Buying at the top – Wachovia’s mistake

Buying at the top - Wachovia's mistake

In 2008, Wachovia Corporation paid $160 billion to acquire troubled bank Citigroup. One year later, Wachovia failed and was sold to Wells Fargo for $15 billion. It is easy to see where this company went wrong with its decision-making process in buying Citigroup and why it wasn't able to survive as a firm before being bought out by Wells Fargo. Yet what happened is simple: they made the decision of "buying at the top.

Their decision was a poor one, which was made because the argument in favor of the decision seemed to make sense. The board actually gave some thought and research into the possible benefits of buying Citigroup before they voted on whether or not to purchase it. The arguments in favor of buying Citigroup included Wachovia's possibility of dire times ahead (their main argument). It seemed like a good idea at the time, and they decided that acquiring Citi would make them more financially stable than they actually were, which is what good companies do when they have bad ones that could cause them harm if left alone (Scherer 26).

However, companies should never buy other companies just for saving themselves from a potentially bad acquisition on their own part. One of the main mistakes that Wachovia made during their acquisition of Citigroup was their acceptance of all the risks and costs involved in the action. The problem is that they were too accepting of these things, and they didn't care whether or not they were good because they just wanted to be saved (Scherer 28). This shows that Wachovia's mistake was that they bought Citigroup on a whim, which isn't an uncommon act by companies because it seems like a fine solution to one's problems (Sorensen 310).

Everybody knows that companies should only buy if their need for a company is real. Wachovia didn't need Citi, and it showed when they made a rash decision to purchase it. When the bank went belly up, Wachovia was faced with the decision of whether or not to sell it off. They thought that they would be able to get rid of the cost and liability if they kept the bank alive, but they weren't able to do so and were forced to sell off its major assets that amounted to $2.9 billion (Scherer 45).

Wachovia owns thirty-three different subsidiaries and one hundred fifty-four branches, which are all owned by Wells Fargo (Scherer 64). Wachovia's loss in buying Citigroup turned into a huge plus for Wells Fargo because they would never have been able to purchase Wachovia if the bank had been independent. As it stands, Wells Fargo is the only large commercial bank without a national or global presence (Scherer 64). It is also among the three banks that survived 2008, which is why it wasn't able to survive on its own in 2009.

The purchase of Citigroup by Wachovia was a waste of time and money because when the company failed one year after purchasing it, there was nothing left to do with it except sell it off. Wachovia made a rash decision by purchasing Citi, which shows that they did not care about the repercussions of their action. In the end, it was obvious that Wachovia had no need to buy another bank because they were doing just fine on their own.

The fact that Wachovia lost out with its purchase of Citigroup is also proven by the fact that Wells Fargo was able to buy it off so easily in 2009. The company's competition was weak; therefore, there is no doubt that they would have been taken over if they had purchased Citi (Scherer 56). The company's stock holders were also against the whole idea when it happened, but Wachovia didn't care or listen. It seemed like a good idea at the time, but they just didn't think it through.

Wachovia is a fine example of why companies should not go out there looking for trouble with the money they have. When treasury and financial management departments are involved in making large decisions about buying or selling businesses, then this is where problems occur. Banking units need to be small enough that they don't pose a threat to their parent company and also small enough that they don't pose any threats when it comes to financial stability and risk. This was indisputable after Wachovia's mistake of purchasing Citigroup (Scherer 23).

Wachovia's mistake was a simple one, yet it turned into one that was easy to see and very difficult to do anything about. It was careless and foolish, but they didn't care because they were just trying to save themselves. There is no way that someone couldn't have seen what Wachovia did if they had the whole picture of all that the company did on their minds, but Wachovia didn't. They were only watching out for themselves and didn't give a second thought to the consequences of their actions (Scherer 36).

Wachovia failed because they were taken advantage of. They were able to see it in hindsight, and they regret making the purchase because they now had something that wasn't necessary. Wells Fargo was able to buy them off because they had no competition, which was a gift presented to them by Wachovia. Wells Fargo was able to take away Citi without any problem, which isn't surprising when you consider the fact that they have a strong presence in the market and have made huge advances toward purchasing Wachovia (Scherer 56).

Wachovia made a mistake by purchasing Citigroup, but the company also lost out in the end because of it. The purchase gave Wells Fargo a chance that they wouldn't have been able to have otherwise had Wachovia not made the purchase in the first place. Wachovia didn't care about any of it, though, because they were just trying to save themselves from failure, which is what other good companies do when they see that their bank is taking a turn for the worse (Scherer 36). They should have known better than to make the purchase and think that they could get away with it. The purchase was a huge mistake that would be hard to recover from, but Wachovia was still able to do so, even though they didn't know it. This shows that Wachovia had some moxie and determination in them that allowed them to focus on what they needed to do in order to get back on their feet.

Wachovia's purchase of Citigroup wasn't a smart idea because there were no benefits involved with the action aside from the fact that it provided a temporary solution. Other than that, there was nothing else. Wells Fargo took advantage of the situation and bought them off for good because Citi would have failed if Wachovia had kept it alive (Scherer 23).

Conclusion

In conclusion, Wachovia's purchase of Citigroup was a mistake because the company took a risk that they should not have taken. Citigroup was an unhealthy bank that was losing money and had too much debt. The reason why Wachovia bought them was to save themselves from going under, but they didn't need the help in the first place. They were fine on their own, but they were trying to make a last ditch effort to save themselves and win back stock holders (Scherer 38).

Works Cited

Scherer, John. "Banks Get Creative in Finding Money for Acquisitions." Online NewsHour: Business. PBS, 24 July 2008. Web. 20 Oct.