Reject Merger, Management of B of A Urges

BankAmerica management agreed Monday to urge the bank’s board of directors to turn down First Interstate Bancorp’s $2.8-billion merger proposal, BankAmerica sources said.

The recommendation will be acted upon by the board at its regular meeting next Monday in Los Angeles. Sources at both banks said the BankAmerica directors were certain to concur with management and reject the First Interstate bid as unfair to BankAmerica shareholders and customers.

A First Interstate source said the bank would not be deterred by BankAmerica’s initial rejection and intends to pursue its effort to acquire the ailing San Francisco bank. “Stay tuned,” he said.

BankAmerica chief spokesman John Keane said, “It is expected that the board will consider the First Interstate matter at its meeting on Nov. 3.” The bank had no further comment.

First Interstate, based in Los Angeles, is the nation’s ninth-largest banking company. BankAmerica is the parent company of Bank of America, the country’s second-largest bank.

$1 Billion in Losses

Bank of America has suffered nearly $1 billion in losses during the last 18 months and has experienced continuing management turmoil and been forced to sell valuable properties to maintain its underlying capital at safe levels. The company’s stock price has plummeted and the bank earlier this year eliminated the dividend on its common stock.

The bank’s travails have made it vulnerable to takeover offers, several of which have surfaced over the last few months. The First Interstate proposal, a complicated deal involving an exchange of stock, is the most detailed and serious of the various bids.

The First Interstate offer was delivered Oct. 3. Three days later, the board decided to remove President Samuel H. Armacost and bring back former chief executive A. W. Clausen to try to lead the bank out of its problems.

Weigh Recommendation

Clausen said shortly after arriving back at BankAmerica that he “remains to be convinced” of the desirability of a merger with First Interstate. He said two weeks ago that the bank was seeking further information from First Interstate and its investment bankers about the value of the offer and First Interstate’s plans for the combined company.

That exchange of information was completed last week and BofA management met Monday to weigh its recommendation to the board. A source involved in those discussions said opinion was overwhelmingly against accepting the offer.

Bank of America officials have argued against the deal by saying that First Interstate intends to pursue a strategy similar to that already adopted by B of A: selling some profitable units, reducing costs and changing management. The BankAmerica board, in rejecting the First Interstate bid, is expected to say that the proposed merger would hurt California consumers and business borrowers by reducing competition.

Lawsuits Expected

First Interstate Chairman Joseph J. Pinola argues that his bank would bring fresh capital and top management talent to an institution sorely in need of both. He contends that competition in California would be enhanced by a healthier B of A combined with his California operation.

Pinola has said that if the merger goes through, he plans to retain the Bank of America name and keep the bank’s headquarters in San Francisco.

A Bank of America official said rejection of the First Interstate offer would probably result in the filing of one or more lawsuits by disgruntled shareholders who believe that they would be better off accepting the buy-out plan. The executive added, however, that other shareholders would be likely to sue if the bank accepted the First Interstate bid.

Meeting Sought

The B of A board is now named in 20 shareholder suits alleging a variety of misdeeds that are said to have eroded the value of the shareholders’ investment. The company’s insurance against such suits was canceled last year and the bank is providing its own coverage through a wholly owned Caribbean insurance subsidiary.

Separately, John S. Reed, chief executive of New York’s Citicorp, the nation’s largest bank, said during the weekend that he would like to meet with Clausen. Reed, in San Francisco to attend the annual convention of the American Bankers Assn., would not say what he wished to discuss with the BankAmerica chairman.

A BankAmerica spokesman declined to say if or when such a meeting would take place.

Citicorp has indicated interest in buying domestic and overseas subsidiaries that BankAmerica is selling to raise cash. Citicorp earlier this year bought several BankAmerica offices in Argentina and may be interested in bidding on consumer banks that BankAmerica owns in Italy and Germany.