Should Investors Buy or Sell Wachovia Now?

When WB was in financial trouble, the FDIC orchestrated an auction for WB's assets.  When you thought Wachovia (WB) deal was done with Citigroup (C), now Wells Fargo (WFC) surprises investors that it also wants to buy WB for $7.00.  Because of the new bid from WFC, WB stock price closed at $6.21, up 58.8%.  Should you buy or sell WB stock now?

The market obviously thinks WFC will acquire WB; investors bid up the stock price close to $7.00.  Obviously, the shareholders will prefer the WFC $7 deal.  But this is far from sure especially if you look at from the legal perspective.

When WB agreed to be acquired by C, they had an agreement that WB cannot negotiate another deal.  This is a standard agreement since now everyone knows what C would pay for the company.  With this information, of course, WFC could offer a better bid.  But there is one major difference in the bid between WFC and C.  C is only buying the banking operations and FDIC has to limit C's potential losses from the mortgage backed securities.  For taking the risks, FDIC receives $12 billion worth in preferred stock and warrants from Citigroup.  So, if C is doing well, then the taxpayers can actually make money on the deal.  FDIC is actually an investor in C in this deal.  WB will continue to operate its brokerage and asset management businesses. 

WFC would buy the entire WB for $7.00, not just the banking side.  So, WB would disappear entirely.  In this deal, the government and the taxpayers will not have any risks, but at the same time, without any potential reward.  There is a lot of speculation why WFC comes in so late.  Possible reasons are the potential tax benefits, possible change in mark-to-market accounting rule, and the passage of the bailout plan.

But remember, WFC originally was involved with the bidding process.  It withdrew from the bidding.  Now, after the deal is done between C and WB and the terms are known, WFC jumps in.  This is a closed bid, not an open bid and the deadline has passed.  This is just like betting on a horse race after the race is finished.  Of course, WFC has the highest bid.

There will be a lot of issues unfolding.  The 3 possible scenarios are:

1. Is there a legal binding agreement between C and WB? If so, the deal is done, and WFC is too late.  If this is the case, WB stock price will immediately drop back to below $5.00.
2. If the FDIC allows WFC to acquire WB, then from now on, no one will follow the bidding process rule.  No one will trust any deals arranged by the FDIC.  Unfortunately, the FDIC indicates it is considering WFC's proposal.
3. Then finally, if the FDIC allows WFC to bid for WB, will C raise the bid for the entire WB now? In other words, will C get into a bidding war for WB?  If this is the case, then the stock can go up above $10.00.

The WB deal is far from over, there will be legal issues and government trust issue involve.  WB's stock price will react to any new development about the deal.

One thing for sure – there will be lawsuits against WB management no matter what the result is.

Bottom line:  You can buy or short the stock based on your assessment of the likelihood scenario.

Comments

[stock0ptimist:]

Some points not mentioned in this article.. The FDIC stated that WB did not fail. Therefore, the FDIC's role here is limited. Shareholders were required to approve either deal.. Which deal do you think would be approved? (Both were made public before the vote)

2008 Oct 06 09:26 AM

[Gary Lucido:]

There have been some interesting plays here with the various classes of Wachovia preferred: www.investingminds.com...

2008 Oct 06 09:31 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 06 09:48 AM