When he received an early morning phone call telling him that Wells Fargo had just trumped Citigroup's government-brokered $2.2bn deal to buy Wachovia, a senior Citi executive thought he was having a bad dream. But as he awoke fully, reality dawned on him: his company had been blindsided by a blitz from Wells for Wachovia - a bank that Citi thought it had in the bag 48 hours earlier.
Wells, which abandoned talks to acquire Wachovia last week, made its surprise move at 9pm on Thursday night when Dick Kovacevich, its chairman, called Robert Steel, Wachovia's chief executive, with details of the $15.1bn all-share bid, according to people close to the situation.
Some insiders say that Wells had contacted regulators earlier and regulators had told Wachovia it might receive an unsolicited offer.
Mr Steel hastily convened a board meeting by phone and after hours of discussions, Wachovia, the sixth-largest lender in the US, was ready to switch horses.
The news sparked an angry reaction from Citi, whose executives had been with Wachovia's top brass, including Mr Steel, on Thursday to thrash out details of their own merger.
The US financial services group said Wachovia's decision to swap partners was in breach of an exclusivity agreement.
Citi is still considering whether to raise its $1-a-share bid for Wachovia, according to people close to the situation, but it has also issued a thinly veiled threat to take legal action to stop the transaction or demand damages.
The exclusivity agreement, seen by the Financial Times, states that Wachovia "shall not . . . solicit, initiate or take action to facilitate or encourage the submission of any acquisition proposal [or] enter into or participate in any discussions or negotiations".
The document, which was signed by Gary Crittenden, Citi's chief financial officer, and Jane Sherburne, Wachovia's general counsel, was due to expire on Monday, according to a handwritten note initialled by Ms Sherburne.
Wachovia declined to comment on the exclusivity agreement and John Stumpf, Wells Fargo's chief executive, told Wall Street analysts that he was not aware "of any merger agreements that have been consummated".
Mr Stumpf, who was advised by JPMorgan Chase and the renowned law firm of Wachtell, Lipton, Rosen & Katz, said he was confident the deal for Wachovia, which has been advised by Goldman Sachs and Sullivan & Cromwell, had been "done appropriately."
But if Citi follows through with its threat to take legal action, that decision could be out of Mr Stumpf's hands.
Citi insiders yesterday pointed to the Texaco/Pennzoil case as supporting their argument.
In 1984, Texaco trumped a $2.6bn deal by Pennzoil to buy a stake in Getty Oil with its $10.1bn proposal to buy the whole company. Texaco claimed Pennzoil and Getty had only had an agreement in principle, not a legally enforceable contract. Pennzoil sued, and won $10.53bn, claiming the loss of a "significant and valuable business opportunity."
However, Wachovia's advisers argued that its management was duty bound to present Wells' offer to the board. The board, for its part, felt it could not justify rejecting a higher bid to its shareholders, partly because the agreement with Citi had come under pressure from regulators.
