A New York judge on Saturday blocked Wells Fargo & Co.'s attempt to purchase Wachovia Corp.
Citigroup said in a statement that New York Supreme Court Judge Charles Ramos temporarily halted the sale of Wachovia. Responding to a petition by Citigroup, the judge called for a meeting between representatives of Citigroup and Wachovia on Oct. 10.
Wells Fargo & Co. stepped in Friday to purchase Wachovia Corp. in a $15.1 billion bid to catapult the new company into the top echelon of financial services. But Citigroup said the deal was "in clear breach" of an earlier agreement for Citigroup to acquire Wachovia's banking operations.
The Wells Fargo agreement calls for the complete merger of Wells Fargo and Wachovia with no federal assistance. Wells Fargo said it will acquire all of Wachovia's businesses, including its debt in a "stock for stock" transaction. As part of the deal, Wells Fargo, which is based in San Francisco, would gain control of all outstanding shares of Wachovia's common stock. Wachovia is based in Charlotte, N.C.
Analysts were surprised by the announcement, which both companies said was "definitive," because it comes on the heels of a deal brokered by the Federal Deposit Insurance Corp. on Sept. 29 to sell Wachovia to Citigroup. Under the terms of that deal, Citigroup would have acquired all of the banking operations of Wachovia, and Wachovia would have kept ownership of its securities divisions, including Wachovia Securities, AG Edwards and Evergreen.
Citigroup would have absorbed up to $42 billion of losses from Wachovia's $312 billion pool of loans. And the FDIC would have absorbed additional losses in exchange for receiving $12 billion in preferred stock and warrants as compensation for taking on the risk.
On Friday, Citigroup said that Wachovia's agreement to enter into a deal with Wells Fargo violated an exclusivity agreement between Citigroup and Wachovia. Citigroup also said Wells Fargo engaged in "tortious interference."
FDIC Stands Behind Citigroup Agreement
In an unusual twist, FDIC Chairman Sheila Bair said in a statement issued Friday that the agency "stands behind its previously announced agreement with Citigroup." Bair said the FDIC will be "reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest." Historically, the FDIC has no oversight over bank mergers and acquisitions.
Wells Fargo said it plans to maintain Wachovia's banking offices in Charlotte and its securities offices in St. Louis as part of the deal. The combined company will have $1.42 trillion in assets and $787 billion in deposits. It will also have bank locations in 39 states and the District of Columbia.
"They'd be a top-three bank in the U.S.," says Matthew Warren, an equity analyst for Morningstar. "It will be one of the largest depositories in the country."
The larger deposit base will give the combined company economies of scale and will enable it to compete with JPMorgan Chase and Bank of America with a "nationwide banking presence," he says.
Merrill Lynch, which Bank of America purchased in mid-September for $50 billion, has the largest team of brokers in the U.S. And On Sept. 25, JPMorgan Chase acquired the assets of Washington Mutual — previously the nation's largest savings and loan — in a deal brokered by the FDIC for $1.9 billion.
Warren says the Wells Fargo-Wachovia deal was driven by Wells' interest in acquiring the "second-largest brokerage army" to foster cross-selling of services for both banking and wealth management clients.
The agreement will require the approval of Wachovia's shareholders and federal regulators. Wells Fargo's board has already approved the offer. Wells said the merger costs are likely to be close to $10 billion and that it would issue up to $20 billion in common stock to raise additional capital.
Warren says Wells Fargo is "the only AAA-rated bank in the country" and that it has strong capital levels. Regardless, the bank still needs to raise capital to "support this opportunistic deal," he says.
Wells Fargo Chairman Dick Kovacevich said in a prepared statement that the merger "provides superior value" compared with the FDIC-brokered deal whereby only the banking operations of the company would be acquired by Citigroup.
Robert Steel, president and CEO of Wachovia, struck a similar chord in a press release. He said the agreement "enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," adding that the two firms have businesses that were "extraordinarily complementary."