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Fed Suggests Citi and Wells Split Wachovia

Update: An appeals court has overturned Citi's injunction against the Wachovia-Wells Fargo merger, the Fed is urging the companies to reach a compromise.

"Wachovia is just not that into you," an appeals court effectively said to Citigroup Sunday night, overturning New York Supreme Court Justice Charles Ramos' order the previous day upholding Citi's exclusivity agreement with Wachovia. Associate Justice James M. McGuire argued that the Saturday order was invalid because it was made outside the state of New York (at Justice Ramos's Connecticut beach house).

Meanwhile, according to the Wall Street Journal, the Federal Reserve is pushing Citigroup and Wells Fargo to reach a compromise. "The effort could result in carving up the Charlotte, N.C., bank between its two suitors," the paper reported. Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California. Wells Fargo would also take over Wachovia's asset-management and brokerage units. Could the Fed, like Solomon, be suggesting Wachovia be cut in half to find out who the most worthy acquiror is?

On Saturday night, it looked like Citi had gained the upper hand in the Wachovia-Citi-Wells Fargo romantic triangle. A New York judge granted an emergency Injunctive extending the exclusivity agreement that Citi and Wachovia signed last Monday. This agreement, while in effect, unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi. Justice Charles Ramos of the Supreme Court of the State of New York issued the order, which requires Citi and Wachovia to appear before him on Friday, October 10, 2008.

This put a temporary kibosh on the merger that Wachovia and Wells Fargo announced on Friday, four days after Wachovia announced that its banking business was being acquired by Citi with help from the FDIC. Although it came as a surprise to everyone including Citi, the Wells Fargo deal appeared to be a far better one: it will receive no financial assistance from the government, whereas the Citi deal included $312 billion worth of loss protection from the FDIC. Wells Fargo is offering $7 per share where Citi offered only $1. And where Citi was prepared only to buy Wachovia's banking units, the Wells Fargo deal includes the brokerage and asset management portions of the company.

Under terms of the Wells Fargo agreement, which has been approved unanimously by the boards of both companies, Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. Based on Wells Fargo's closing stock price of $35.16 on October 2, the deal is valued at $7 per Wachovia common share for a total transaction value of approximately $15.1 billion.

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