Vultures target Wachovia

Citigroup and Wells Fargo are stalking a weakened Wachovia:

A bidding war for Wachovia has erupted between banking giants Citigroup and Wells Fargo, according to a published report Sunday night. ...

Rumors of deal talks arose on Friday as published reports said that Wachovia was considering a deal with Citigroup, Spain's Banco Santander or Wells Fargo.

Sunday's report in The Times added that the Federal Reserve and Treasury Department were also participating in the discussions, but that the government is refusing to help bidders by guaranteeing a part of Wachovia's assets the way it did for Bear Stearns in March when it was sold to JPMorgan Chase.

The government was also not ready to take over Wachovia the way it did Washington Mutual last week, The Times reported, unless its financial position deteriorates more rapidly.

Timing for a deal was not clear, and the talks could extend beyond Sunday night, The Times said.

Wachovia shares were hit particularly hard on Friday — the stock lost nearly a third of its value.

Though the stock closed at $10 on Friday, Citigroup and Wells Fargo are unlikely to bid more than a few dollars a share for Wachovia, according to The Times.

Also unclear, The Times said, was whether the banks would bid for all of Wachovia or pieces. Wachovia's retail banking operations would help Citigroup and Wells Fargo expand their branch networks, The Times said.

It is foolish for Citi and Wells to get into a bidding war over America's fourth largest bank. Instead, they should work together to split up Wachovia.

Neither Citigroup nor Wells Fargo are strong enough to take over Wachovia on their own. Both are damaged due to the mortgage meltdown, although Citi is much more damaged than Wells. On the other hand, Wells Fargo is much smaller than Citi. In fact, Wells Fargo is smaller than Wachovia. This puts both banks in a bad spot with respect to such a large acquisition.

Rather than either one of them trying to bite off more than they can chew, they should split Wachovia in two. Wells Fargo should take the western half and Citigroup should take the eastern half. This way, each bank can be the dominant player in parts of the country where they are already strong, and they can benefit from the network effects of being the dominant bank in their respective regions.

By working together, not only would they avoid over-stretching themselves, but they would also be able to buy at a lower price.