Citi Fights For Wachovia

Citi Fights For Wachovia

Citigroup came out swinging on Monday, filing a $60.0 billion suit after Wachovia sought to jilt it in favor of a better takeover offer from Wells Fargo.

The shares of all three banks slid on Monday, with Citi showing the biggest decline, a sign that investors either think it will lose the battle or end up paying too much for some or all of Wachovia. The value of the suit is 30 times more than the size of Citi's proposed acquisition.

Citigroup’s shares tumbled 9.5%, or $1.75, to $16.61 in afternoon trading, while Wachovia’s shares sank 7.7%, or 48 cents, to $5.73. Wells Fargo (nyse: WFC - news - people ) slipped 1.7%, or 58 cents, to $33.98.

Citi filed a complaint in New York Supreme Court against Wachovia and Wells Fargo, seeking more than $60.0 billion in damages for interfering with its deal for the former's commercial banking operations. The complaint seeks more than $20.0 billion in compensation and more than $40.0 billion in punitive damages from Wells Fargo for tortious interference. Citigroup also seeks relief from Wachovia for an alleged breach of contract.

Last week, Citigroup (nyse: C - news - people ) bid $2.0 billion to buy Wachovia, deposits and assets and back its holding company debt, while Wells Fargo followed four days later with an offer of $15.0 billion , or $7.00 a share, for the whole thing. (See " Citigroup Swallows Wachovia." and " Wells Woos Wachovia Away From Citigroup.")

The original Citi plan would result in a rump Wachovia operation with the bank's securities units, A.G. Edwards and the Evergreen Securities.

Sanford Bernstein analyst John E. McDonald said Wells Fargo and Citigroup may submit additional bids or reach a compromise where they will split Wachovia’s branches geographically with Wells Fargo taking on Wachovia’s asset management and securities businesses. (See " Citigroup May Have To Walk Away.")

One reason the bidders may end up splitting Wachovia is that the original transaction, which was supported by the government, may have been aimed as much at bolstering Citi as it was in avoiding an outright failure of Wachovia. He said Citi's financial position would be a factor in how the Federal Deposit Insurance Corp., which would be on the hook if Wachovia (nyse: WB - news - people ) failed, handles the situation in the coming days.

McDonald said, however, that he expects Wells Fargo’s bid to succeed. It will expand Wells Fargo's earnings power, though at the risk of weakening its balance sheet and generating significant integration and legal costs. The benefits will not appear immediately, he said, estimating a Wachovia takeover would negatively impact Wells Fargo’s earnings by 30.0% in 2009 and 2010.