Citi to Wells Fargo: Not so Fast

“Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia. In addition, Wells Fargo’s conduct constitutes tortious interference with the Exclusivity Agreement.,” Citi said in a  press release .

That “tortious interference” was a $15.4 billion all-stock takeover bid by Wells Fargo that effectively valued Wachovia at $7/share and absorbed the Charlotte-based bank and financial services company intact versus a $2.16 billion deal with Citigroup that had been struck earlier in the week (see  Wachovia Leaves Citigroup at the Altar ).  

The Citigroup deal, which included a provision for the U.S. government to possibly absorb hundreds of billions of dollars in future Wachovia losses (reportedly anything above $42 billion), while leaving behind Wachovia’s retail brokerage, asset-management, insurance and retirement-services units (see  Wachovia Retirement Stays in Acquisition Deal ).   Analysts estimated that shares in the new Wachovia would be worth about $2 each, according to the Wall Street Journal.

The abrupt shift apparently also took government officials by surprise.   On Friday the Federal Deposit Insurance Corp. (FDIC) issued the following  statement ; “”The FDIC stands behind its previously announced agreement with Citigroup.”   But then the agency also said that it would “…be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”  

The Federal Reserve also  commented , noting that “The Citigroup proposal has undergone extensive review by the Federal Reserve and the Office of the Comptroller of the Currency. We have not yet reviewed the new Wells Fargo proposal and the issues that it raises.”   However, the Fed also left a door open, noting “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.”  

Update:  On Saturday Justice Charles Ramos of the Supreme Court of the State of New York granted emergency injunctive relief extending the Exclusivity Agreement between Citi and Wachovia Corp. until further order of the court.   MORE

Published reports indicate that the $700 billion federal bailout bill passed by the House of Representatives on Friday and signed into law by President George W. Bush includes a provision that suggests that contracts relating to pending acquisitions in which the FDIC is involved might not "be enforceable."   The WSJ reports that Wachovia signed the agreement with Wells Fargo in part because it knew of the language in the bill, citing "a person close to Wachovia."

The WSJ reports that Citigroup never signed a definitive merger agreement with Wachovia, and was relying instead on language in a two-page terms sheet.   However, Citi says it "…was negotiating in good faith and nearly completed the definitive agreements required to consummate the Citi/Wachovia transaction that was announced on Monday."   Citi also said it had been providing liquidity support to Wachovia Bank since Monday's announcement.  Reuters reports that Wells Fargo says it has signed a definitive agreement to acquire Wachovia.

Making matters worse, after news of the Wells Fargo move came to light,  Citigroup 's stock price fell 18.44%, their biggest one-day drop since October 1987.

It's not clear at this point where things stand, or what that might mean for plan sponsor clients of Wachovia - or the individuals who work there.   

On Saturday Citi was granted emergency injunctive relief extending the Exclusivity Agreement between Citi and Wachovia Corp. until further order of the court.   According to a  press release from Citi, the relief was granted over the objection of Wachovia. Justice Charles Ramos of the Supreme Court of the State of New York issued the order.

Citi said it was prepared to continue negotiations with Wachovia on the parties' previously agreed-to transaction.   Citi reemphasized in the press release, as it had stated in court filings, that the Exclusivity Agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi.

According to the press release, under the Judicial Order, Citi and Wachovia must appear before Judge Ramos on Friday, October 10, 2008. Citi said it "remains willing to enter into an agreement with Wachovia which Citi believes would deliver powerful capabilities of the two entities to their respective stakeholders."