1st Interstate Must Hike Bid to Buy B of A, Analysts Say
First Interstate Bancorp will have to raise its $2.8-billion offer for BankAmerica Corp. if it is to succeed in its bold attempt to take over the much larger bank, analysts said Tuesday.
But few are dismissing the idea that the nation’s second-largest bank could be acquired by the smaller institution, an idea that just a year ago would have seemed far-fetched.
Debate raged inside and outside BankAmerica on Tuesday over the desirability of a merger with First Interstate--and at what price. Analysts said that while First Interstate’s initial offering price may be too low, the merger of the two California banks would be workable and would create a financial giant dominating the industry in the Western United States.
BankAmerica is the San Francisco-based parent of Bank of America, the nation’s second-largest bank, with $117 billion in assets. First Interstate, with headquarters in Los Angeles, owns banks in 12 Western states and ranks ninth among U.S. banking companies, with $49 billion in assets.
The fate of BankAmerica now lies with its board of directors, particularly the 11 members who are not executives of the bank, who must weigh the First Interstate offer and whatever other bids it may inspire.
Knowledgeable sources said a number of directors are pushing for some action to reverse the bank’s dangerous slide and have had informal contacts with Joseph J. Pinola, First Interstate’s chairman and chief executive, about the possibility of a merger.
Bank management, however, is expected to argue forcefully that the First Interstate offer is inadequate and that the bank is correcting its considerable problems and should fight to remain independent.
BankAmerica got an expression of support from an unexpected quarter Tuesday when Los Angeles-based Security Pacific Corp. issued a statement denying rumors that it would bid for BankAmerica.
Richard J. Flamson III, Security Pacific’s chairman and chief executive, said: “We think it is important that BankAmerica remain an independent organization. . . . We have assured the management of BankAmerica Corp. that we stand ready to cooperate with them in any way that we can to assist in meeting mutual objectives.”
Security Pacific officials said such assistance could take the form of purchasing BankAmerica assets, such as Seafirst Na tional Bank of Seattle, to help BankAmerica raise capital and profits to fight the First Interstate takeover attempt.
A source close to First Interstate said its $2.8-billion offer is “pretty firm” but left open the possibility of sweetening the deal if BankAmerica’s directors should reject the initial offer.
The BankAmerica board on Monday asked First Interstate to provide further information on its offer. No timetable was set for a BankAmerica response after it has the information it seeks.
A First Interstate source said the company would not proceed with a hostile takeover try if BankAmerica rejects the negotiated merger offer.
The complex offer is based on a swap of First Interstate common shares for BankAmerica’s stock and the issuance of a new preferred stock with dividends based on the profitability of the combined bank.
Under the proposal, each share of BankAmerica common stock would be exchanged for 0.22 shares of First Interstate common stock and one share of a new preferred issue, valued by First Interstate at $6 a share.
BankAmerica common stock rose $2.625 a share to $14.875 on Tuesday in composite trading on the New York Stock Exchange, while First Interstate’s shares fell $1.50 to $53.25. BankAmerica was the second most heavily traded issue, with more than 5.5 million shares changing hands.
Risks in Loan Portfolio
Analysts read the stock movements as an indication that investors believe that BankAmerica stands to benefit from a combination with the smaller but healthier First Interstate. But First Interstate would be assuming incalculable risks by acquiring BankAmerica’s $80-billion loan portfolio, which has yielded nearly $1 billion in net losses for the bank over the past year and contains $7 billion in non-performing loans and loans to troubled Latin American borrowers.
The First Interstate offer is worth about $18 a share, none of it in cash. Analysts estimated BankAmerica’s value at between $15 and $30 a share. Salomon Bros., BankAmerica’s investment bankers, put the company’s worth at close to $30 a share.
“The $18 offer was a good feeler and starting point,” said Santa Monica banking consultant Salvatore Serrantino. “On the other hand, B of A is smoking vanilla hemp if they think the bank is worth $30 a share.”
“There’s real sense to it (the merger),” said bank analyst Larry Cohn of the investment firm of Merrill Lynch in New York. “The problem is that in taking on B of A, First Interstate is taking on a company with a fair amount of problems. Can they manage the situation to get real value out of it? That’s going to be a function of just how much trouble there really is in the portfolio.
“This deal will come back time after time to the real imponderable: What are the loan losses still to be felt?”
Offer Too Low, Analysts Say
Cohn said the price offered by First Interstate appears reasonable, although it is difficult to calculate the true value of the offer because it is based on future stock prices and a hypothetical preferred stock issue. He said his firm considers BankAmerica to be worth about $15 a share.
Other analysts, however, said the First Interstate offer was far too low. Stephen Berman, banking industry specialist with Nomura Securities in New York, said: “I can’t see them (BankAmerica) accepting this deal. They’d have to be crazy. If he (Pinola) is willing to double his offer, he might have something.”
Berman said First Interstate is not in a position to acquire BankAmerica because it has not adequately controlled its own expenses. The success of any big merger depends on squeezing redundant costs from the two entities, something Wells Fargo Bank has proven in its acquisition of Crocker National Bank, Berman said.
“I don’t think this proposal is attractive enough to make sense to shareholders or directors at BankAmerica,” said Dan Williams, a banking analyst for Sutro & Co. in San Francisco. “But a sweeter deal could fly.”
