1st Interstate Asks Fed’s Approval to Merge With B of A : Move Signals Intent to Pursue Takeover Despite San Francisco Bank’s Coolness to Proposal

In a step toward launching a hostile tender offer for BankAmerica, First Interstate Bancorp on Monday asked the Federal Reserve Board to approve the proposed merger.

First Interstate thus signaled its intent to pursue the troubled San Francisco bank, with or without its consent, despite BankAmerica’s repeated refusals to respond to the offer.

First Interstate also revised the terms of its bid, lowering the offered price to $3.24 billion, or $21 a share, from $3.39 billion, or $22 a share. However, the new offer is considered a firmer price because it does not include a preferred stock issue whose payout was contingent on the combined bank’s future profits.

BankAmerica, which has suffered $600 million in losses so far this year, is racing to divest itself of assets and cut costs in a desperate bid to regain profitability, raise capital and resist the unwelcome First Interstate bid.

BankAmerica Sells Division

On Monday, BankAmerica announced that it had sold its consumer trust division to Wells Fargo & Co. for $100 million cash. The move brings the BankAmerica a $98-million after-tax gain but deprives it of 12,400 customers and $51 million in annual fee income.

BankAmerica recently announced that it would sell as much as $8 billion of its $113 billion in assets and cut employment by 7,500 workers by the end of next year.

First Interstate said it would file “in the near future” a registration statement for the Securities and Exchange Commission covering new securities that would be issued to BankAmerica shareholders in the proposed merger.

First Interstate appears to be moving quickly to complete the proposed merger so that it can reap the profit from BankAmerica’s current asset sales. It also wants to get its application before the Fed soon so that it can present its offer to BankAmerica shareholders before BankAmerica’s annual meeting next May.

BankAmerica Chairman A. W. Clausen, in a statement late Monday, complained about the “pressures” First Interstate is exerting on his ailing bank. “We very much regret that First Interstate refuses to wait until we complete the comprehensive analysis of our business strategies that is now under way,” Clausen said. He insisted that the bank’s board of directors would not act on the First Interstate bid until that review is completed.

Conditions of Offer

First Interstate, in a statement it released Monday, said its offer is contingent upon regulatory approvals, acceptance by BankAmerica and First Interstate shareholders and verification of the accuracy of BankAmerica’s financial statements.

BankAmerica has repeatedly been surprised by the extent of its loan-loss problems. An unexpected $640-million loss in this year’s second quarter led to the ouster of President Samuel H. Armacost and the return of Clausen, who was chief executive of the bank before beginning a five-year term as president of the World Bank in 1981.

In addition, First Interstate said its offer depends on the effects of BankAmerica’s continuing assets sales and “other changes now occurring at BankAmerica.” Those changes are thought to include a “poison pill” defense against a hostile takeover now being devised by BankAmerica’s outside counsel, Martin Lipton, a New York lawyer who specializes in takeovers.

“This is going to get ugly before it’s over,” predicted banking industry analyst Stephen Berman, of Nomura Securities International in New York.

First Interstate’s revised offer consists of three parts. For each BankAmerica share, First Interstate proposes to exchange 0.23 shares of First Interstate common stock, a share of preferred stock worth $4 and a bond worth $4.45. First Interstate values the offer at $21 a share, based on Friday’s closing stock prices.

In composite trading on the New York Stock Exchange Monday, BankAmerica closed at $14.625 a share, unchanged. First Interstate closed at $54.25, down 25 cents.

One major BankAmerica shareholder said Monday that he likely would recommend accepting First Interstate’s offer for his fund’s 500,000 shares.

“If there’s an opportunity to take a profit now rather than one that might not materialize for several years, you have no choice,” said George Reagan, head of equity trading for the Texas Teacher Retirement System.

First Interstate also said Monday that it would raise a total of $550 million in capital for the combined bank before the deal is closed. The capital would consist of $150 million in common stock, $150 million in preferred stock and $250 million in debt securities.

The new capital was proposed in answer to skepticism about the likelihood of regulatory approval in the absence of significant new equity capital for the combined entity.

Prior Talks With Fed

Industry sources said First Interstate had conducted discussions with Federal Reserve officials about the deal before submitting its draft application Monday. First Interstate was not discouraged from applying for approval of the merger, the sources said.

In San Francisco, Harry Green, vice president for regulation of the Federal Reserve Bank, confirmed that the agency had received First Interstate’s four-inch-thick draft application.

Once a final application is filed, the Fed has 90 days in which to approve or disapprove a transaction, although it strives to decide most applications in 60 days. Even if the Fed approves the deal, it still must win shareholder support.