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Citigroup Inc. demanded that Wells Fargo & Co. and Wachovia Corp. terminate a $15.1 billion takeover agreement announced today, saying it breached an exclusive deal the New York-based company reached earlier this week.
Citigroup, led by Chief Executive Officer Vikram Pandit, dropped as much as 15 percent in New York trading after San Francisco-based Wells Fargo said it would buy Wachovia in an all- stock transaction. Citigroup announced a $2.16 billion offer for parts of the company four days ago.
``Citi has substantial legal rights regarding Wachovia and this transaction,'' the New York-based company said in a statement. ``Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia.''
The Citigroup deal, which included assistance from the Federal Deposit Insurance Corp., would have pushed the New York- based lender to third place among U.S. bank networks, behind Bank of America Corp. and JPMorgan Chase & Co. The proposal didn't include Wachovia's brokerage and mutual-fund businesses.
``Citigroup loses an attractive, accretive deal, complete with government assistance,'' David Trone, an analyst with Fox- Pitt Kelton Cochran Caronia Waller in New York, wrote in a note today. ``The deal was struck at the 11th hour and clearly had not been formally completed.''
Shares of Citigroup fell $2.50 to $20 in composite trading on the New York Stock Exchange at 10:24 a.m. The stock had gained 12 percent since the Wachovia deal was announced on Sept. 29.
FDIC Review
``The FDIC stands behind its previously announced agreement with Citigroup,'' FDIC Chairman Sheila Bair said in a statement today. ``The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.''
U.S. bank regulators said they haven't evaluated Wells Fargo's deal.
``We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,'' the Federal Reserve and Office of the Comptroller of the Currency said today in a statement in Washington. ``The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.''
Citigroup's proposed deal with Wachovia ``has undergone extensive review'' by the Fed and OCC, the statement said.
Wachovia's Value
The Wells Fargo transaction values Charlotte, North Carolina-based Wachovia, led by CEO Robert K. Steel, at $7 a share, the companies said in a joint statement today. Wachovia traded at $6.80, up 74 percent from yesterday. Wells Fargo rose 8 percent to $38.16.
``It provides superior value compared to the previous offer to acquire only the banking operations of the company,'' Richard Kovacevich, 64, chairman of San Francisco-based Wells Fargo, said in a statement. ``Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies.''
Wachovia shareholders get 0.1991 shares of Wells Fargo common stock for each share they own. Wells Fargo expects charges related to the acquisition of about $10 billion, and the company said it will issue as much as $20 billion of new securities, mostly common stock.
Wells Fargo said it will acquire all of Wachovia's businesses, preferred equity and banking deposits. Chief Financial Officer Howard Atkins said in the statement that the acquisition will add to earnings per share by the third year after completion and should produce an internal rate of return of at least 15 percent.
U.S. stocks rose for the first time in three days as the biggest job losses in five years spurred expectations Congress will pass a bank-bailout plan and the Federal Reserve will cut interest rates to bolster the economy. Bank of America Corp., General Motors Corp. and United Technologies Corp. climbed more than 4 percent as futures traders bet the Fed will lower its benchmark rate by as much as 0.75 percentage point at its next meeting. Wachovia Corp. rallied as much as 80 percent after Wells Fargo & Co., the biggest West Coast bank, agreed to buy the lender for about $15.1 billion. National City Corp. climbed 25 percent and Sovereign Bancorp Inc. added 16 percent. ``This economic report is putting a gun to Congress's head that they've got to do something,'' said Peter Jankovskis, the Lisle, Illinois-based co-chief investment officer at Oakbrook Investments LLC, which manages $1.4 billion. ``There's no wiggle room for Congress, and that makes it very likely the bailout package will be passed soon.'' The Standard & Poor's 500 Index gained 31.88, or 2.9 percent, to 1,146.16 at 11:08 a.m. in New York. The Dow Jones Industrial Average added 247.7, or 2.4 percent, to 10,730.55. The Nasdaq Composite Index rose 64.17, or 3.3 percent, to 2,040.89. Six stocks gained for each that fell on the New York Stock Exchange. The S&P 500, which has fallen 5.6 percent over the past five days, pared losses at the end of its worst week since 2002. The benchmark index for U.S. stocks tumbled 4 percent yesterday as reports on jobless claims and factory orders reignited concern the economy is sinking into a recession. Wachovia Rallies Wachovia rallied as much as $3.14 to $7.05 on the New York Stock Exchange. The Wells Fargo offer values the Charlotte, North Carolina-based bank at $7 a share, the companies said in a joint statement today. Citigroup Inc., which had agreed four days ago to buy Wachovia's banking operations, declined $2.37, or 11 percent, to $20.13. The bank demanded that Wells Fargo and Wachovia terminate their agreement, saying it breached an exclusive deal the New York-based company reached earlier this week. National City, Ohio's biggest bank and the subject of takeover speculation earlier this week, gained 25 percent to $3.92. Sovereign, the second-largest U.S. savings and loan, increased 95 cents to $5.99. The U.S. House of Representatives cleared the way to complete action on a Senate-passed $700 billion financial-market rescue package that was refashioned to entice enough votes for passage. By a vote of 223-205, the House prevented members from offering amendments that could snarl the proceedings. The tally signaled the plan has enough support to clear Congress and be sent to President George W. Bush to be signed into law. The House roll call was scheduled for early this afternoon. Fed Funds futures trading on the Chicago Board of Trade show a 98 percent chance the Fed will reduce its target rate for overnight bank loans by a half-percentage point to 1.5 percent at its Oct. 29 meeting and 2 percent odds of a 0.75 percentage- point cut. `Part of the Solution' ``We wouldn't be surprised to see the Fed cut rates 50 points even before the next scheduled meeting,'' James Shugg, a senior economist at Westpac Banking Corp. in London, said in an interview on Bloomberg Television. ``It actually helps boost, to some extent, bank profitability. An interest-rate cut is an important part of the solution to the current serious problems confronting the U.S. economy.'' Payrolls fell by 159,000 in September, the biggest decrease in five years, the Labor Department said. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964. Railroad Rally CSX Corp. jumped $3.96, or 8.4 percent, to $51.17. JPMorgan Chase & Co. upgraded shares of the Jacksonville, Florida-based railroad to ``overweight'' from ``neutral,'' saying an 11 percent tumble yesterday left the stock at a ``compelling valuation'' given its ``strong visibility'' for earnings growth next year. Burlington Northern Santa Fe Corp., also raised to ``overweight'' from ``neutral'' by JPMorgan, climbed $4.31, or 5.2 percent, to $87.31. The Fort Worth, Texas-based railroad whose largest investor is billionaire Warren Buffett dropped 7.3 percent yesterday on concern falling commodities and factory orders may foreshadow a decline in freight volume. General Growth Properties Inc. gained $4.05, or 53 percent, to $11.64. The Chicago-based mall owner whose shares slumped 48 percent yesterday fired its chief financial officer and suspended dividend payments to weather the seizure in financial markets. Equities retreated from Sao Paulo to London to Tokyo this week, sending the MSCI All-Country World Index to an 8.9 percent decline, as an increase in bank failures exacerbated the credit freeze that pushed up borrowing costs for companies and consumers around the globe. The S&P 500, down 22 percent this year, still trades for 21.9 times profit from the past 12 months. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price-to-earnings ratio, according to data compiled by Bloomberg yesterday. Europe's Dow Jones Stoxx 600 Index trades at 10.9 times earnings, near the lowest since at least 2002.
In another sign of weakness, the average hourly work week slipped by 0.1 hour to 33.6 hours. And a modest 3-cent gain in the average hourly salary, combined with the shorter week, means that the average weekly paycheck fell by 81 cents to $610.51. Both the work week and hourly wage gains were weaker than forecasts. The report is based on surveys of employers and households conducted in the week of Sept. 8 to 12, a period before the worst of the current financial crisis hit Wall Street. That crisis caused banks to hoard cash and cut back on credit extended to businesses. Fears that the credit crunch will cause widespread job losses and a severe downturn in the already struggling economy prompted Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to push for a $700 billion Wall Street bailout. The measure, which passed the Senate Wednesday night, was voted down in the House on Monday. But the House is set to vote on the measure again Friday
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Under terms of the agreement, which has been approved by directors of each company, Wachovia shareholders will receive 0.1991 shares of Wells Fargo stock in exchange for each share of Wachovia stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on Thursday, is valued at $7 a share. Wachovia has almost 2.2 billion common shares outstanding. The agreement requires the approval of Wachovia shareholders and regulators. “This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support,” Wachovia’s chief executive, Robert K. Steel, said in a statement. “The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth.” The agreement, the chairman of Wells Fargo, Richard M. Kovacevich, said, “provides superior value compared to the previous offer to acquire only the banking operations of the company and because Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world’s great financial services companies.” “Wachovia’s brokerage and asset management businesses, which would have been left behind in the prior proposal,” Mr. Kovacevich said, “are tightly interwoven with Wachovia’s core banking business — and this agreement avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia’s team members and customers.” Under the Citigroup deal, Wachovia would have retained parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises, and Citigroup would received the banking subsidiaries. In addition, as part of the Citigroup deal, the F.D.I.C. had agreed to guarantee losses above $42 billion in exchange for preferred stock and warrants worth about $12 billion. The deal will further concentrate power within the nation’s banking industry in the hands of a few giant lenders. A sale to Wells Fargo would further concentrate Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Wells Fargo would control more than 30 percent of the industry’s deposits. Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors. For Wells Fargo, a deal will extend its reach past the Mississippi River, creating a cost-to-coast branch network that will compete with Bank of America and now JPMorgan Chase. It would also give Wells Fargo an important foothold in New York, Florida, and other big markets along the Atlantic Coast, ramping up its ability to sell mortgages, checking accounts, and other consumer loans. On the surface, Wachovia and Wells Fargo, the country’s fourth and fifth largest banks by assets, appear to be almost mirror images of each other. Both were oversized regional banks that never seemed to have national ambitions. Both emphasized consumer banking over lending to big institutional clients. And both had strong sales culture and a focus on nuts-and-bolts operations. Wells and Wachovia have been the subject of merger speculation for years. But Wachovia, like WaMu, has been hobbled by bad mortgages, making a merger more urgent and prompting federal regulators to push for a quick sale. Wachovia’s share price has plunged nearly 74 percent this year. With a big presence along the California coast, Wells Fargo has racked up big losses on mortgages and credit card loans as the housing market has melted down. But it has not been crippled by the bust like many of its big competitors, and maintained relatively strong finances. Wells Fargo kept its lending standards relatively high, even as other big mortgage lenders barreled into California as the housing market boomed. It held many of its loans, rather than packaging and selling them to outside investors. And without a big investment bank, it never suffered the massive write-offs of its big Wall Street rivals. It also bolstered its results with aggressive accounting. Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive. The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape. As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks. The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths. But a Wells-Wachovia deal also could shift the center of power in the banking industry further from New York. JPMorgan, which bought Seattle-based WaMu, is based in Manhattan. But Bank of America, which recently acquired Merrill Lynch, is based in Charlotte, N.C. And Wells, which is seeking to buy Charlotte-based Wachovia, is based in San Francisco. In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to people close to the situation. Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.
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