Citigroup Battling to Keep Wachovia Bid Alive

Citigroup is fighting to keep its planned deal for Wachovia alive in the face of Wells Fargo's surprise, overnight agreement to acquire Wachovia for about $15.1 billion.

Chuck Burton / AP

Citigroup, which planned to acquire Wachovia for $2.2 billion in a deal backed by the U.S. government, is considering its options and may file a lawsuit to break up the Wachovia-Wells Fargo deal.

Citigroup has demanded that Wachovia and Wells Fargo terminate their talks and not proceed with any proposed transaction. Wachovia's board approved Wells Fargo's higher offer Thursday night.

But experts in mergers and acquisitions said Citigroup may have trouble using the courts to quash the Wells Fargo counterbid.

"It is highly unlikely that Citigroup is going to be able to prevent Wachovia from being acquired by Wells Fargo," said Professor Samuel C. Thompson Jr of Pennsylvania State University's Dickinson School of Law.

"I don't think you are going to have a binding contract here," Thompson said.

Citigroup said it had an exclusivity agreement with Wachovia to prevent them from finding other possible buyers. Statements from the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. appear to favor the Citigroup deal.

• Copy of Wachovia-Citi Exclusivity Agreement (PDF)
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"Citi was negotiating in good faith and nearly completed the definitive agreements required to consummate the Citi/Wachovia transaction that was announced Monday," the company said in a written statement. "The value of the Citi agreement to Wachovia shareholders was substantially in excess of Wachovia's closing price on Thursday, October 2nd. Citi has also been providing liquidity support to Wachovia Bank since Monday's announcement."

Citigroup has even taken its case to the FDIC. and the Federal Reserve, telling officials there that its deal with Wachovia is more cost-effective for the government than Wells Fargo's.

Citigroup says Wells Fargo will sell Wachovia's toxic assets to the new government bailout fund, whereas Citigroup is absorbing $54 billion in losses on its proposed deal—$42 billion in bad assets, plus $12 billion worth of insurance Citigroup paid the FDIC for insurance on the rest.

A source close to Citigroup told CNBC that the firm hopes Wachovia and Wells Fargo "come to their senses" before Citigroup takes legal action—which could include suing Wachovia CEO Robert Steel, whom Citigroup claims agreed to an exclusivity clause.

Citigroup shares fell on word of the sweeter Wells Fargo offer, while shares of Wachovia jumped.

Citigroup said Wachovia's deal with Wells Fargo "constitutes tortious interference" with an exclusivity agreement it had to negotiate with Wachovia.

(See the accompanying video for more.)

Thompson and other legal experts compared the situation with the mid-1980s court struggle between Texaco and Pennzoil. A jury found Texaco illegally enticed Getty Oil out of a merger with Pennzoil.

The courts found that an agreement in principle between Pennzoil and Getty was a binding contract and that Texaco "tortiously interfered" with that contract and ultimately Texaco became liable to Pennzoil for $10 billion.

Any legal action by Citigroup may hinge on what kind of exclusivity provisions were spelled out in its agreement-in-principle with Wachovia, said Keith Gottfried, an attorney at law firm Blank Rome LLP in Washington who specializes in merger law. He is not involved in the dispute.

"When people say a deal is subject to definitive documentation, it sounds like you're kind of engaged, but not quite married," Gottfried said.

But Donald Zakarin, a partner at law firm Pryor Cashman LLP in New York, who is not involved in the case, said he thinks Citigroup could have strong legal claims.

He views exclusivity agreements as enforceable, though he expects Wachovia would argue that it had a fiduciary responsibility to shareholders to seek a better deal for its shareholders.

"Citigroup entered into an agreement and it sounds to be binding," he said.

"If it does not get itself resolved I think you could find a lot of interesting legal issues arising." U.S. banking regulators said they will seek to resolve the rival acquisition proposals.

FDIC Chairman Sheila Bair said in a statement that the new offer "does not require FDIC assistance." "It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured," she said.

(For more analysis, watch the video to the left.)

The FDIC announced a shotgun merger proposal between Citigroup and Wachovia on Monday, with the FDIC agreeing to absorb up to $42 billion in losses should Wachovia's $312 billion pool of loans later turn sour.

But a deal with Wells Fargo could wipe out potential risks to the government and taxpayers that a government-approved Citi deal would include.

-- Steve Liesman, Senior Economics Reporter; Mary Thompson, Reporter, and Reuters contributed to this report.

© 2008 CNBC