The Green Sheet Online Edition
October 27, 2008 • Issue 08:10:02
Duel in the Big Apple
The battle between Citigroup Inc. and Wells Fargo & Co. for control of Wachovia Corp.'s banking operations is, for the time being, over. On Oct. 14, 2008, the Board of Governors of the Federal Reserve approved Wells Fargo's application to merge with Wachovia. Under the agreement, Wells Fargo acquires all of Wachovia for $15.1 billion. The merger is expected to be completed by the end of 2008.
Citigroup and Wells Fargo were competing for control of Wachovia's $448 billion in assets. On Sept. 29, Citigroup intended to acquire the Charlotte, N.C.-based financial institution in a transaction facilitated by the Federal Deposit Insurance Corporation. But on Oct. 3, Wells Fargo presented Wachovia with an offer to purchase all of its banking and business operations and stated it would need no FDIC assistance to complete the takeover.
After Wachovia broke off negotiations with Citigroup and accepted the Wells Fargo offer, a chain reaction of legal maneuverings was set into motion. On Oct. 4, New York Supreme Court Judge Charles Ramos granted a request from Citigroup for additional time to complete the Wachovia deal. The next day, an appellate of the same court dismissed Ramos' order.
Simultaneously, Wachovia was in federal court asking U.S. District Judge John Koetl to declare the Citigroup deal invalid because provisions in that agreement restricted Wachovia from considering other bids or negotiating with other firms. Wachovia indicated that it only agreed to the Citigroup deal "with the understanding that the FDIC would seize its assets" unless it accepted Citigroup's proposal.
In the four days between the agreement and its breaking, Citigroup said it provided Wachovia with $1.2 billion in liquidity to keep the bank operating and that the company lost $20 billion in stock value on Oct. 3 after the Wells Fargo announcement.
"Citigroup exposed itself to substantial economic risk by publicly committing to rescue Wachovia with less than 72 hours' due diligence, as well as the risk that it would be used as a stalking horse for other bidders who might come in later after Citigroup's action prevented Wachovia from failure," Citigroup said.
A Wachovia spokesman called the arrangement with Wells Fargo "proper, valid and in the best interests of shareholders, employees, creditors and American taxpayers. Additonally, it imposes no risk to the FDIC fund." Robert Steel, Wachovia's Chief Executive Officer, said the deal with Wells Fargo will allow the company to remain "intact, preserving the value of an integrated company without government support."
Wells Fargo Chairman Dick Kovacevich reiterated that "the two companies have a firm, binding merger agreement and we are confident the merger will be completed."
According to a Citigroup spokesman, the company dropped out of the settlement talks on October 9 and will not challenge the merger. However, Citigroup said it will seek up to $60 billion in punitive and compensatory damages from both Wells Fargo and Wachovia, alleging a "bad-faith" breach of contract.
"This lawsuit adds nothing to the issues already joined by the parties in court," Citigroup said. "Citigroup believes strongly that the deplorable conduct of Wells Fargo and Wachovia here gives rise to substantial legal liability, and we look forward to contesting this case fully and vigorously." Wachovia and Wells Fargo representatives declined to comment. But on Oct. 13, 2008, Wells Fargo countersued Citigroup, asking the New York State Supreme Court in Manhattan to rule the original agreement between Citigroup and Wachovia invalid, which would relieve Wells Fargo of liability for damages sought over its acquisition of Wachovia.
Countdown to compromise
All parties involved anticipate a quick resolution because a prolonged court battle could further diminish Wachovia's stock value, which, according to Wachovia officials, has already been weakened by billions of dollars lost from failed mortgages.
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