Los Angeles billionaire Marvin Davis revealed Tuesday that he owns a “significant amount” of First Interstate Bancorp’s stock and suggested to its directors that now may be the “ideal time” for them to sell the struggling banking firm.
Davis’ move did not trigger a major immediate reaction, but some analysts and investors suggested that Davis--a major corporate raider--may be trying to spark a shareholder revolt or proxy fight.
In a letter sent to directors through First Interstate Chief Executive Edward M. Carson, Davis said he is dissatisfied with the bank’s management, saying he has “watched with distress” the bank’s “deteriorating financial condition.” He suggested that the Los Angeles-based banking firm, historically plagued by high overhead costs, find ways to operate more efficiently or look for a buyer.
With a net worth estimated by Forbes magazine in October at $1.65 billion, Davis has some of the deepest pockets around. Still, investors generally shrugged off the letter. First Interstate’s stock hardly moved, finishing the day at $25.125 per share, up 37.5 cents, in trading on the New York Stock Exchange.
“The market is not sure how to read this,” said Donald K. Crowley, a banking analyst in San Francisco for Keefe, Bruyette & Woods Inc.
Davis and his associates declined to comment on the letter. Davis did not reveal how much First Interstate stock he owns, but he is known to typically buy 3% of the shares in companies he is active with. Davis made huge profits on his stock holdings after threatening last year to buy the parent companies of Northwest and United airlines.
First Interstate has been hit hard during the past year by losses stemming from its ill-fated move into Texas in the late 1980s and problems in Arizona, where the economy has softened.
Simon Barker-Benfield, a First Interstate spokesman, said the bank was unaware that Davis was a shareholder until he sent the letter.
“We take his concerns seriously as we do the concerns of all of our shareholders. We also are encouraged by the progress we have made so far this year,” Barker-Benfield said.
Investors and analysts said Davis is probably hoping to ignite a revolt among the handful of institutional shareholders who control First Interstate’s stock. Some 70% of the stock is owned by institutional investors, with nearly half owned by six institutions.
One possibility is that Davis may launch a proxy fight to pressure management. Indeed, his letter was released publicly by the well-known proxy solicitation firm D. F. King & Co. A D. F. King spokeswoman said the firm frequently releases financial information for clients. She said releasing the letter does not mean that Davis is using the firm’s proxy solicitation services.
Investors and some securities analysts discounted any threat and questioned Davis’ conclusion that now is the time to sell the bank. They cited the serious slump in the banking industry and, more important, the small number of potential buyers who could pull off such a large transaction.
“This is hardly an ideal time to sell a bank or parts of a bank,” said John Neff, who heads Windsor mutual fund, one of First Interstate’s largest shareholders. Neff is one of the bank’s most vocal critics.
The list of potential buyers is growing shorter all the time. Security Pacific Corp., once at the top of the list, acknowledged this week that it won’t be expanding for at least a year in the wake of the $320-million to $360-million loss it expects to post in the fourth quarter.
Large New York banks once considered likely buyers of California banks, such as Citicorp and Chase Manhattan, are having their own huge problems and are in no position to swallow such an acquisition. Japanese banks as well are under pressure in the wake of Japan’s real estate and stock market slump. Large regional banks are loaded with problem real estate loans or are still working through other acquisitions. Banks that could buy First Interstate, notably New York giant J. P. Morgan, have no interest in retail banking.
That leaves two most likely candidates: BankAmerica Corp. and Wells Fargo & Co. Neither is likely to make a bid unless it is on friendly terms, and industry executives believe it is unlikely for now that First Interstate’s management would want to do that. In addition, Wells Fargo and BankAmerica are digesting large savings and loan acquisitions, and also face uncertainty next year because California’s economy is softening.
In addition, nearly 10% of First Interstate’s shares are held by Kohlberg Kravis Roberts & Co., the huge investment firm. Earlier this year, KKR willingly granted First Interstate an agreement in which it will not sell to a buyer without First Interstate’s permission until February, 1992. First Interstate management has portrayed the investment as friendly.
Any suggestion that Davis may try to buy the bank himself was widely discounted. Banking industry lawyers and executives said the layers of state and federal regulatory laws would be so cumbersome that it would be virtually impossible. All told, Davis would have to go through at least 14 state banking regulators and at least three federal ones.
Furthermore, they said, regulators would undoubtedly frown on Davis’ reputation as a corporate raider. In addition, regulators would scrutinize the financing of the acquisition because banks by nature are highly leveraged. Finally, Davis would have to work out a method of buying the bank to avoid restrictions that bank holding company laws might place on his ownership of other businesses.
In the letter, Davis said he agrees with comments made last week in the Wall Street Journal by Neff, who said then that he would not hesitate to join other large investors to force a breakup or sale of First Interstate. Neff said he spoke very briefly with Davis after his comments were published, but the billionaire gave no indication of his plans. Neff said he personally believes the best time to sell First Interstate has passed.