Wells Fargo expects charges related to the acquisition of about $10 billion, and the company said it will issue as much as $20 billion of new securities, mostly common stock. Wachovia agreed to give Wells Fargo preferred stock that will represent 39.9 percent of Wachovia's voting power.

Wells Fargo said it will acquire all of Wachovia's businesses, preferred equity and banking deposits. Chief Financial Officer Howard Atkins said in the statement that the acquisition will add to earnings per share by the third year after completion and should produce an internal rate of return of at least 15 percent.

"This is a franchise that Wells Fargo wanted and this is one they didn't want to get away," said Mark Morgan, portfolio manager at Thrivent Financial for Lutherans in Minneapolis. Thrivent held 1.8 million Wells shares as of June 30, according to Bloomberg data. "This provides an opportunity for Wells Fargo to expand in the eastern U.S., particularly in the Southeast, in markets they've wanted to be in."

Buying Wachovia detours from the strategy outlined by Wells Fargo Chief Executive Officer John Stumpf, who has said he prefers smaller acquisitions with less risk that would fill gaps in the existing branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. All told, the bank would have $787 billion in deposits and 10,761 branches in 39 states.

The deal also gives Wells Fargo responsibility for about $122 billion of option ARMs sold by Wachovia, the No. 1 provider of such loans. The home mortgages are prone to default because they allow borrowers to defer part of their interest payments and add it to the principal of the loan. Those terms backfired when housing markets weakened, leaving borrowers with loans larger than the price of their homes.

Wachovia issued more than half its option ARMs in California, according to the bank's second-quarter earnings presentation to investors. Wells Fargo is already the biggest bank based in that state. The stock gained 16 percent this year through yesterday.

"The credit issues are the risk in this," Morgan said. "It gives them a lot of concentration in California and mortgage business in general. But they are paying a pretty low price, so it's not out of line with their acquisition philosophy."

Wells Fargo was advised on the transaction by Wachtell, Lipton, Rosen & Katz and JPMorgan Chase & Co., the statement said. Wachovia relied on Sullivan & Cromwell LLP, Goldman Sachs Group Inc. and Perella Weinberg Partners, the statement said.

"The deal doesn't sit too well with me," said Jocelynn Drake, an equity analyst at Schaeffer's Investment Research in Cincinnati. "Wells was doing very well, and merging with Wachovia, which has such a bad rap among Wall Street investors, looks questionable to me."