Citigroup (NYSE: C) looks like it's trying to get a breakup fee in exchange for giving up on its deal for Wachovia (NYSE: WB). Citi persuaded a New York judge to extend an exclusivity agreement between Citi and Wachovia -- which prohibited Wachovia from talking to other suitors -- through at least October 10th when the parties are scheduled to meet with the judge. Citi can either offer a higher price than its rival, Wells Fargo (NYSE: WFC), or it can negotiate a breakup fee to soothe its hurt feelings.
As a reminder, Citi thought it had a deal last Thursday but on Friday that deal evaporated. Citi's deal for Wachovia's banking operations was for $1 a share, or $2.2 billion, and it left Wachovia's brokerage business as a "stub." On Friday, Wells offered much more -- $7 a share, or $15 billion -- for all of Wachovia's operations. Not only that, but the Wells deal was less risky to the FDIC.
That's because the Citi deal required it to take the first $42 billion in Wachovia losses from Wachovia's option ARM mortgages. The FDIC would take the rest of the losses in exchange for Citi preferred stock and warrants worth about $12 billion. By contrast, the Wells deal -- paid for by issuing $20 billion worth of shares -- would leave the FDIC unscathed.
Citi -- whose stock lost 18% of its value on Friday -- is seeking $60 billion in damages from Wells. I would not be surprised if Citi received less than that in a settlement. But I would be rather shocked if Citi -- which did not have a formal merger agreement with Wachovia -- comes back with a bid that offers more to Wachovia shareholders and to the FDIC than the Wells proposal.
Update. DealBook reports that Citi and Wachovia are in the midst of legal skirmishes which further complicate matters. A New York appelate judge threw out the original ruling of a lower court which extended Citi's exclusivity agreement until at least Friday because that judge issued his ruling while he was out of New York state. Meanwhile Citi and Wachovia are battling over whether the $810 billion bailout bill contains a provision which influences the negotiations.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup and Wells Fargo stock and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
10-05-2008 @ 11:00AM
JDSalinger12 said...
Now, we even have the big banks fighting each other in a break neck race to consolidate which is being done for business survival rather than business gain. Sadly, the bailout will not help them much. They are hurting and when they hurt, we all suffer. Everyone should start looking for ways to protect their money. This basically comes down to either taking your money out of the market and cutting discretionary spending or diversifying and investing some overseas. I personally use offshore bank accounts and they have helped me with diversification and asset protection. If you want to read more on why offshore investing is smarter, feel free to visit my website.
Best,
Frank Miller
http://www.theoffshorebankaccount.com
10-05-2008 @ 11:40AM
Japippy said...
Shouldn't there be a law prohibiting exclusivity agreements where an offer is being made to a publicly held company? Especially in this day and age when not only are the investors at risk, but the FDIC is also at risk, and thus the public, with no say in this decision, is exposed to the possibilities of possibly being made to contribute to this transacation in the form of higher taxes?
Also; how are the present investors of either the TARGET company or the offering suitors protected with there NOT HAVING BEEN GIVEN AN OPPORTUNITY TO VOTE ON SUCH an opportunity thus far?
If anyone can answer those couple of questions, it would certainly be appreciated?
Jim
10-05-2008 @ 12:36PM
Jmor said...
Shame on you Citi.
Regardless of the outcome... you will lose in the most important court and that is in the courts of public opinion. The Wells Fargo deal saves tax payers money by not requiring a fed assistance. I think our tax money is at enough risk right now. Either make the deal similar to Wells or pull out.
10-05-2008 @ 1:14PM
cindy said...
From a consumer standpoint Citi is terrible to deal I sure hope wells fargo gets the deal
10-05-2008 @ 4:26PM
anonymous said...
[quote]"-- is seeking $60 billion in damages from Wells. "[/quote]
$60 Billion in damages.. is there a letter misplaced?? Am I the only one that finds the amount ridiculous?
10-05-2008 @ 3:08PM
Shiv Kumar said...
Citi cannot be allowed to get Wachovia. Wells has offered a much better shareholder deal, has far superior management and Wachovia will do immeasurably better under Dick Kovacevich.
Citi is trying to buy Wachovia to hide its own balance sheet problems with the acquisition and lock in an expanded bail-out for its own book eventually.
Citi should instead be regulated to an extreme extent so that management cannot move an inch with planned mandatory asset sales over time to create a slimmed down bank focused on international banking with a small NYC base much like Standard Chartered operating out of London.
10-05-2008 @ 4:16PM
JOHN M. said...
as a wachovia customer i wish they did`nt have to merge at all, as wachovia`s been the best bank i ever had a account with, but if citi take`s control my account will be closed
10-05-2008 @ 7:40PM
william lindblad said...
to keep it simple - no