In a single stroke, Wells Fargo & Co. achieved what many thought impossible in recent weeks: It rescued a troubled bank without putting billions of taxpayer dollars at risk.
On Friday, in a dramatic turn of events that could bolster public confidence in the banking sector, Wells Fargo's board of directors approved a $15.1 billion takeover of Charlotte, N.C.-based Wachovia Corp. in a deal that requires no government assistance and scuttles a federally backed deal between Wachovia and Citigroup.
Citigroup threatened legal action Friday, and may sweeten its bid for Wachovia. That could touch off a takeover battle for a bank that, just a week ago, appeared on the verge of failure and was desperate for government assistance.
"This is a huge confidence-builder," said Derek Ferber, a bank analyst with SNL Financial in Charlottesville, Va. "It shows that private banks can broker their own deals without the government's help."
The deal, which was approved by boards of both banks, also marks a dramatic turning point for San Francisco-based Wells Fargo, which just a week ago appeared to have given up on its quest for Wachovia. Wells Fargo, Minnesota's second-largest private employer with more than 20,000 workers, had almost reached a deal for the bank last weekend, but Chairman Dick Kovacevich said the bank didn't want to rush into a deal until it had completed all of its due diligence. So a week after Citigroup agreed to pay about $2.1 billion for Wachovia's banking operations only, Kovacevich swooped in and offered more than seven times that for the entire company.
Because Wells Fargo's shares closed down 60 cents Friday, the value of Wells Fargo's all-stock offer for Wachovia has fallen from its initial $7 a share to $6.88 a share. That's a 76 percent premium to Wachovia's closing share price of $3.91 on Thursday. Citigroup's offer was about $1 a share.
But analysts said that the biggest difference between the offers is that Wells Fargo's bid does not include government assistance. Citigroup had agreed to shoulder as much as $42 billion in losses on Wachovia's $312 billion pool of loans; while the Federal Deposit Insurance Corp. (FDIC) would absorb any losses beyond that.
"It's still a good deal for Wells Fargo and a great deal for Wachovia," Morningstar analyst Matthew Warren said.