Citi Examines its Carrots and Sticks

I just got off the phone with Carl Tobias, a professor at Richmond School of Law; I asked him whether the exclusivity agreement between Citigroup and Wachovia was worth the paper it was written on.

His take was that it's extremely unlikely any court would enforce the "specific performance" remedy in the agreement: i.e., force Wachovia to go ahead with the Citi deal and leave Wells Fargo with nothing. "It's draconian to have specific performance, it's just too much," said Tobias. "Very few courts so far have enforced those kind of agreements. Most lawyers would advise their clients that they might have to pay money [for violating the agreement], but that it's unlikely a judge would order them to consummate a deal of this sort."

Of course, the agreement specifically says that financial damages would not be an acceptable form of recompense -- but there's the law for you.

In any case, the chances are it won't go to court. My best guess is that Citi is putting together a package of carrots and sticks to try to make its deal go through; the exclusivity agreement is in its arsenal of sticks, but Citi hopes not to have to use it in court.

Another stick may or may not be Sheila Bair. If she comes out in adamant opposition to the Wells Fargo deal, then Wachovia might well be stuck with Citi. But that seems unlikely at this point.

As for the carrots, the main one would surely be a sweetened offer. Citi's also going to try to persuade the Wachovia board that they're underestimating the value of the stub Wachovia, which they'll continue to be in charge of if the Citi deal goes through. Maybe Citi's investment bankers are trying to find another buyer for what's left of Wachovia, to prove just how much it's worth. In any case, they're going to try very hard to demonstrate that the total value for Wachovia's shareholders from the Citi deal is significantly higher than just the amount that Citi is paying for the bank.

Then there's the more personal/emotional stuff. Citi will rake Wachovia's executives over the public coals if they get those golden parachutes as a result of accepting the Wells Fargo offer. At the same time, they'll promise to move the retail banking headquarters of a combined Citi-Wachovia to Charlotte, and to keep more Wachovia jobs, especially in Charlotte, than Wells Fargo might be inclined to do.

At the same time, Wells Fargo might be willing to pay some amount of money to Citi to make them go away, especially if it has a deal pretty much sewn up. So the noisier Citi gets, the better off it'll be, even if it doesn't get the big prize.

How much money might Citi hope to get as a de facto break-up fee? Well, its market capitalization fell by about $18 billion today, although Wells Fargo would never spend that much.

The market spoke today, and it spoke clearly: it thinks the Wells Fargo deal is going to happen, and that Citi is going to walk away with next to nothing. But I'm not so sure. Given the rise in Citi's stock price that would result from snatching Wachovia back from Wells Fargo, I suspect Vikram Pandit would be willing to spend quite a lot of money and effort to make that happen.