The Wells Fargo deal will be done without government assistance, while the Citigroup deal would have been done with the help of the Federal Deposit Insurance Corp.
"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.
The combined company will have total deposits of $787 billion and assets of $1.42 trillion, more than doubling Wells Fargo's totals on both counts. The bank will operate more than 10,000 locations. The two banks currently employ a combined 280,000 people.
On Monday, Citigroup agreed to buy Wachovia's banking operations for $2.16 billion in a deal orchestrated by the federal government. That deal, which had been approved by the boards of both companies, was still subject to approval by Wachovia's shareholders and regulators. It is not clear whether Citigroup will be entitled to a break-up fee.
The deal is still subject to Wachovia shareholder and other regulatory approvals. Wells Fargo said it expects the deal to close by year-end.
For each share of Wachovia, investors will receive 0.1991 of Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16.
"It provides superior value compared to the previous offer to acquire only the banking operations of the company and because Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies," said Wells Fargo Chairman Dick Kovacevich.
While Wells Fargo has logged three straight quarters of profit declines, the bank has been weathering one of the nation's worst credit crises better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector.
Citigroup has posted more than $17 billion in losses in the last three quarters.
"For Citigroup, this is a real loss. ... This was a deal that was going to save them as much as it was saving Wachovia," Cassandra Toroian, a chief investment officer, told Reuters.
Like Washington Mutual, which was seized by the federal government last week, Wachovia was a big originator of option adjustable-rate mortgages, which offered very low introductory payments and let borrowers defer some interest payments until later years. Delinquencies and defaults on these types of mortgages have skyrocketed in recent months, causing big losses for the banks.
This summer, Wachovia reported a $9.11 billion loss for the second quarter, announced plans to cut 11,350 jobs -- mostly in its mortgage business -- and slashed its dividend.
