The Battle For Wachovia

It sounds like a war, doesn’t it? It’s the corporate type that will most likely end up in court somewhere. Citigroup (C) offered to pay $2.1 billion for Wachovia’s (WB) banking operations just 4 days ago. What I don’t understand is how Wells Fargo (WFC) could go behind Citigroup’s back and do a deal, just like that. A copy of the exclusive agreement between WB and C can be found here.

Remember over the weekend, both WFC and C were involved in a bidding war? If it was a genuine bidding war, how in the world did WFC come up with the $14.8 billion figure in a matter of days but not be able to control WB’s banking operations on Monday by bidding a bit higher than $2.1 billion?

WFC has an uphill battle to fight since the FDIC is backing Citigroup. Citigroup also has some legal merit since their agreement with WB states that WB “cannot enter into any transaction with any party other than Citigroup or negotiate with anyone else”. Not only that, shareholders and regulators will have to approve of this deal, and with the mess that WB’s in, it’ll get pretty complicated. This is sort of like having two girls like you, but you have to chose only one (both if you’re a freak). The difference is, you can’t choose which one you want to be with!

By law, the FDIC is required to find the least-costly resolution for taxpayers and since WFC’s deal isn’t requiring gov’t assistance, that would be the solution. Citigroup’s deal relied on gov’t assistance, but was the first to consummate a deal with WB. (Citigroup agreed to take on up to $42 billion in losses from WB’s portfolio and the FDIC will cover the rest in exchange for $12 billion in C preferreds and warrants). Two large institutions with a lot of lawyers and money — this could get ugly.

Who will win?

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