M&A

Wachovia-Wells Fargo Merger Awakens Sleeping Giant

Citigroup demands that Wachovia abandon its plans to merge with Wells Fargo, and threatens to sue if its former partner tries to complete the deal.
Marie LeoneOctober 3, 2008

Citigroup Inc. is threatening to sue Wachovia Corp., claiming the smaller bank breached an exclusivity agreement by signing a merger deal with Wells Fargo & Co. instead of honoring the one it already had with Citi.

Early Friday morning, Wells Fargo agreed to buy Wachovia for $15.1 billion in an all-stock transaction. There had been speculation swirling just a week ago that Wells Fargo would buy Wachovia’s assets, but on Monday Wachovia signed an “agreement-in-principle” to sell its retail banking unit to Citi for $2.1 billion. The Citi deal, which was brokered by regulators, included a promise by the Federal Deposit Insurance Corp. to backstop Wachovia’s mortgage-related assets.

In a statement released just hours after the Wells Fargo merger was announced, Citi said its exclusivity agreement with Wachovia did not allow the smaller bank to enter into a transaction with any party other than Citi, or participate in any discussion or negotiations with a third party. Further, the exclusivity agreement stipulated that the parties would be “irreparably harmed by any breach” of the agreement, Citi said.

As a result, Citi now has demanded that Wachovia and Wells Fargo abandon their merger agreement. “Citi was negotiating in good faith and clearly completed the definitive agreements required to consummate the Citi/Wachovia transaction,” noted the press statement.

In an effort to squelch disinformation about its liquidity position, Citi also noted that it currently has total deposits exceeding $800 billion, and a Tier 1 capital ratio of 8.7 percent as of the second quarter. (A Tier 1 ratio is a measure of a bank’s financial strength, particularly tied to its ability to absorb losses. The average ratio for large banks is around 8.)

Spokespersons from Wachovia and Wells Fargo declined to comment beyond what was issued in the press statements. During a conference call Friday morning, Wachovia president and CEO Robert Steel said he could not comment on whether the Wells Fargo deal breached an exclusivity agreement with Citi.

A Citi/Wachovia merger would create a retail banking operation with $1.3 trillion in total deposits — representing nearly 10 percent of U.S. deposits. The combined Wachovia/Wells Fargo merger would create a bank with $787 billion in deposits.