Merged Wells-Wachovia Could Challenge No. 1
Wells to acquire Wachovia
October 3, 2008
By MortgageDaily.com staff
Wachovia Corp. has scrapped a deal to be acquired by Citigroup Inc. and will instead be acquired by Wells Fargo & Co. The W&W merger creates a formidable challenge to Bank of America Corp.’s potential standing as the No. 1 residential originator.
Wells and Wachovia have signed a definitive merger agreement that includes Wachovia’s banking operations, a press release today said. The $15 billion deal, which has been approved by both companies’ boards, calls for Wachovia shareholders to receive 0.1991 shares of San Francisco-based Wells based on Oct. 2nd’s closing price.
A share exchange agreement has Wachovia issuing Wells preferred stock that votes as a single class. Wachovia’s common stock would represent almost 40 percent of its voting power.
The deal follows a failed deal between Citigroup that was brokered by the FDIC earlier this week. That deal called for Citi to acquire most of Wachovia’s assets and liabilities, including five depository institutions, and assume Wachovia’s senior and subordinated debt. But it also came with an FDIC agreement to absorb losses beyond $42 billion on a $312 billion pool of loans identified as troubled.
Wells expects to incur $10 billion in merger-related costs. It will raise $20 billion to strengthen capital.
No taxpayer dollars will be involved, including no assistance from the Federal Deposit Insurance Corporation, the news release indicated.
“Under the agreement, Wells Fargo will acquire all outstanding shares of common stock of Wachovia in a stock-for-stock transaction,” the statement said.”In the transaction, Wells Fargo will acquire all of Wachovia Corp. and all its businesses and obligations, including its preferred equity and indebtedness, and all its banking deposits.”
The transaction puts Wells Fargo right in Bank of America’s back yard, with the statement indicating the combined operations will include a strong presence in Charlotte, N.C., where both Wachovia and BoA are based. Wells and BoA were previously cross-town rivals in San Francisco.
Combined, Wells Fargo and Wachovia originated nearly $80 billion during the first quarter — trailing BoA and recently acquired Countrywide Financial Corp., which together funded around $93 billion during the same period. The third biggest residential originator will likely be JPMorgan Chase & Co., which with its recent acquisition of Washington Mutual Bank, is likely to originate around $70 billion based on second-quarter data.
However, a steep decline in recent loan applications suggest that overall industry originations will be lower in the second-half of this year.
The W&W deal would create a servicer with a combined residential servicing portfolio of around $1.6 trillion as of the end of June, trailing BoA with a $1.9 trillion servicing portfolio as of June 30. The JPMorgan and WaMu merger creates a new No. 3 residential servicer, with a potential servicing portfolio of $1.4 trillion.
Total assets at W&W would be $1.4 trillion, while total deposits would be $0.8 trillion.
With its strong presence in the Golden State, Wells may be able to pursue a better hands-on servicing approach with Wachovia’s problem option-ARM portfolio.
The future for the combined 280,000 employees, including 120,000 Wachovia employees, remains challenging.
“An important measure of success for this integration will be our ability to retain as many of the talented Wachovia team members as possible,” Wells Chief Executive Officer John Stumpf said in the statement. “We want to assure them we’ll do everything we can to make the integration of our operations as smooth as possible.”
Citigroup, however, issued a statement indicating Wachovia breached an exclusivity agreement that prohibited Wachovia from entering a transaction with any other party. Citi said it has “substantial legal rights” and noted that it has been providing liquidity support to Wachovia since Monday’s announcement.
“Citi has demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the exclusivity agreement,” Citi said.
Related:
Citi Acquiring Wachovia
The federal government has stepped in to prevent a failure of Wachovia Bank.
