NEW YORK (AP) - In an abrupt change, Wachovia said Friday it agreed to be acquired by San Francisco-based Wells Fargo & Co. in a $15.1 billion all-stock deal that trumps Citigroup's plan to acquire Wachovia's banking operations and avoids government assistance.
The Citigroup deal would have been done with the help of the Federal Deposit Insurance Corp., but the Wells Fargo deal for Wachovia will be done without it. Shares of Wachovia and Wells rose in morning trading, while Citigroup shares fell.
"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert Steel, Wachovia's president and chief executive, said in a statement.
The Wachovia-Wells deal, announced Friday, comes in a turbulent time for banks and financial firms as they grapple with the ongoing credit crisis, which led to the recent bankruptcy of Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc.
Wachovia Corp. shareholders will receive 0.1991 shares of Wells Fargo for every share of Charlotte, N.C.-based Wachovia stock they own, valuing Wachovia at about $7 per share. This is a nearly 80 percent premium over the stock's Thursday closing price of $3.91. Shares closed at $10 last Friday, the last trading session before the deal with Citigroup Inc. was announced.
The board approved Wells Fargo's offer late Thursday. The deal is still subject to Wachovia shareholder and other regulatory approvals. Wells Fargo said it expects the deal to close by year-end.
"It 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," said Wells Fargo Chairman Dick Kovacevich.
Wells Fargo will record merger and integration charges of about $10 billion, but says it expects earnings to be boosted within the first year after the acquisition closes. No government assistance is part of the deal terms.
Wells Fargo said it will record Wachovia's credit-impaired assets at fair value, but provided no estimate of what that would be. In its planned takeover of Wachovia, Citigroup said it would write down those assets by $30 billion at the close of the transaction and be responsible for the next $12 billion in losses over a period of three years. If the total exceeded that, the FDIC would cover the difference.
Additionally, Wells Fargo plans to issue up to $20 billion of stock, primarily common stock, to maintain a strong capital position.
Charlotte will be the headquarters for the combined company's East Coast retail and commercial and corporate banking business. St. Louis will remain the headquarters of Wachovia Securities.
Additionally, three members of the Wachovia board will join the Wells Fargo board when the transaction is completed.
The combined company will have total deposits of $787 billion and assets of $1.42 trillion, more than doubling Wells Fargo's totals on both counts. The bank will operate more than 10,000 locations. The two banks currently employ a combined 280,000 people.
On Monday, Citigroup agreed to buy Wachovia's banking operations for $2.16 billion in a deal orchestrated by the federal government. That deal, which had been approved by the boards of both companies, was still subject to approval by Wachovia's shareholders and regulators. It is not clear whether Citigroup will be entitled to a break-up fee.
In addition to assuming $53 billion worth of debt, Citigroup had agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.
But the failure of the government's proposed $700 billion bailout for financial institutions Monday afternoon cast doubt on whether Citigroup would be able to rid itself of some of Wachovia's bad debt.
While the proposal would have prevented most banks from profiting on the sale of troubled assets to the government, an exception would have been made for assets acquired in a merger or buyout.
That would have allowed Citigroup to sell Wachovia's distressed mortgage-related assets to the government for a profit.
A revised version of the bailout plan was passed on Wednesday by the Senate and goes up for a House vote on Friday. The plan still centers on enabling the government to spend billions of dollars to buy bad mortgage-related securities and other devalued assets from troubled financial institutions.
Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank.
While Wells Fargo has logged three straight quarters of profit declines, the bank has been weathering one of the nation's worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector.
That means it hasn't been forced to take the huge number of write-downs that other banks have needed. Under Stumpf the bank also has continued raising its dividend at a time when many other financial institutions are slashing theirs to preserve capital.
John G. Stumpf, Wells Fargo president and CEO, took over in June 2007 - near the start of the credit crisis - from Kovacevich, who remains chairman. Both men worked since the 1980s at Norwest Corp., Wells Fargo's predecessor.
Wachovia, like Washington Mutual, which was seized by the federal government last week, was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.
This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs - mostly in its mortgage business - and slashed its dividend. Wachovia also boosted its provision for loan losses to $5.57 billion during the second quarter, up from $179 million in the year-ago period.
Wachovia shares rose $3.03, or 78 percent, to $6.04 in morning trading, while Wells Fargo rose $3.49, or 10 percent, to $38.65. Citigroup shares were down $3.05, or 13.4 percent, to $19.45.