Citigroup Ends Bid To Buy Wachovia
Friday, October 10, 2008
Citigroup has ended its pursuit of Wachovia, allowing Wells Fargo to proceed with its $15 billion deal to buy the troubled Charlotte bank and emerge as one of the largest retail and commercial banks in the United States.
Citigroup said, however, that it would continue to press a lawsuit seeking more than $60 billion from Wells Fargo and Wachovia for striking a deal after Wachovia had agreed to negotiate exclusively with Citigroup.
The announcement ends two weeks of financial, legal and political squabbling over the fate of Wachovia, which was crushed by massive losses on mortgage loans but still coveted for its lucrative bank branch network.
Wells Fargo will become the largest bank in the Washington area, and it will join Bank of America and J.P. Morgan Chase in a small group of giants that now control about a third of the U.S. retail and commercial banking industry.
"We believe that that is the correct and right decision for our Country and our citizens and the health of our already stressed financial system, as well as our and Wachovia's respective shareholders and stakeholders," Wells Fargo Chairman Richard M. Kovacevich said in a statement.
The government stands to lose billions of dollars in tax revenue from the deal. Under a new change in tax regulations, Wachovia's losses will allow Wells Fargo to avoid at least $20 billion in federal taxes, according to analyst estimates.
Citigroup, struggling with its own loan losses, faces an uncertain future. Banks increasingly are dependent on deposits as a low-cost funding source, and the company has a relatively small deposit base.
The company had agreed to buy Wachovia for $2 billion in a deal arranged by the Federal Deposit Insurance Corp., which in turn agreed to absorb much of Wachovia's projected losses. That appeared to be a cheaper deal for taxpayers because the FDIC is funded by the banking industry. Only after Citigroup kept Wachovia alive for nearly a week, by lending the company money, did Wells Fargo emerge with a $15 billion offer.
Citigroup sounded a bitter note in conceding its prize.
"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened," the New York company said in a statement. "We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."
Wachovia had agreed to sell itself to Citigroup after the FDIC threatened to seize the company. Wachovia shareholders, employees and some executives bridled against the deal from the start because Citigroup wanted to buy only part of the company and because, they said, the price was too low.
When Wells Fargo offered to buy all of Wachovia last Friday, the company's board jumped.
"We look forward to completing our merger with Wells Fargo, which we have always believed is in the best interest of shareholders, employees, creditors and retirees as well as the American taxpayers," Wachovia spokeswoman Christy Phillips-Brown said last night.
The companies had agreed to suspend lawsuits against each other earlier this week in favor of negotiations. That truce was scheduled to end today, and regulators thought the companies were likely to reach a deal to divide Wachovia.
A source familiar with Citigroup's thinking said the company walked away from the negotiating table because it became increasingly concerned that losses on Wachovia's loan portfolios would be even larger than anticipated.
Wells Fargo issued a statement that read in part, "We believe we have adequately evaluated the risks inherent in the portfolios as of the time of this merger agreement."