In a surprise development, Wachovia Corp. and Wells Fargo & Co. announced a $15.1 billion merger yesterday. In doing so, Wachovia spurned a deal with Citigroup announced this week that was brokered by federal regulators.
But shunned Citi is not going away quietly and has demanded that Wachovia and Wells Fargo put a halt to their plans. And federal regulators are backing the Citi deal.
Meanwhile, Wachovia customers in the Baltimore area, where the North Carolina-based company is the third-largest bank based on deposits, are left wondering whether they will be part of Citi or Wells Fargo by the end of the year.
One of the major differences between the two deals is government involvement. Citi's deal, announced Monday, would require assistance from the Federal Deposit Insurance Corp. The merger with San Francisco-based Wells Fargo would not.
By merging with Wachovia, Wells Fargo would become the nation's largest bank, with $787 billion in deposits and 10,761 branches. Wells Fargo branches are spread across 23 states, mostly in the West and Midwest. With Wachovia, Wells Fargo would have branches in 39 states, with many of the additional states on the East Coast.
Wells Fargo has no banking branches in Maryland, although it has 20 home mortgage stores, 22 financial stores and one regional commercial bank in the state.
Wachovia customers are not expected to see any changes in their bank branches under the Wells Fargo deal.
The jobs of Wachovia employees in investment banking and trading, though, could be in jeopardy unless Wells Fargo decides to expand in those businesses, said Chris Mutascio, a managing direcctor of Stifel Nicolaus in Baltimore.
Wells Fargo officials, who were not available for interviews yesterday, told analysts they expect the merger to close by the end of the year. The Wachovia name would disappear.
Under the Wells Fargo merger, the bank would acquire all of Wachovia in a stock swap. Wachovia's shareholders would receive 0.1991 shares of Wells Fargo common stock for every share of Wachovia stock they hold, valuing Wachovia at $7 per share.
Citi had agreed to buy Wachovia's banking operations for $2.16 billion.
It promised to assume $53 billion worth of debt and absorb up to $42 billion of losses in Wachovia's $312 billion loan portfolio.
The FDIC would cover any additional losses in exchange for $12 billion in Citi preferred shares and warrants.
Wachovia would remain a public company with two major subsidiaries, Wachovia Securities and Evergreen Asset Management.
Wachovia's stock yesterday rose $2.30, or nearly 59 percent, to close at $6.21 per share.
The Wells Fargo "deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert K. Steel, president and chief executive of Wachovia, said in a statement.
The merger still would have to be approved by Wachovia shareholders and regulators.
But will the deal go through?
"It's questionable," Stifel Nicolaus' Mutascio said. "This is unprecedented."
Though the Wells Fargo deal doesn't require assistance from the federal government, it still puts the FDIC in a tough spot when it tries to broker more deals in the future, Mutascio said.
The FDIC stepped in to orchestrate a deal with Citi before Wachovia failed. If Wachovia walks away from that deal into the arms of another partner, the FDIC could lose credibility, he said.
The next time the FDIC wants to broker a similar deal, it may not find an institution willing to take over the weak bank, which will then be left to fail. Other institutions could buy the pieces of the failed bank, potentially leaving the FDIC holding a bad loan portfolio that must be sold at a discount and at a huge cost to the government, he said.
FDIC Chairman Sheila Bair said in a statement that the FDIC stands behind the Citi deal and regulators "will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest."
Citi said in a statement that Wachovia violated an agreement not to enter into a transaction with any other party other than Citi.
Wells Fargo and Wachovia executives told analysts yesterday that the deal was solid and they expected it to go through.
Executives would not comment on whether Citi would be entitled to any compensation for Wachovia's exit from that agreement.
Wachovia customers who were just getting used to the idea of Citi now may have to get used to another owner.
The Associated Press contributed to this article.