Citi Gets a Good Deal; Ken Lewis Overpaid 10 comments
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This morning, CNBC's Charlie Gasparino called the Citigroup (C) / Wachovia (WB) merger "like two ugly girls kissing".
The WSJ reports
Citigroup Inc. agreed to acquire Wachovia Corp.'s banking operations in another deal orchestrated by the federal government -- this time by the Federal Deposit Insurance Corporation and one in which the agency could be on the hook for loan losses.
The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.
Citigroup also said it plans to sell $10 billion of common stock and slash its quarterly dividend in half to 16 cents a share to maintain a strong capital position, in the wake of its takeover of Wachovia's banking operations.
They continued:
Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.
Citigroup is buying what the FDIC said is "the bulk of" Wachovia's assets and liabilities, including five depository institutions, and assumes the company's senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.
Citi, like JPMorgan (JPM), got a lot for almost nothing. Citi was desperate to expand its deposit footprint and this deal does it, very cheaply.
Now that we look at these recent deals, it does appear more evident every day that Ken Lewis and Bank of America (BAC) vastly overpaid for Merrill Lynch (MER). Assets are being had at "give away" prices currently and Lewis did pay a huge premium to the then Merrill price when he agree to a deal. He reasoned at the time the price was cheap and wanted to snap it up. But, the questions needs to be asked, snap it up from whom?
Merrill was not actively being pursued by other institutions. I think no one could argue that Lewis did not grossly overpay for Countrywide (CFC), both when he made his first investment and finally when he purchased the rest of it; he could have bought it out of bankruptcy had he waited.
Lewis has the deposit base to absorb the deal without hurting shareholders badly; the problem it that the upside to both deals is limited at best.
Disclosure ("none" means no position):Long C, none
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This article has 10 comments:
Good! Let's send them to Russia, Iran, Venezuela and China so they can help those economies like they've helped ours!
You really dont understand anything...add the 42B Citi is on the hook, plus the 12 B in preferred, etc...they payed MORE than BAC for ML, and ML comes with THE BEST asset management business in the world, almost 50% of Blackrock worth more than 10B...
But hey, you know more that Buffett right?
NO WAY!!
Let us live our way - we had our president elected while you had your primaries underway (and still call it democracy - much better democracy than you have established in Iraq) and we would keep our economy somewhat regulated before we let "the market to self-balance itself" (which would require $700B+ from your taxpayers)
Gotta say BAC got an absolute steal with countrywide it's accretive right now and if you read in to it further the goverment has given BAC 5 billion in tax breaks if they did the deal, so essentially they did it for nada!! As for Merril Lynch, this is a premier asset bought at a 50% discount and being bought with an all staock transaction, whats better than that, short term dilution but you pick up 1.5 trillion in assets, trading systems worth billions. This will be looked at as a very good deal, and the strong get stronger!!