Citi Left Deserted As Wachovia Falls For Fargo

This past week has been chaotic for the markets, for investors and for Citigroup (C). Announced on Monday, Wachovia’s (WB) operations excluding Wachovia Securities and Evergreen Asset Management were sold to Citigroup. The deal was brokered by the FDIC over the weekend of September 28th and 29th to prevent any further shockwaves in the financial markets and the economy. The deal was at a fire sale price of $1/share for Wachovia’s assets, including the toxic waste that has corroded a significant portion of its market value. Wachovia shareholder’s woke up on Friday morning to a sweeter offer, Wells Fargo (WFC) came out with a $14.8 billion offer for the Charlotte bank. Citigroup on the other hand was left waiting at the altar like a groom waiting for his bride who got cold feet and fled from the chapel.

Friday’s news from Wells Fargo sent Wachovia’s shares shooting up over 58% as shareholders saw a $1.00 a share bid become minuscule compared to Wells Fargo’s $7.00 a share offer.

The new offer from the West Coast banking giant leaves Wachovia intact, taking Securities as well as the commercial and investment bank with it. Wells Fargo management apparently has been savoring a Wachovia acquisition for years, now at a time of distress, the patience seems to have paid off. Wells Fargo’s management was very smart in taking time to calculate the price of the Southern banking giant in its entirety. This preservation of the business will help Wells Fargo diversify its revenues as well as gain an immense foothold in the east coast banking environment. Wachovia’s culture milked value from the cross selling abilities of its wide range of offerings backed by employees that rank #1 on the customer satisfaction index. Wells Fargo is getting Wachovia at a great discount, but not ripping off the shareholders completely with their $15.1 billion offer. So during all of this action on Friday, what was the groom up to?

What about Citi?

Early Sunday morning, a court order froze the Wells Fargo and Wachovia order stating that according to the deal brokered with Citi, Wachovia could not negotiate with any other parties. Score one for Citi. The tides soon turned in favor of Wells Fargo when a higher court overturned the ruling and the government came back to help find a compromise to the situation. Citi’s share price fell on Friday by almost 6% as investors found the uncertainty of the Wachovia deal very disconcerning. Legal battles have ensued all weekend over the “exclusivity agreement” between Wachovia and Citi which was broken when Wachovia accepted Wells Fargo’s offer. Currently, the deal between Wachovia and Wells Fargo has been put on hold as Fed officials are sweeping in offer alternatives. One alternative is to break up Wachovia’s operations between the two banks. Citi getting all of the north eastern and mid atlantic branches along with the investment bank. Wells Fargo gets the asset management, brokerage, and all the southern and western branches. In addition to this idea, Citi came out saying they are suing Wachovia for $60 billion over the breach of the agreement. At the same time however, Citi is willing to come back to the table to settle out of court. This will continue to be an interesting lesson in the intricacies of business law.

So what should happen?

In my own personal opinion, Wachovia’s shareholders are best served by a takeover by Wells Fargo. Wells Fargo’s management has come out and stated that the acquisition will require a substantial multi billion dollar write down. This aggresive strategy will serve Wells Fargo well in the future. Citi on the other hand has its own issues, the bank will become too large to manage and will just assume more toxic waste stemming from Wachovia’s cursed Golden West acquisition.

So when reviewing this, it seems that it is best even for Citi shareholders for Pandit and his team to let this one go. Initially, shareholder value maybe destroyed at Wells Fargo, but in the long run, led by Chairman Kovacevich will be one of the best run banks in the country. Management will have to instill much better risk discipline for Wachovia’s banking operations where poor bets have sunk a coveted giant. Word on the street is that Wachovia would have failed two days after the deal with Citi. At this point in time, we cannot worry about this, Wachovia will continue to operate as long as both potential knights stay at the round table to hammer out a deal. The future of the American banking landscape is in limbo right now as what was once the fourth largest bank in America is being taken over. Keep an eye on the news as the markets continue to head south and act in a calculated manner when investing.

Disclosure: The author currently has no positions in any of the aforementioned companies.

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