Citi, Wells Fargo: Why the Wachovia Fight?

A few days ago Wachovia was near collapse, done in by the financial crisis. Now Citigroup and Wells Fargo are dueling over its takeover

by Ben Steverman

Consolidation of the banking sector took a strange turn Oct. 3 when giant banks Citigroup (C) and Wells Fargo (WFC) began wrangling over the chance to take over Wachovia (WB), despite the fact that just a few days ago the troubled bank was near collapse.

Wells Fargo's offer of $15.1 billion in stock for all of Wachovia beats Citi's deal, announced Sept. 29, to buy parts of Wachovia for $2.2 billion in stock. Citi also relied on participation from the Federal Deposit Insurance Corp. to protect Citi from losses from Wachovia's troubled mortgage investments. But San Francisco-based Wells Fargo contends it doesn't need the government guarantee.

Citi strongly objected to Wells Fargo's one-upmanship. In a statement Oct. 3, Citi said the new merger deal was illegal, "in clear breach of an exclusivity agreement between Citi and Wachovia."

A Valuable Prize

The fierce competition over Wachovia is surprising given the bank's troubles: After seeing its stock fall 93% in the past year, the Charlotte (N.C.)-based bank looked ready to be seized by the FDIC a week ago. But despite Wachovia's problems, Wells Fargo and Citigroup both see an enormously valuable prize in the bank: its size. Many are betting that, when it comes to the future of the U.S. banking industry, bigger will be better. The financial crisis offers a "once in a lifetime" chance for the U.S.'s large banks to get truly huge, says Robert Ellis of the financial consulting firm Celent. "There's an opportunity to get big and get scale," he says.

During the crisis, federal regulators seem to be ignoring antitrust rules that had previously constricted the growth of national bank franchises such as Bank of America (BAC) and JPMorgan Chase (JPM). More important, Ellis says, the price is right: Banks with thousands of branches and billions of dollars in deposits are being forced into sales at rock-bottom prices.

In the past year, Bank of America has acquired mortgage giant Countrywide Financial and more recently brokerage Merrill Lynch (MER). JPMorgan has scooped up investment bank Bear Stearns and, on Sept. 25, Washington Mutual—with both sales essentially forced by the federal government after the firms looked to be near collapse.

Though Wachovia has had problems with exposure to bad mortgage debt and other troubled investments, it is one of the largest banks in the U.S., operating 3,300 branches in 21 states. Depositors had almost $450 billion in Wachovia accounts at the end of the second quarter.

"Cheap Deposits"

"Wachovia offers an opportunity to get a large amount of cheap deposits," says John Jay, a banking industry analyst at the Aite Group. In a time of crisis, when capital is scarce and expensive, those deposits are especially valuable. They offer relatively inexpensive funding for financial institutions dealing with large losses from bad investments.

It may be up to the courts whether Citi or Wells Fargo ultimately wins Wachovia. Several analysts, however, predicted Wells Fargo would be the victor.