Wachovia Sale to Wells Fargo Is a Better Deal for the U.S. Banking System

The deal everyone first expected to happen is now likely to proceed. Wells Fargo (WFC) is set to buy Wachovia (WB).

Earlier this week, we heard that Wachovia was to be acquired by Citigroup (C), the beleaguered corporate behemoth that has written down over $50 billion during this credit crisis. What's more is that Citigroup was only going to pay about $2 a share to acquire Wachovia.

That was a big shock to everyone who expected Wachovia to go to Wells Fargo. Analysts were questioning whether there were some time bombs lurking on Wells Fargo's balance sheet keeping them from the acquisition. Now, Wells has come in and gone over the top and trumped Citigroup's offer.

From my perspective, this is a good deal for Wells Fargo, Wachovia, and the U.S. banking system. This is the sort of deal that will lead the credit crisis to end sooner rather than later.

Citigroup is clearly a riskier company than Wells Fargo, which is the U.S.'s only AAA-rated major bank. Therefore, in order to get the deal with Wachovia done, Citi needed FDIC assistance and were not going to buy the company in its entirety. Wells does not need the FDIC and it is buying the whole company for a significant premium to Citi's bid (but still below last Friday's close).

Citi is the loser here as its stock was down on the news and both Wachovia and Wells Fargo were up. Obviously Wachovia, not happy with the Citi deal, looked to get more for their shareholders and struck a deal that is a better natural fit for two large institutions that get most of their funding through deposits.

Moreover, for the U.S. banking sector, and the economy, it is definitely preferable to have a strong institution like Wells do this transaction rather than Citi. Wells has a strong financial backer in Warren Buffett, who owns 9% of shares. And this is a classic Warren Buffett-style move, picking up good franchises at bargain basement prices due to market volatility or economic uncertainty.

Ultimately, Wells acquiring Wachovia and issuing capital will reduce overcapacity in financial services and make the U.S. banking system stronger. That will mean a quicker end to the credit crisis than if the Citi deal had gone ahead.

Citi is not taking this lying down and has threatened to sue. I am sure we will be hearing more about this trio of firms in the coming days and weeks.

Deal Terms

• Fixed exchange ratio of 0.1991 Wells Fargo shares for each Wachovia share (at deal time this was $7.00 a share, but more now as WFC's stock rose on the news): $15.1 billion.
• Whole company acquired - No FDIC assistance.
• Wells Fargo needs to raise a massive $20 billion in capital to fund the deal.
• $5 billion in annual synergies (meaning layoffs and expense reduction).
• $10 billion in deal costs. That's a shed load.

(click on charts to enlarge)

See sources below for more data on the expected deal.

Related posts
Consolidation through merger over bankruptcy

Sources
Wells Fargo Deal News Release (PDF) - Wells Fargo
Wells Fargo Deal Presentation (PDF) - Wells Fargo Website

Related articles
Citi Blasts Wachovia-Wells Fargo Merger Plan
Wachovia and the Uncertainty Principle
Wells to buy Wachovia for over $16 billion
Citigroup moves to thwart Wells-Wachovia deal
Citigroup falls on Wachovia-Wells Fargo deal

Disclosure: None

Comments

[hunter:]

After all this wrangling between the two banks attempting to buy wachovia the wachovia share holders will ultimately decide. The FDIC had no business bulldozing Wachovia into a deal with Citi. Wachovia is not in jeopardy and now with the rescue package passed and relaxation of mark to market accounting rules Wachovia should remain independent. Remaining independent may be the best thing for Wachovia shareholders and the banking public. If the 4th largest bank is no longer competition will lessen and the consumer will be hurt with higher fees ect. Wachovia shareholders are not getting a good deal either from Citi or Wells Fargo. Wachovia has a lot of underlying good businesses. Their retail bank is among the best and most profitable among its peers. Wachovia should be getting no less than 30 billion to sell. With Citi's troubles Wells Fargo needs to step to the plate with a better offer an offer that will resolve the issue once and for all.

2008 Oct 05 08:43 AM

[Coolride:]

Wells/Wach is an all around better deal for everyone, lets just see how careless the feds. are with our taxes on this one.

2008 Oct 05 09:11 AM

[dixie:]

The FDIC continues to unnecessarily meddle with the financial market. First it was with Washington Mutual by gifting it to JPM Chase, now it seeks to give Wachovia to Citibank over the objections of taxpayer and Wachovia shareholder interest.

What gives with the FDIC? Is it the pawn of Paulson, the Federal Reserve, or just who?

2008 Oct 05 09:18 AM

[greanpea:]

boy I am outta my league here, but I just have to jump in..
Did I miss something? Am I so naiv? I believed the point of 'shareholders' (educated or un-educated) was to give capital to a company..whatever it is and whatever sector of business...so it can..ummm..grow? Thought that was what helped our economy grow too?
I am not a Crystal-Ball owner, but I am betting that if enough of these Smart(er) People come in more often and 'save' these companies (WaMu, Wachovia) at the expense of the 'common' shareholders, Wall Street may find itself owned by no-one at all. Hello mattress.

2008 Oct 05 09:39 AM

[infoplease:]

I agree with Hunter, why would WB want to make a deal with either Bank now that the Bail out has passed. The only reason it happened with Citi was because the FCID knew some analyst were going to downgrade WB on Monday morning and they felt they could not handle a bank run. Instead of brokering a deal they should have come out and said WB was working through problems and was basically a sound bank. Then with the bail out the bad loans could have been taken care of or as Mr. Steel has stated he has teams of people working with homeowners to refinance these loans. As a long time stockholder I do not appreciate what the FDIC and the government has done. I know KT made a huge mistake in buying Golden West but for that WB is a good bank. It has a great retail bank and brokerage arm. If the government would do away with mark to market they could reevalue assets and that would raise the liquidity of the bank. Bottom line there are now better options out there than Citi or WF. Our bank is worth more than is being offered.

2008 Oct 05 09:45 AM

[vatexas645:]

Citi deal was bad, Wells significantly better; BUT neither deal is good for shareholders. WB is worth much more, especially with the TARP provisions. Shareholders need to hold out for an even better offer. Citi will not be approved by shareholders (my opinion), and perhaps neither will the Wells Fargo deal.

2008 Oct 05 09:47 AM

[Ishortyou:]

Now that the 'bail out' plan came through, Wachovia needs fast to take advantage of it, it needs to sell its toxic loan portafolio from its banking subsidiaries around 122 billion if not more to the government close to even cost prices and take serious advantage of the tax break plan and remediate their banking book of business. They also need to contact their customers that did the run on the bank like chickens without head to bring their deposits back and reassure them that they are ok and there is not reason to panic because of the talking heads of FOX news and rest of media and the incompetence of the FDIC. This strategy will demonstrate to the public that the current 'bail out' plan is working and that Wachovia is the first product of it.

2008 Oct 05 09:48 AM

[alersjr:]

Check your facts--Wachovia did not "look" for a better deal. WFC approached Wachovia with the offer Thursday night and the CEO fulfilled his duties by calling the board together and presenting it to the them. The board agreed it was a better deal for the shareholders and approved it. This may be semantics but Citi is claiming Wachovia proactively sought another suitor and therefore broke the preliminary agreement. In fact Wachovia did not. So, Citi really does not have much of a legal recourse except that the FDIC is pushing this deal. Which begs the question, is Citi's balance sheet so messed up that the only way to get out of this hole and save the FDIC a mint is to push Wachovia into the arms of Citibank in a shot gun wedding? Are Wachovia's deposit so desparately needed by Citi to shore up its balance sheets that they are willing to push for a deal that clearly is not the best one on the table? And what happens when the shareholders reject the deal? Is the fed going to declare WB insolvent and then push it into the arms of Citi...? LOL more to come.

2008 Oct 05 11:35 AM

[MehulT:]

Back Burner - Wells

Seems strange, the time when Wachovia was in deep distress, Wells Fargo didn’t come up with its bids, was it too busy assessing the risks of acquiring Wachovia rather than thinking on moral grounds of rescuing a troubled bank Wachovia.

The more surprising on the part of Wachovia, to rely on the bank which came after a weeks to help after the Citigroup stepped in and finalized the deal to acquire the part in Wachovia.
Morally as well as ethically, Wells Fargo is definitely a defaulter and Citigroup Wachovia deal makes sense.

Again, it’s yet another story of the stake holders/leaders in Wachovia, if the merry Citigroup-Wachovia happens out a success. Hope they don’t have to see the door’s….

2008 Oct 05 01:24 PM

[starpvb:]

CITI SUES TO PUT TAXPAYERS ON THE HOOK FOR UP TO 42BIL IN LOSSES. CITIGROUP IS A PRIME EXAMPLE OF MAIN STREET'S DISDAIN FOR THE "FAT CATS" ON WALL STREET WHOSE MAIN CONCERN IS FOR THEIR OUTRAGEOUS SALARIES, GOLDEN PARACHUTES AND EGOS. FEDERAL BANK REGULATORS AND FDIC SHOULD SUPPORT THE WELLS FARGO OFFER TO BUY WACHOVIA WITH WHATEVER LEGAL MEANS IS AVAILABLE TO THEM GIVEN THEIR FIDUCIARY RESPONSIBLITY TO THE TAXPAYERS. CITIGROUP SHOULD BE MINDFUL OF THEIR OWN "REPUTATIONAL RISK" IN POTENTIALLY LOSING THEIR OWN CUSTOMERS AND DEPOSITS IN THE LAWSUIT. FURTHERMORE, THEY SHOULD CONSIDER THE GOOD OF THE COUNTRY IN THIS ECOMOMIC CRISIS AND EITHER MAKE A SUPERIOR OFFER TO THE WELLS FARGO OFFER WITHOUT TAXPAYER ASSISTANCE OR STOP THE LAWSUIT WHICH CAN POSSIBLY DAMAGE THE FRAGILE ECONOMY FURTHER.

2008 Oct 05 04:11 PM

[mlyn:]

I think alersjr is correct.

Since last year when CEOs were being fired, one of them being Citibank, I read from astute analysts how C had a lot of the toxic level 3 OTC derivatives that are over-leveraged 30 to 1. C hasn't been in the news lately, but I wouldn't be surprised that the FDIC is pushing Wachovia to C, hoping two weak banks become one that is "too big to fail." The OTC derivatives have yet to fall. I think the U.S. taxpayers are getting hit by the "economic hitmen" except it's our own government doing it. Go Wells Fargo!

As far as I am concerned, the failed/failing banks represent the banks that do the bidding of the President's Working Group or the "Plunge Protection Team" which includes laundering funds for the CIA, keeping the price of precious metals low, propping up the U.S. stock market and the U.S. dollar. The fundamentals of this country are awful, and President's Working Group's (Treasury, Fed, et al.) smoke-and-mirrors are being revealed. The politicians gave Wall St what it wanted via less regulation. Wall St (banks, hedge funds) earned enormous profits which recycled back into political campaigns. Now the President's Working Group is trying to save them in order to maintain their avenues of international influence.

This bailout, in my opinion, is only a short-term answer, to maintain "stability" during the elections and the rest of 2008. This allows Bush-Cheney Adm and Paulson and Cox and other Wall Streeters time to "bail out."

If you want to learn more about the banks, see solari.com and read, now an outdated commentary, "Where Would Jesus Bank?" by Catherine Austin Fitts. It includes a list of banks, some of which no longer exist, that supports "free market" manipulation. Catherine used to work for Bush I but left because she could not fight against the corruption of the Bush I Adm.

2008 Oct 05 06:17 PM

[dixie:]

The FDIC continues its unethical practice of arranging shotgun weddings.

Who is the next couple????

2008 Oct 05 11:27 PM

[Ishortyou:]

is anybody calling the regulators that oversight the FDIC for its unethical behaviour?

2008 Oct 06 06:59 AM

[sieraromero:]

When has wall street and the government and the rich been concerned about ethical behavior? It's all about greed, money and power. ETHICS have never been and never will Be an overriding power over the almighty dollar.

2008 Oct 06 08:51 AM

[carey_jim:]

We talk about corporations as if they are people.

Wells Fargo made an offer to buy Wachovia and the shareholders have to vote for it. But who is this guy/gal anyway?

I've met a lot of shareholders in my day but I've never met Wells Fargo. I wonder if she/he would come to my next party?

2008 Oct 06 11:43 AM

[sumosama:]

Great factual article! Thank you!

2008 Oct 06 12:23 PM

[small fish ...:]

THE FDIC (SHELIA BAIR) GAVE WACOVIA A HEADS UP TO MAKE A DEAL WITH CITI OR THE BANK WAS GOING TO BE SEIZED THAT DAY UNLIKE THE MANAGEMENT AT WASHINGTON MUTUAL. THAT COMPANY WAS SEIZED ON A THURSDAY ( IT USUALLY HAPPENS OVER A WEEKEND TO HELP MAKE A DEAL TO THE BENEFIT OF ALL CONCERNED )WITH NO NOTICE AND THE SHAREHOLDERS WERE SCREWED OUT OF THEIR RETIREMENT SAVINGS. SPEAKING OF GETTING SCREWED AGAIN
WASHINGTON MUTUAL HAS A FIVE BILLION DOLLAR YES I SAID A 5 BILLION DOLLAR ACCOUNT AT JP MORGAN BANK AND JP MORGAN IS BALKING AT GIVING ACCESS TO WASHINGTON MUTUAL THE REMAINING SHELL COMPANY THE MONEY. ( DIDNT THE FDIC AND JPMORGAN SAY THAT ALL ACCOUNTS AT THAT BANK WERE SAFE AND BUSINESS AND INDIVIDUALS WOULD HAVE ACCESS TO THEIR MONEY WHEN THEY WANTED IT?) JP MORGAN CHASE AND THE FDIC ALREADY DID THE BANK ROBBERY ON WAMU ARE THEY GOING BACK FOR SECONDS AND THIRDS. JPMORGAN GOT THE WAMU BANKS FOR NOTHING AS WE CAN NOW SEE BY THE FIGHT GOING ON BETWEEN WELLS FARGO AND CITIBANK FOR WACHOVIA WHICH HAD MORE PROBLEMS THAN WAMU AND LESS VALUE.
AMERICANS WAKE UP AND SMELL THE COFFEE OR SHOULD I SAY SMELL THE STINK COMMING FROM THE FDIC AND JPMORGAN AND THEIR DIRTY DEEDS.

2008 Oct 06 12:58 PM