Citigroup has decided to drop its fight with Wells Fargo for the acquisition of Wachovia.

Wells Fargo will now be able to proceed with its $15-billion acquisition of the troubled competitor, making it one of the largest retail and commercial banks in the United States.

However, the Long Island-based Citigroup said it would continue to press a lawsuit seeking over $60 billion from Wells Fargo and Wachovia for striking a deal after Wachovia agreed to negotiate exclusively with Citigroup.

Citi obtained a stay on Saturday afternoon from the New York supreme court, restraining Wachovia from going ahead with the competing bid from Wells Fargo, which was overturned by a New York state appeals court last night as Wachovia obtained a restraining order preventing Citi from interfering with its deal to sell the entire company to Wells Fargo.

Citi had offered to acquire the banking business of Wachovia for $1 per share against the Wells Fargo offer of $7 per share for the whole enterprise (See: Citi to acquire Wachovia assets in a US government-backed rescue) 

At the end of September, Citigroup had sought to acquire most of Wachovia Corporation assets even as US lawmakers were preparing to vote on a $700 billion bail-out of failed banks in the US. Citigroup Inc was to pick up the banking operations of the Charlotte, North Carolina-based Wachovia Corporation, in a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC) with the concurrence of the board of governors of the Federal Reserve and the secretary of the treasury in consultation with the President.

The FDIC had entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc would have also absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC would have absorbed losses beyond that.

Wells Fargo stunned Citi in a matter of four days, announcing that it had signed a deal to buy Wachovia for more than $16 billion (See: Wells Fargo edges Citi to grab Wachovia for $15.1 billion).

Wells Fargo now becomes the latest member of an exclusive group of domestic American banking entities who have emerged to control almost a third of the US retail and commercial banking landscape. It joins the newly resized Bank of America and JP Morgan Chase, who too have acquired banks recently after the fallout of the credit crisis on Wall Street.

In a statement, Wells Fargo chairman Richard M Kovacevich said, "We believe that that is the correct and right decision for our country and our citizens and the health of our already stressed financial system, as well as our and Wachovia's respective shareholders and stakeholders,"
Ironically, it was Richard Kovacevich who was Citi's CEO in the '80s, and was the one who coined the famous Citi advertising tagline: ''Citi that never sleeps.''

The government too stands to lose billions in tax revenue, since under a new change in tax regulations, Wachovia's losses will allow Wells Fargo to avoid around $20 billion in federal taxes.