Surprise move may turn out better for employees, shareholders and taxpayers. Wachovia has backed away from an agreement in principle reached just days ago to sell its banking businesses to Citigroup and entered into a definitive agreement to sell itself hook, line and sinker to Wells Fargo.

In a complicated deal backed by the U.S. government, Citi had proposed to take over Wachovia's banking businesses, including its multifamily office Calibre, for $2.16 billion of its stock and the assumption of $53 billion of Wachovia's subordinated debt.

The FDIC promised to cover all but $42 billion of losses Citi might incur on Wachovia's $312-billion portfolio of mortgage-related securities. In exchange, the FDIC was in for Citi preferred stock and warrants worth about $12 billion.

That would have left Wachovia as a standalone, publicly traded brokerage with 14,600 advisors and $1.1 trillion in client assets at the end of June 2008 and a fund manager, Evergreen, which managed $246 billion at the end of June.

Considering the noise Wachovia has made about integrating its brokerage with its banking business, some say Wachovia Securities by itself would be in hot pursuit of another bank to take it over. On the other hand, media reports have made much in recent days of the supposed attractiveness of independence to some of its advisors -- especially 5,000 or 6,000 who came over when Wachovia bought St. Louis, Mo.-based A.G. Edwards last year. 

Friday surprise

Now though, Well Fargo is proposing to pay $15.1 billion for all of Wachovia including its debt, deposits and "credit-impaired" assets.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," says Wachovia's CEO Robert Steel.

If combined today, the brokerage divisions of Wachovia and Wells Fargo would have $1.373 trillion in client assets and about 15,890 financial advisors -- $1.17 trillion of that through Wachovia's 14,600 reps.

Elizabeth Nesvold, managing partner of New York-based M&A consultancy Silver Lane Advisors agrees that an all-in deal between Wachovia and Wells Fargo makes more sense than a partial sale of Wachovia to Citi.

For one thing, it gives San Francisco-based Wells Fargo a chance to make good on an ambition to extend its retail-banking footprint east of the Mississippi. Wachovia has 3,300 branches with most of them concentrated in the U.S. South and on much of the Eastern Seaboard.

This lack of geographic overlap might mean that more Wachovia employees will keep their jobs with Wells fargo at the helm than would if Citi, a bank with a signficant retail presence in the eastern U.S. , took over.

And, from a wealth-management perspective, Calibre makes a better fit -- geographically, culturally and in terms of market segmentation and service offerings -- with Wells Fargo's Family Wealth Group than with anything up and running at Citi.

"It's a better deal for everyone," says Nesvold, comparing the proposed merger of Wells Fargo and Wachovia to a tie-in between Wachovia and Citi. "It's better for shareholders, better for Wachovia employees, and better, frankly, for U.S. taxpayers."

Spitting darts

However that may be, Citi is fuming about Wachovia's change of heart.

"Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia," Citi says in a statement.

According to Citi, its agreement with Wachovia stipulates "that Wachovia will not enter into any transaction with any party other than Citi, and will not participate in any discussions or negotiations with any third party" and underlines the notion "that the parties would be irreparably harmed by any breach of the agreement and that the remedy of specific performance of the agreement is appropriate."

Citi further notes that the value to Wachovia shareholders of its proposed takeover of the company's banking businesses "was substantially in excess of Wachovia's" 25 September 2008 closing price -- and that Citi has "been providing liquidity support to Wachovia Bank" since the two firms announced their tentative deal.

Citi is expected to sue to keep Wells Fargo and Wachovia apart. Either that, or make a higher bid for Wachovia; maybe for all of it this time. -FWR

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