The deal everyone first expected to happen is now likely to proceed. Wells Fargo is set to buy Wachovia. Earlier this week, we heard that Wachovia was to be acquired by Citigroup, 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 ended 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, they 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 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.
- 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.
See sources below for more data on the expected deal.
Consolidation through merger over bankruptcy
Wells Fargo Deal News Release (PDF) – Wells Fargo
Wells Fargo Deal Presentation (PDF) – Wells Fargo Website
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