Wachovia advisers get whiplashed

The sighs of relief emanating from Wachovia Securities LLC brokers were almost audible early Friday morning when the firm’s parent said that it intends to sell itself to Wells Fargo & Co. and scuttle a previous deal to hand the bank over to Citigroup Inc.

Within hours, however, the sighs descended into groans as New York-based Citigroup challenged the arrangement made by San Francisco-based Wells Fargo and Wachovia Corp. of Charlotte, N.C.

“I spoke with five Wachovia brokers [Friday] morning, and they all felt [the Wells Fargo deal] was a positive,” said recruiter Richard Kronman, founder of Kronman Matthew & Associates in Los Angeles. “They felt real comfortable if a name like Wells would come in and take them over. Now we’ll have to see if [the deal] will go through.”

In a call with brokers Friday, Danny Ludeman, chief executive of St. Louis-based Wachovia Securities, said the firm had no idea that Wells Fargo would re-emerge as a buyer.

“You can never say never in terms of what may happen” with the Wells Fargo deal, he told representatives. But the offer is likely to go through, because it does not require backing by the government, Mr. Ludeman said.

Under the initial plan, announced last Monday, New York-based Citi would have purchased Wachovia’s banking operations only, leaving its sprawling network of brokerage offices and its asset management unit orphans with an uncertain future.

What’s more, Citi was offering about $2.1 billion, or just $1 a share, to Wachovia stockholders along with a guarantee from the U.S. government to take losses on Wachovia’s $312 billion loan portfolio once Citi absorbed the first $42 billion of losses.

No wonder Wachovia brokers cheered when Wells Fargo swooped in four days later with an all-stock deal valued at about $15.1 billion that would absorb all of Wachovia without any financial assistance from the government — and preserve a much bigger part of reps’ retirement nest eggs.

“[Our offer] provides superior value compared to the previous offer to acquire only the banking operations,” Wells Fargo chairman Richard Kovacevich, a former Citigroup consumer banking executive, said Friday.

“Wachovia’s brokerage and asset management businesses, which would have been left behind in the prior proposal, are tightly interwoven with Wachovia’s core banking business — and this agreement avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia’s team members and customers.”

The deal also fits more nicely into the vision of Mr. Ludeman, who had suggested to Wachovia advisers earlier in the week that Citi’s banking-assets-only plan, backed by the FDIC, would reassure depositors of both mortgage-scarred banks.

“We figured maybe they were still going to do a deal with Wells Fargo on the brokerage side, because all Danny Ludeman can talk about is the universal-banking model,” a Wachovia broker on the West Coast said Friday. “I’m glad to see the deal with Wells, but I want to see if it shakes out.”

A few days earlier, the broker, who asked not to be identified, complained that the Citi deal had terrified brokers and their clients.

“We’ve been ‘Enron-ed,’” he said, referring to the collapse of Houston-based Enron Corp.

“When you get a memo on Friday from [Wachovia chief executive] Bob Steel that says everything is fine, and your stock is at $10 a share, and then on Monday, you’re sold for $1 a share, that’s why we now answer the phone, ‘Enron Securities.’”

Both the sales force and clients were shaken by the swiftly evolving events, said a Wachovia broker in the Midwest, who asked not to be identified.

“Guys here are absolutely, positively numb,” said a California adviser, who asked not to be identified. “Everybody is in shock.”

Meanwhile, Citigroup on Friday said Wachovia is “in clear breach” of an exclusivity agreement that prohibited it from doing a deal, or even negotiating, with any other party.

It also said it has been providing liquidity to Wachovia since Monday’s announcement and — turning to its own struggling finances — insisted that its balance sheet and deposit bases are healthy “with or without this transaction.”

In a sign that the government could resist the Wells Fargo proposal, the Federal Deposit Insurance Corp. said in a prepared statement Friday that the agency “stands behind its previously announced agreement with Citigroup.”

But FDIC Chairman Sheila Bair said: “Under either proposal, all banking customers of the merged institutions would be fully covered, with no disruptions in service.”

During a Friday morning conference call with securities analysts, Mr. Steel, Wachovia’s CEO, tersely refused to discuss Citigroup’s claims.

Wells Fargo executives said they believe that regulators are “comfortable” with their plan and expect to close the merger in the fourth quarter. They also said that combining with Wachovia would bring the resulting megabank close to the 10% cap on deposits that any single bank company can hold.

Mr. Kovacevich and John Stumpf, Wells Fargo’s president, appeared especially enthusiastic about the ability to combine Wachovia’s 14,600 brokers with Wells’ network of 2,590 registered representatives (1,290 at Wells Fargo Investments LLC and about 1,300 who work out of its bank branches) to fuel revenue growth.

Asked by analysts to explain his confidence in rebuilding capital ratios that would be damaged by some $74 billion of write-offs of bad loans from the deal, Mr. Kovacevich said revenue would rapidly expand from combined strengths that neither bank could realize on its own.

He singled out Wachovia Securities and its brokerage distribution as the perfect example of that.

The biggest rooters for a Wells deal may be the brokers with A.G. Edwards & Sons Inc. of St. Louis, who quickly lost faith in Wachovia this year as their new parent lost billions of dollars through bad loans and presided over a steep dive in its stock price.

Edwards “had a clean balance sheet, no debt and a couple hundred million in cash,” one disappointed broker, who asked not to be identified, said last week after the Citigroup deal was announced.

“We could have sat by while all these other behemoths fell.”

Brokers were particularly concerned about the financial viability of the stub piece of Wachovia they would be left holding if they were abandoned in a Citigroup deal. Wachovia would still be publicly traded but would be a shadow of itself without the banking parent, they said.

“Wachovia brokers should be thrilled that they will be getting Wells Fargo stock rather than keeping a stub,” said a New York broker at a rival firm, who asked not to be identified.

Another positive of a Wells deal, according to many Wachovia reps, is that they would shed the tainted Wachovia name. Wells Fargo executives said its stagecoach-branded name would dominate after the merger.

A Wells Fargo takeover would be a “considerably better set of circumstances than what we faced” by being a standalone brokerage firm, said an East Coast broker, who asked not to be identified.

It would “be the best of all worlds — a well-capitalized parent and [a brokerage] organization that stays … in St. Louis, with a brand you can be proud of,” the broker said.

E-mail Dan Jamieson at [email protected] Jed Horowitz at [email protected].

Related Topics: Citigroup Inc., Wachovia