Wells Fargo Buys Wachovia in $15.1 Billion All-Stock Deal
It was a surprise twist of fate for Wachovia Corp., when the nation’s fourth-largest bank announced that rival bank Wells Fargo would buy its entire business operations in an all-stock deal worth $15.1 billion, or about $7 a share.
In purchasing Wachovia, San Francisco-based Wells Fargo will not require any assistance from the Federal Deposit Insurance Corporation (FDIC). Less than a week ago, Citigroup had sought financial backing from the FDIC as it tried to put together an agreement to buy only the banking portion of Wachovia, not its brokerage and asset management businesses, for approximately $2.16 billion, or about $1 per share. Had that deal materialized, the FDIC would have been responsible for up to $270 billion of Wachovia’s most risky loans.
It was only yesterday that Wachovia announced that it would temporarily halt access to a $9.3 billion investment fund used by some 1,000 colleges to pay salaries and other expenses. The Commonfund Short Term Investments Fund will be liquidated by the end of this year.
Over the past few weeks, rumors of either a merger or government takeover have been rampant for Wachovia. Pummeled by bad mortgages - and, in particular, pay-option mortgages - the company’s stock share price has plunged 75% this year alone. In June, Wachovia’s board of directors fired its longtime CEO Ken Thompson, who previously orchestrated the ill-fated $25 billion purchase of home lender Golden West Financial Corp. in 2006. Golden West Financial is a California lender that specialized in risky payment-option adjustable-rate mortgages.
By comparison, Wells Fargo’s finances have been relatively stable in the face of the subprime crisis and the ongoing credit crunch. Unlike many of its competitors, Wells Fargo holds a substantial portion of its mortgage loans, and does not package and sell them to investors. Nor has the bank been forced to take massive write offs onto its balance sheets.
One of the immediate winners in the Wachovia-Wells Fargo transaction is billionaire investor Warren Buffet. His company, Berkshire Hathaway, is among the largest shareholders in Wells Fargo.
On the downside, however, Wells Fargo is now responsible for more than $120 billion of Wachovia’s option ARMs. The mortgages, which allow borrowers to make smaller payments at the beginning of their loan by deferring part of the interest and then making it up later on, were instrumental in creating Wachovia’s financial downfall this year.
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