Wachovia, Wells Fargo, and Citigroup – Now You’re Negotiating With The Big Boys

by drjim on October 14, 2008

Both Citigroup And Wells Fargo Wanted To Buy Wachovia

Both Citigroup And Wells Fargo Wanted To Buy Wachovia

The financial world sure seems to be intent on driving itself off of a cliff; however, that is no reason that negotiations should not stop. As long as companies are talking, there is learning for us to be doing. This time around the negotiations center on just who gets to buy what remains of the battered Wachovia bank – Wells Fargo or Citigroup? Sounds like it’s time for some negotiating…

I guess just a little bit of background would be appropriate so that we’re all on the same page here. Wachovia is a bank that made the mistake of investing too heavily in securities that were backed by sub-prime mortgages. Once folks started defaulting on those mortgages, Wachovia’s investments went up in smoke and they could no longer get credit to cover their debts. They had to put themselves up for sale or risk going out of business. Interestingly enough, the FDIC steped in and brokered a deal with Citigroup to buy out Wachovia. This allowed Wachovia to keep their doors open. Simple, eh?

Nothing ever stays simple in the world of finance for long. Wells Fargo realized that this was a great way to expand their operations on the cheap and so then they stepped in and offered more money than Citigroup to buy Wachovia. Oh oh – conflict.

Once both offers were on the table, the negotiating started. Needless to say it didn’t go well (I guess both parties don’t read this blog!). In fact, things were going so poorly, that all three sides ended up calling for a two-day timeout. The purpose of this timeout was to give everyone a chance to step back from the negotiation table and take a breather. Another big reason that the timeout was called was because the government was not happy at how the negotiations were going – they were taking too long.

Now just between us, what do you think that the negotiators did during those two days? Sit at home? Huddled with just their team to plot strategy? No way! I’m sure that all three teams reached out behind each other’s backs and had private discussions with the other two teams. This “forced pause” in the negotiations was just a bit unusual, but the experienced negotiator knows to make the best of what he/she has been handed. This two day period was just what the teams needed in order to send up some trial balloons and see what the other side thought of them. They could also do some probing in order to determine if there was any sort of offer that they could make that would effectively make the other side walk away.

In the end, this last step is exactly what happened. Just before the two-day timeout was called, there had been a deal on the table that would have split up Wachovia with Citigroup taking Wachovia’s northeast customers and assets and Wells Fargo taking the rest. However, because of the way that the deal had been structured and because they had two days to think about it, Citigroup eventually decided that they would be taking on too much risk for too little of a benefit if they agreed to this deal. In the end, Citigroup walked away and Wells Fargo will now buy out all of Wachovia.

From a negotiating point-of-view, the two-day timeout made all of the difference. Before the break, Citigroup was willing to go toe-to-toe with Wells Fargo. However, the two day break gave them time to change their mind and in the end, that made all the difference in the world.

Have you ever called for a break in the middle of a negotiation? How long was the break? When both  parties came back to the table, were things different? What did you do to secure your position during the break? Leave me a comment and let me know what you are thinking.

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