships between the various parts of Wachovia.
Citigroup said the offer was prohibited under an exclusivity pact that Wachovia had signed.
"As indicated by Citi in court filings, the exclusivity agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi," the company said in a news release Saturday.
But legal and takeover experts who reviewed the agreement at the request of The Times said the agreement, although strictly banning any conversations about a deal with a third party, did not bar another bidder from making an offer or Wachovia's board from accepting it. Such a "fiduciary out" is common in "no shop" agreements during takeover talks, Columbia University law professor John C. Coffee said.
In a conference call with analysts Friday, Wells Fargo Chairman Richard Kovacevich said his bank had not been given any additional information by Wachovia after it walked away from the FDIC auction. Instead, he said, Wells Fargo completed its analysis with no further input from Wachovia and submitted an offer that Wachovia's board preferred.
Citigroup and Wachovia have been ordered to appear before Ramos on Friday, Citigroup said in its news release, adding: "Citi has made clear it is prepared to resume negotiating in good faith to complete the transaction contemplated by the agreement in principle."
Wells Fargo countered with a statement Sunday saying, "We have a definitive merger agreement with Wachovia Corp., and it is a compelling value for, and in the best interests of, Wachovia's shareholders, team members, customers, communities and the American taxpayers."