Surprise Deal: The New Wells Fargo

Wells Fargo in a Deal to Buy All of Wachovia

Excerpts:

In a surprise twist, the West Coast bank Wells Fargo & Company, said Friday that it had reached an agreement to acquire a rival, the Wachovia Corporation, for about $15.1 billion in stock.

The announcement came just four days after Citigroup had agreed to buy Wachovia’s banking operations for $2.2 billion, or about $1 a share in a deal brokered by the Federal Deposit Insurance Corporation.

But Wachovia, which is based in Charlotte, N.C., has now apparently rejected that deal in favor of one where the entire company would be acquired.

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In a statement, Wells Fargo, which is based in San Francisco, noted that the deal required no assistance from the F.D.I.C. or any other government agency.

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“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.”

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Wachovia’s deal with Wells Fargo will further concentrate Americans’ bank deposits in the hands of 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 coast-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 Washington Mutual, 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.

Comments: Images from a publicly available PPT from Wachovia.com

Big buzz at the office today! When completed this will be my wife's third merger. She started with United Bank in Colorado which was acquired by Norwest who acquired Wells Fargo who is acquiring Wachovia!