First Interstate Bancorp on Monday halted its $3.25-billion effort to buy BankAmerica Corp., ending an 18-month drama that left both California banking giants bloodied.
Troubled BankAmerica will remain independent, at least for now, but as a dramatically smaller and less ambitious firm. First Interstate, led by Joseph J. Pinola, an aggressive former BankAmerica executive, walks away chastened and with an uncertain future in the competitive California banking marketplace.
First Interstate's withdrawal scuttles what would have been the largest U.S. bank merger in history. The deal ended with an acrimonious exchange between Pinola and his one-time friend and boss, BankAmerica Chairman A. W. Clausen. BankAmerica is the parent of Bank of America, the nation's second-largest bank.
Pinola, in a statement issued from First Interstate's Los Angeles headquarters, said he was withdrawing his buyout bid because BankAmerica is no longer worth the $3.25 billion he offered for it last fall. He said BankAmerica's sales of valuable subsidiaries over the past several months have weakened the bank and made it an unattractive merger partner.
"The continuing dismemberment of this institution no longer justifies our current offered price," Pinola said.
He added that the smaller overall size of BankAmerica serves only to magnify its multibillion-dollar problems with shaky Third World debt and bad loans and makes its ultimate recovery less likely.
"For these reasons--BankAmerica's weakened asset mix and reduced earning power--we see much less value to the First Interstate Bancorp shareholder, thus precipitating our withdrawal action," Pinola said.
As a result of BankAmerica's defensive moves, he said, shareholders of the San Francisco-based banking giant had been cheated out of the opportunity to receive a $6-a-share premium over the current market price for their stock and the chance to see the combined company run by superior management. Pinola had valued his no-cash, all-securities offer at $21 a share.
The First Interstate executive added that he would "continue to monitor" BankAmerica, implying that he might return later in the year with a revised acquisition bid. But banking industry analysts were doubtful that he would risk another embarrassment by trying again any time soon.
BankAmerica's Clausen, clearly delighted to have the threat of a hostile takeover lifted, said in a statement Monday that First Interstate's withdrawal "is definitely in the interest of BankAmerica and all its shareholders."
"We will now be able to focus all our attention on the job of turning BankAmerica around in 1987," he said.
Then, in a slap at the 61-year-old Pinola, his former subordinate, Clausen, 63, said, "It's regrettable that FIB (First Interstate Bancorp) chose to couch its withdrawal in a petulant tone of disparagement of our institution, but we suspect that there is a great deal of disappointment on their part that our restructuring program has progressed so quickly."
First Interstate owns 23 banks in 12 western states, including First Interstate of California, the state's fourth-largest bank. Overall, First Interstate is the ninth-largest banking company in the United States.
BankAmerica, with $104 billion in assets, is roughly twice First Interstate's size.
Pinola's withdrawal is a victory for Clausen, who returned to lead BankAmerica last October after the company ousted chief executive Samuel H. Armacost. Clausen had led the bank for 11 years during the 1970s, a period when it was the largest and most profitable financial institution in the world.
Clausen left BankAmerica in 1981 just as inflation, volatile interest rates, high operating expenses and weak management combined to undermine the bank's success. Under Armacost, profits fell every year until the company recorded losses of $337 million in 1985 and $518 million last year, among the worst deficits in banking industry history.
Clausen watched BankAmerica's decline from his new post as head of the World Bank in Washington, an institution devoted to helping less-developed countries, many of whom were stagnating because of overwhelming debts to commercial banks. Among the biggest lenders to poor nations was BankAmerica, with more than $7 billion in outstanding loans to troubled Third World borrowers.
Clausen was not reappointed to the World Bank job at the end of his five-year term and was thus available when the desperate BankAmerica board of directors sought a replacement for Armacost. His mission, which he readily accepted, was to fight off the First Interstate takeover bid and return BankAmerica to its former profitability and prominence.
His strategy was simple: sell off everything that was not essential to the company's core banking business, cut expenses as deeply and as quickly as possible and erect whatever legal, regulatory and political roadblocks were needed to stop Pinola.
In just the past seven weeks, Clausen has unloaded BankAmerica's Italian subsidiary, its consumer trust business, a British real estate unit and its Charles Schwab & Co. discount brokerage--divestitures worth nearly $1 billion. He promised to reduce BankAmerica employment by at least 4,000 in the next year and cut loan losses almost in half.
He vowed privately to repel Pinola "at whatever cost" and in recent weeks began a publicity barrage aimed at convincing employees, securities analysts and the media that an independent BankAmerica is in the best interests of shareholders, employees, customers and the nation at large.
Pinola, meantime, applied to the Securities and Exchange Commission and the Federal Reserve Board for permission to go forward with a buyout offer directly to BankAmerica's long-suffering shareholders. He said in filings with the regulatory agencies that shareholders would benefit from the immediate resumption of the common stock dividend, which BankAmerica suspended in January, 1986, and from the size and strength of the combined company in California and the West.
The Federal Reserve Board in December delayed action on the First Interstate application for technical reasons, giving BankAmerica time to carry out its restructuring program and put in place its defensive moves.
Pinola said Monday that he is confident that the government agencies would have approved the proposed merger. But his withdrawal avoids the possibility of the added embarrassment of the Fed's rejection of the controversial deal.
Analysts said Fed approval was by no means certain, especially in light of new rules governing bank capital. The rules would have made it much more expensive for First Interstate to raise the money to meet Fed capital guidelines.
First Interstate's attempt to buy BankAmerica was in part a defensive move. Pinola believes that unless First Interstate grows larger by acquisitions, it will be vulnerable to being taken over itself when state law allows out-of-state banks to buy California banks beginning in 1991.
In some ways, however, First Interstate came out ahead in the deal. It no longer has to worry about assuming the burden of BankAmerica's huge bureaucracy and deep pit of bad loans. It reaped millions of dollars worth of free publicity. In addition, it is now free to shop for smaller and more manageable bank acquisitions elsewhere to expand its territory.
In a related development, Assembly Speaker Willie Brown (D-San Francisco) said late Monday that he would not pursue a bill he sponsored to allow out-of-state banks to bid to buy BankAmerica. The bill was designed to allow Citicorp or other major New York bank holding companies to bypass current state law barring interstate acquisitions of California banks. Brown sponsored the bill to encourage higher bids for BankAmerica, because a richer price would benefit state pension funds, which are major holders of BankAmerica stock.
"In light of First Interstate's decision today to withdraw its bid for Bank of America, my bill is not immediately necessary," the Speaker said in a statement Monday. "My intent was, and continues to be, to protect public shareholders from an unfair buyout."
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