Wells' original offer totaled about $15.1 billion, but since the value of its shares closed down 60 cents Friday, the deal is now valued at about $14.8 billion.
Only four days earlier, Citigroup Inc. agreed to pay $2.1 billion for Wachovia's banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.
The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks' regulators "to pursue a resolution that serves the public interest."
Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.
Barring legal action, the future of Wachovia will be determined by the bank's shareholders and regulators, which both have to approve a final deal.
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It was clear which they preferred Friday, as Wachovia shares climbed as high as 80 percent.
The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay's financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn't been nixed yet, he said. "But at the same time, they are saying they are reviewing all proposals."
By law, he said the FDIC is required to find the least-costly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.
The Federal Reserve, which has regulatory oversight of the three big banks, said it hasn't had time to review the proposed sale of Wachovia to Wells Fargo but will work to ensure that all creditors and depositors of Wachovia are protected.
The Fed said regulators will be working with Wachovia and Wells Fargo "to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability."
Under Wells Fargo's deal, Wachovia shareholders would receive 0.1991 shares of Wells Fargo for every share of Wachovia stock they own, valuing Wachovia at about $7 per share. This is a nearly 80 percent premium over the stock's Thursday closing price of $3.91. Shares closed at $10 on Sept. 26, the last trading session before the deal with Citigroup was announced.
"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," Robert Steel, Wachovia's president and chief executive, said in a statement.
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In its planned takeover of Wachovia, Citigroup said it would assume $53 billion worth of debt and agreed to absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio. The FDIC agreed to cover any remaining losses in exchange for $12 billion in Citigroup preferred stock and warrants.
"Wells' deeper and more considered due diligence has probably revealed fewer risky assets and a larger number of higher valued assets than originally thought," said Anant Sundaram, professor of finance at the Tuck School of Business at Dartmouth College in an e-mail to The Associated Press. "Although it is still too early to tell, this could presage a significant shift in market sentiment toward the value of companies such as Wachovia, and may suggest that there has been an overreaction in the downdraft that we saw in the past few weeks. It is a huge shot in the arm for market confidence. It is also a signal that market forces are capable of resolving some aspects of the crisis without undue congressional, and hence, taxpayer, intervention."
The fight for Wachovia comes at a turbulent time for banks and financial firms as they grapple with the ongoing credit crisis, which led to the recent bankruptcy of Lehman Brothers Holdings Inc. and the failure of Washington Mutual Inc.
It also comes at a time of unprecedented government intervention in the financial markets.
Wells Fargo may have decided to make a move as the passage of the government's financial bailout plan seemed imminent, said Donn Vickrey, co-founder and chief analyst at Gradient Analytics.
"At the time they made the decision, it looked a lot more likely that it would pass," he said. "You have the possibility of offloading these loans at a price that is higher than current values."
The failure of the government's proposed $700 billion bailout for financial institutions Monday cast doubt on whether Citigroup would be able to rid itself of some of Wachovia's bad debt.
The proposal would have allowed Citigroup to sell Wachovia's distressed mortgage-related assets to the government for a profit.
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Congress approved a sweetened version of the bailout plan Friday and President Bush quickly signed it.
The core of the plan remains little changed from its inception - the Treasury Department would have $700 billion at its disposal to purchase bad mortage-related securities that are weighing down the balance sheets of institutions that hold them.
But in analyzing the deal, Wells Fargo assumed it would not sell any of the loans to the government.