This interim success by Citigroup, of getting a judge to step into Wells Fargo’s effort to break up a deal that Citi had struck to acquire Wachovia, is surprising, to say the least. Most observers thought that the bank had slim grounds for recourse (the FDIC has broad authority regarding the disposition of failed and about-to-fail institutions; the language in the agreement with Wachovia forbidding them to shop Citi’s offer was not as iron-clad as it might have been).
From the New York Times:
Citigroup fired the first shot in what could be a prolonged legal battle, persuading a New York judge to temporarily block Wells Fargo from acquiring Wachovia…
Citigroup has accused Wells Fargo of wrecking its plan to acquire Wachovia’s banking operations for $2.2 billion, or $1 a share, in a deal arranged by the Federal Deposit Insurance Corporation. Four days after that deal was struck, it fell apart when Wachovia agreed to Wells Fargo’s offer to pay seven times as much for the entire company…
A person briefed on the situation said that Citigroup was seeking a total of $60 billion in damages.
Citigroup contends that the deal with Wells Fargo violates an agreement that prohibited Wachovia from having any sale or merger discussions with anyone other than Citigroup until Oct. 6. The order issued by a judge on Saturday extends the term of that agreement until further court action, according to Citigroup’s press release.
The litigation could be a blockbuster, pitting some of the nation’s largest surviving financial institutions against one another and giving work to the most expensive legal talent money can buy. Citigroup is represented by the New York lawyer Gregory P. Joseph; Wachovia by David Boies of Boies, Schiller & Flexner; and Wells Fargo by Wachtell, Lipton, Rosen & Katz, according to people briefed on the matter.
Until late Thursday, Citigroup believed that it had reached a deal with Wachovia after marathon talks last weekend under intense pressure from federal regulators worried about Wachovia’s financial condition. Regulators agreed to absorb any losses above $42 billion.
Wells Fargo, which had walked away from a deal with Wachovia, returned late Thursday with a shocking bid. Wells Fargo offered to buy all of Wachovia, not just its banking operations, for about $15 billion in stock, far more than Citigroup offered. And its deal, which takes advantage of a lucrative tax loophole, would be structured without any government support…
Federal regulators — including the Treasury Department, the Office of the Comptroller of the Currency and the F.D.I.C. — have been reviewing the situation, according to a person briefed on the matter. Officials from the Federal Reserve have reached out to both parties to encourage a swift resolution, this person added.
Citigroup raised the stakes on Saturday afternoon, asking Justice Charles E. Ramos of New York Supreme Court to issue an emergency order blocking the deal between Wachovia and Wells Fargo. Late Saturday, Justice Ramos issued an injunction effectively blocking the Wells Fargo deal, pending a hearing scheduled for later in the week.
The agreement with Wachovia that Citigroup has cited and that contains the ban on negotiating with any other potential bidders was not a final merger contract, but a letter agreement to “continue to proceed to negotiate definitive agreements.”
The letter agreement does not state that a deal must be completed. It also specifically rules out the collection of money damages if the agreement to negotiate were breached.
Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.
The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit.
If Wells succeeds, I suspect Wachovia will turn out to be a poisoned chalice. I cannot imagine, even with tax bennies included, it can make an offer that much richer than the Citi bid (admittedly, not know the details of the tax breaks, they could be very rich and largely explain the difference, which in turn would suggest that the Wells deal is really not all that much better for taxpayers, but merely serves better to obscure the real cost). Of course, Wells could have had another aim: to become too big to fail.