Los Angeles Mayor Richard Riordan on Thursday blasted Wells Fargo & Co.'s hostile takeover bid for First Interstate Bancorp as potentially devastating to the region. He said he would support the hometown bank's efforts to resist.
"There's something very, very bad about a situation where . . . someone offers a lot of money and it somehow destroys the whole context of what's been built up over years," Riordan said of the bid, valued at $10.85 billion in Wells Fargo stock at Thursday's closing price.
A major part of Wells' rationale for the deal is the savings of $700 million a year that the San Francisco-based bank says it could achieve by closing branches, consolidating "back shop" data-processing operations and laying off workers.
Wells executives could not be reached for comment on Riordan's remarks late Thursday, but they have maintained that consolidation is unavoidable if banks are to survive in competition against lower-cost rivals, such as mutual funds and brokerages.
Analysts estimated that job cuts following the merger could range from 7,000 to more than 9,000--or 15% to 20% of the banks' combined 47,300-member work force in California and the 12 other states where First Interstate does business. Wells itself did not provide an estimate of job cuts.
The bulk of the job losses would come in California, where the two banks' operations overlap. And the Los Angeles area "is certainly going to be hit the hardest," Riordan said in a late-afternoon phone interview.
Analysts agreed that as Wells Fargo consolidates the two companies' staffs, it is likely to evacuate First Interstate's landmark headquarters in Downtown Los Angeles, along with workers ranging from clerical workers to high-paid professionals. And Wells would transform First Interstate's branch system to match its own model: smaller offices with more automated teller machines, more computers and fewer people.
Local real estate brokers said the deal might also postpone a long-awaited turnaround of the troubled Downtown Los Angeles real estate market and leave suburban shopping centers littered with more empty bank branches.
Wells Chairman Paul Hazen went public with the bold offer Wednesday morning after William E.B. Siart, First Interstate's chairman and chief executive, had rebuffed his overture the night before.
Hazen's action prompted enthusiastic investors to bid the stocks of both companies to dizzy new highs. First Interstate's stock leaped $34.25 on Wednesday--nearly a third over its price the day before. And the stock hardly backed off at all on Thursday, closing at $139.875, down 37.5 cents, in trading on the New York Stock Exchange.
Wells stock closed at $228.375 on Thursday, down 62.5 cents but still $14.75 above where it was when the First Interstate bid was announced.
Analysts and at least one Wells executive said the reaction amounted to Wall Street's belief that the deal is all but done.
"Realistically, I think they're in a corner," analyst R. Jay Tejera of the Dain Bosworth brokerage in Seattle said of First Interstate. First Interstate may be able to negotiate a higher price by agreeing to a friendly merger, he said, but it is unlikely to find another partner to top Wells' bid--nearly three times First Interstate's book value (the difference between its assets and liabilities).
To make the case that First Interstate should remain independent, it would have to persuade investors that it could achieve that value on its own, said analyst Charlotte Chamberlain of Wedbush Morgan Securities in Los Angeles. While First Interstate has lately made strides in cost cutting and profitability, its stock was trading at a little over twice book value before the bid.
Neither Siart nor other First Interstate officers have commented beyond Siart's initial statement Wednesday that he was "very disappointed" by Wells' action but that the board would consider the offer and respond "when appropriate."
But Riordan said he expects a fight.
The mayor said he spoke with Siart by phone for 20 minutes on Wednesday and "we were both on the same wavelength, agreeing that this would not be good for Los Angeles."
Notwithstanding their responsibility to shareholders, he said, First Interstate's directors "have a perfect right to step back and take the long view and say no to this."
Riordan did not disclose what action he might take, except that--if invited by Siart--he would explain his view of the deal to First Interstate's directors. The First Interstate board is laden with current and retired executives of such pillars of the local business establishment as Atlantic Richfield Co., Lockheed Corp., SCEcorp and Unocal Corp.
There was some irony in Riordan's position, since in his business career he made a fortune investing in leveraged buyouts, which often entail significant layoffs.
The mayor, of course, has no official power over the deal, but his statements could influence Wells to try to moderate its job cuts in the Los Angeles basin. They could also help to balance investor pressure on First Interstate's board to get the deal done.
On the heels of Siart's public statement, he and his fellow First Interstate directors were slapped with a handful of shareholder lawsuits accusing them of breaching their fiduciary duty by rebuffing Wells Fargo.
The suits, seeking class-action status to recover damages for all First Interstate shareholders, were filed Wednesday and Thursday in Los Angeles County Superior Court by William S. Lerach, a San Diego-based lawyer who specializes in shareholder litigation.
In a telephone interview Thursday, Lerach charged First Interstate's directors with "trying to entrench themselves" in their lucrative posts at the expensive of shareholders, for whom the Wells offer is "literally a once-in-a-lifetime deal."
To Los Angeles area real estate professionals, however, the deal sparked dread.
"It really strikes at . . . the Downtown recovery," said Brett White, regional manager of real estate broker CB Commercial. "You are going to look at large amounts of space hitting the market. It's going to keep rents low and vacancies high."
First Interstate is one of Downtown Los Angeles' largest tenants, occupying almost a million square feet of office and commercial space. The company is headquartered at the 73-story First Interstate World Center--where four giant company logos covered in gold leaf crown the tallest building in the western United States.
Many landlords are still trying to recover from the fallout of the past mergers, particularly the massive Bank of America-Security Pacific combination that led to the closure of about 500 branches. Many of those were purchased or leased by financial institutions, but many were renovated into alternative uses, ranging from medical centers to fast-food restaurants.
But a large number of empty former branches--including those of other merged or failed financial institutions--are scattered across Southern California, according to leasing agents. There are still 50 former Security Pacific branches available for lease or sale, said Ernest Brambila, managing director of retail property services for Lee & Associates.
"If [Wells Fargo and First Interstate] come on the market with 50 branches, it's going to be a while before they sell," given the soft market, Brambila said.
Empty bank real estate has been an economic drag on many communities. In Brea, a giant Security Pacific data-processing center that once employed 2,500 workers was closed down by Bank of America and never reopened.
"It has had a dramatic impact," said Susan Georgino, director of the Brea Redevelopment Agency. "We have lost in excess of $1 million in property taxes."
In estimating the potential job losses from a Wells-First Interstate merger, Gary Findley, an Anaheim-based bank consultant, applied simple arithmetic to some basic assumptions about the deal. If Wells expects gross annual savings of up to $800 million, assume that half, or $400 million, will come from layoffs. If the average bank worker makes $50,000, in salary and benefits, that implies 8,000 pink slips.
Other analysts suggested cuts of 15% to 20% of the combined work force, or 7,000 to 10,000 in all.
Tejera of Dain Bosworth said he expects layoffs in the high end of that range, remarking that Wells "wrote the operating manual" on bank consolidation with its 1986 takeover of Crocker National Bank, which led to 4,000 layoffs.