Wells Fargo to Buy Wachovia, Citi Left Out

In a surprise move, Wachovia scrapped its deal with Citi and agreed to be acquired by Wells Fargo. Wells not only agreed to buy the whole bank, but raised its offer price and did the deal without any government assistance.

Just last week, Citi reached a deal to purchase the consumer banking operations of Wachovia for $2.2 billion or about $1 per share.  That deal now appears dead.  Instead, Wells Fargo will be purchasing the entire Wachovia organization, including the asset management and brokerage business for a higher price and without any government guarantess.

The NY Times reports:

"Under terms of the agreement, which has been approved by directors of each company, Wachovia shareholders will receive 0.1991 shares of Wells Fargo stock in exchange for each share of Wachovia stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on Thursday, is valued at $7 a share. Wachovia has almost 2.2 billion common shares outstanding. The agreement requires the approval of Wachovia shareholders and regulators."

For Wachovia shareholders, this is a far superior deal.  It also provides a glimpse of how banks negotiate with one another.  According to the WSJ, Wells Fargo was prepared to buy Wachovia last weekend for $20 billion and without any government support.  It then abruptly withdrew its offer.  Faced with a rating downgrade at the same time a chunk of debt was coming due, Wachovia scrambled to save itself and did a distressed deal with Citi.  Wells Fargo then came back and offered $5 billion less, or $15.4 billion.  Even at this lower price though, Wachovia shareholders have to be happy that they are now getting $7 per share versus the $1 per share offer from Citi.  It's unclear how much Wachovia's asset management group and brokerage would have fetched for shareholders if sold on its own.

Wells Fargo, along with JP Morgan and Bank of America, now becomes one of the big three banks.  Together, these institutions have 30% of the nation's deposits.  From a rate standpoint, don't expect to see any of these banks offering BestCashCow style returns.  These are McBanks, and they provide coverage, convenience, but not a great return.  Consolidation will only decrease the pressure on them to offer rate competitive products.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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