By failing to land Wachovia, Wells Fargo may have missed a prime opportunity to build a truly national retail bank -- at a fire-sale price.
Years from now, executives at Wells Fargo & Co. may remember Sept. 29, 2008, as the day they missed an opportunity to secure a place among the nation's three largest banks, with a truly national presence.
On Sunday, Wells Fargo was on the brink of closing a deal to acquire Wachovia Corp., the nation's fourth-largest bank, according to news reports, in a deal that would have created a nationwide banking franchise that would compete with Bank of America and J.P. Morgan Chase.
Instead, Charlotte, N.C.-based Wachovia landed in the arms of Citigroup, joining two banks that have struggled with billions of dollars in mortgage-related losses and declining investor confidence. The marriage between Wachovia and Citigroup creates a national behemoth with 4,300 retail branches in the United States and $600 billion in assets.
But to many in the banking industry, Wells Fargo -- based in San Francisco and with a strong presence in the West and Midwest, including Minnesota -- would have been a more logical suitor for Wachovia.
Though saddled with bad loans, Wachovia has an attractive network of retail branches on the East Coast. The two banks also shared a focus on selling a wide range of products, from credit cards to brokerage services, to Main Street customers.
Rumors of a possible deal between Wells Fargo and Wachovia date back to the late 1990s. But the speculation reached a feverish peak this summer as Wachovia's $800 billion loan portfolio began to unravel under the weight of its bad loans. Wells Fargo Chairman Richard Kovacevich fanned the merger rumors by saying in a speech earlier this month that he felt "like a kid in a candy store" and that "Wells Fargo often buys fixer-uppers."
Though other bank deals likely will surface in the coming months amid the market turmoil, Wells Fargo may never get another chance to acquire a bank of Wachovia's size at such a low price, bank analysts said. Citigroup will pay just $1 per share for Wachovia, and the lion's share of Wachovia's loan losses will be absorbed by the Federal Deposit Insurance Corp., in a transaction brokered by the government. The deal leaves Wells Fargo as the nation's fourth-largest bank, but much smaller than the Big Three: Bank of America, Citigroup and J.P. Morgan Chase.
"[Wells Fargo] lost a once-in-a-lifetime opportunity," Tony Plath, a finance professor at the University of North Carolina at Charlotte, said. "In one transaction, they could have built a presence east of the Mississippi, and they could have done so at a really attractive price."
Just how Citigroup, and not Wells Fargo, ended up with Wachovia remained something of a mystery Monday. The Wall Street Journal reported that Wells Fargo was prepared to buy Wachovia without government assistance, but abruptly walked away late Sunday. A spokesman for Wells Fargo did not return telephone calls Monday.
Mark Morgan, a bank analyst with Thrivent Asset Management, said Wells Fargo was a better fit for Wachovia, but Citigroup "needed this more." After all, Citigroup has not turned a profit for three straight quarters and lost $2.2 billion in the second quarter. Citigroup was in the process of eliminating billions of dollars in expenses, but the bank's stock had plunged in anticipation of heavier loan losses.
Though Wells Fargo has had loan problems of its own, it "looked like a well-run bank compared to Citigroup," Morgan said. "Even though [Wachovia] would have been a great addition to [Wells Fargo's] franchise, it would have included a lot of mortgage assets I'm sure they didn't want. But the bottom line is, they probably weren't as anxious to do a deal as Citigroup."
The Wachovia acquisition is the latest in a series of momentous events in the U.S. financial industry, which includes the failure of IndyMac Bancorp in July and the bankruptcy of Lehman Brothers Holdings. Last week, the government seized Seattle-based Washington Mutual, the largest bank failure in U.S. history. WaMu's deposits and assets were acquired by J.P. Morgan Chase for $1.9 billion.
Given the turmoil, Wells Fargo may be smart to stay on the sidelines while its larger competitors try to merge their operations and unwind their bad assets, noted Joseph Morford, an analyst with RBC Capital Markets. "These are large transactions that will demand a lot of attention from management," he said. "Meanwhile, Wells will be able to take share and lend money at a time when the rates they charge on loans are higher."
Added Morford: "But the banking landscape is changing daily. So inevitably, there will be other opportunities."
Shares of Wells Fargo fell $4.06, or 11 percent, to close Monday at $33.25 a share. Citigroup's shares fell $2.40, or 12 percent, to $17.75 a share.
Chris Serres • 612-673-4308