Wells Fargo, the biggest bank on the US West Coast, stunned the market yesterday by agreeing to buy all of Wachovia for about $15bn (£8.43bn), beating an offer from Citigroup made just days before.
The announcement set Wells and Wachovia on a collision course with Citi, which said it had an exclusivity agreement with Wachovia and demanded that its rivals cancel the deal. Citi, which agreed to buy Wachovia's banking business on Monday, said it was prepared to take legal action to enforce its rights.
Wells said its all-share offer did not need any government assistance and would keep the North Carolina-based Wachovia intact. Citi's offer relied on backing from the Federal Deposit Insurance Corp and would have left Wachovia with its investment banking and mutual fund business.
Under the Wells offer, Wachovia shareholders will receive 0.1991 Wells shares for each of their shares and will give shareholders a better chance to claw back some value from the 90 per cent fall in Wachovia's share price this year. The Wells offer was worth $7 a share based on the closing prices of the two banks on Thursday, compared with about $1 for Citi's all-share offer.
Wachovia shares rose nearly 59 per cent to $6.21 in New York, while Wells shares fell 1.7 per cent after rising earlier. Citi's stock shed 18.4 per cent.
The deal is a blow for Citi, which believed it had picked up a big branch network and much-needed retail deposits while using FDIC financial backing to minimise dangers from buying Wachovia's risky mortgage book.
With wholesale funding markets closed, US banks are scrambling to secure retail savings. "For Citigroup, this is a real loss. This was a deal that was going to save them as much as it was saving Wachovia," Cassandra Toroian, chief investment officer of Pennsylvania-based Bell Rock Capital, said. "It was a smart move by Wachovia to entertain Wells Fargo's, obviously unsolicited, bid. I think it is a better deal for them."
Wells has come through the credit crunch relatively unscathed because of its strategy of sticking to straightforward retail and commercial banking. The deal is a departure for Wells, which has limited its interest in takeovers to smaller, "in-fill" acquisitions.
If it lands Wachovia, Wells will become the biggest US retail bank with $787bn of deposits and will gain a strong branch presence on the East Coast. But – as with Lloyds' takeover of HBOS – analysts expressed concern that Wells could sacrifice its position as a low-risk bank by rescuing Wachovia.