The deal is already sparking controversy, as Citigroup – which saw its shares drop USD 4.15 to close at USD 18.35 on 3 October, after the fall of the Wachovia deal was announced – demands the deal be called off and claims that its own agreement with Wachovia stipulates the bank is not to engage in any type of negotiation or conclude a transaction with a party other than Citi itself. Citi’s takeover of Wachovia’s banking operations and subsidiaries worth USD 700 billion in assets, as well as Wachovias senior and subordinated debt, had already been approved by the two banks’ Boards of Directors. However, the FDIC – which was supposed to assists the Citi-Wachovia deal – claims that its obligation is to come up with the most cost-effective solution for taxpayers, and the Wells Fargo deal does not require any kind of government assistance.
The cause of Wells Fargo’s seemingly unexpected decision to take a stake in the fight for the takeover of Wachovia lies with a tax rule clarification issued by the US Internal Revenue Service (IRS) on 30 September, which allows companies to offset losses from companies they acquire with tax breaks applied to their profits after the takeover. For Wells Fargo, this means that it could employ Wachovia’s loan write-downs (which add up to USD 74 billion of tax losses) to offset its own income.
At this point, analysts estimate that Citigroup is set to incur considerable losses if its deal with Wachovia falls through completely, and since its agreement with Wachovia had not been finalized, no breakup fee is expected either.
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