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Wachovia Corp. agreed to sell itself to Wells Fargo & Co. in a $15.4 billion takeover that will require no government assistance, scrapping a federally backed deal with Citigroup Inc.
After watching other transformative bank mergers from the sidelines, Wells Fargo decided to surpass almost all of them in a deal that will create the nation's largest bank in terms of branches. It will become a universal bank, combining commercial banking, retail brokerage and some investment banking, and join the few U.S. banks with a coast-to-coast retail branch network.
The deal carries considerable risk because Wachovia has a giant portfolio of troubled assets and Wells is foregoing the government backstop that Citi would receive for its deal. Embracing such risk is uncharacteristic for Wells Fargo, which has long been one of the most conservative banks.
Asked if Wells Fargo is taking on more risk, Gerard Cassidy, an analyst at RBC Capital Markets Corp., said, "Oh, my God, yes.... If Citi cut this deal with the FDIC and Wells goes it alone, I think Wells is taking on enormous risk. Credit's going to get a lot worse before it gets better. Wachovia clearly has a challenge in front of them."
Wachovia's stock gained 74% in recent trading to $6.85, while Wells Fargo rose 8.9% to $38.34. Citigroup's stock slumped 12% to $19.85.
After the deal, Wells Fargo would have 10,761 branches, 4,618 more than Bank of America Corp. (BAC), which has so far has the most branches in the U.S. Wells Fargo would have $787 billion of deposits, second only to JPMorgan Chase & Co. (JPM), which took the lead with the purchase of Washington Mutual Inc. (WAMUQ) almost two weeks ago and beating Bank of America by a whisker.
Wells Fargo would assume Wachovia's preferred stock and debt. In conjunction with the deal, Wells Fargo plans to issue up to $20 billion in new securities, mainly common stock.
The Wachovia/Wells Fargo deal comes four days after Wachovia and Citigroup reached a $2.16 billion agreement in principle to sell only its banking operations to Citigroup. It's not clear what effort Citigroup will take to defend its deal.
The decision by Wells Fargo to open a banking front on the East Coast is a strategy shift that many analysts, investors and investment bankers had expected for years, though Wells Fargo, until very recently, has played down that option. Just two months ago, Chief Executive John Stumpf said it was highly unlikely Wells Fargo would pursue a large East Coast rival and return to mega deal making. In the past, the bank has had some bad experience with such deals.
But Wells Fargo's appetite for acquisitions began changing in September, as Chairman Richard Kovacevich said. "Given the financial conditions today, I feel like a kid in a candy store." Wells Fargo had also taken a look at Washington Mutual before it was seized last week and sold to JPMorgan for $1.9 billion.
Still, some analysts and investors even exhaled when Wachovia, which Wells Fargo weighed buying, went to Citi in a deal announced Monday.
For the second time in recent years, Wachovia is in the middle of two competing bids. SunTrust Banks Inc. (STI) stepped in when First Union struck a deal for Wachovia several years ago, but First Union prevailed.
Wells Fargo has been extremely risk averse in recent years, but in its proposed deal, it takes on all of Wachovia's troubled assets, mortgage and otherwise. Citi went out of its way to limit the risk from write-downs by essentially buying an insurance policy from the Federal Deposit Insurance Corp. to cap its losses from Wachovia at $42 billion.
In making its bold bid, Wells Fargo might be hoping to benefit from the Troubled Asset Relief Program, which the government and congressional leaders agreed on last weekend and the Senate passed Wednesday, but which was rejected in the House of Representatives. A new version of the bill is pending.
The development is bad for Citigroup, as it highlights weak spots at the New York banking giant and challenges the notion that it has moved solidly from the problem category to the solution camp as the financial crisis unfolds.
Citigroup's move to buy Wachovia's banking operations was an effort to shore up its deposit base, which would look less solid if Wells Fargo succeeds in breaking up the Wachovia deal.
Ratings agencies warned after the Citigroup deal that they could downgrade the financial services company's debt. They had expressed concerns about the poor quality of some of Citigroup's own assets.
Under the deal, Wells Fargo will acquire all of Wachovia. The Citigroup deal had excluded the asset-management and brokerage operations and put the Federal Deposit Insurance Corp. on the hook for potential loan losses above $42 billion.
Wells Fargo's Kovacevich said that the deal "provides superior value" to the Citigroup deal and that it will allow Wachovia shareholders to "have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies."
Wachovia shareholders will get 0.1991 of a Wells Fargo share for each Wachovia share. Following the deal, Wells Fargo expects to incur about $10 billion in merger and integration charges. To maintain its capital position, it plans to issue up to $20 billion of new Wells Fargo securities, primarily common stock.
As part of the deal, Wachovia is issuing Wells Fargo preferred stock giving it votes equal to 39.9% of Wachovia's voting power.
Charlotte will be the headquarters for the combined company's East Coast retail and commercial and corporate banking business, while St. Louis will remain the headquarters of Wachovia Securities. Three members of the Wachovia board will be invited to join the Wells Fargo board following completion of the deal. The headquarters of Wells Fargo will remain in San Francisco.
The deal will validate San Francisco's importance to the financial services industry.
Stumpf indicated the company will try to "retain as many of the talented Wachovia team members as possible."
