A New Deal fo First Interstate : THE DEAL : In Hindsight, Wells Fargo Realizes Its Target Was Sending It Signals

Looking back, the people at Wells Fargo & Co. realize now that First Interstate Bancorp was sending them a signal.

It came after the second--and last--face-to-face meeting between the chief executives of the two giant banks on Nov. 1. Wells’ Paul Hazen and First Interstate’s William E.B. Siart had been looking for ways to transform Wells’ hostile bid--then valued at $10.9 billion--for First Interstate into a friendly merger. But everybody involved knew that the obstacles were great.

Siart had already publicly criticized Wells’ ambush tactics in hitting him with a take-it-or-leave-it bid, the mayors of San Francisco and Los Angeles were bemoaning the possible loss of thousands of jobs, and First Interstate was known to be beating the bushes for a potential alternative merger partner.

Nevertheless, after Hazen’s and Siart’s midweek meeting, the Wells Fargo forces were under the impression that things had gone well, according to people close to the deal. From then until the end of the week, they tried to raise Siart by telephone.

Unsuccessfully.

“People thought Bill Siart was just taking a few days off,” said one person close to the talks. When the final call to First Interstate on Friday was not returned, he added, “that should have been the tip-off.”

Nevertheless, Wells Fargo was all but blindsided by First Interstate’s announcement Monday that it had agreed to be acquired by Minneapolis-based First Bank System Inc. for $10.1 billion--a price lower on its face than Wells Fargo’s offer (whose value has dropped to $10.2 billion).

Interviews with Siart, First Bank Chief Executive John F. (Jack) Grundhofer and others close to the deal indicate that a defensive merger with First Bank was on Siart’s mind almost from the moment he received Wells Fargo’s bid Oct. 18. That very day, Siart and Grundhofer said in interviews with The Times, Siart telephoned Grundhofer in Minneapolis, calling him out of a board meeting to discuss the bid.

“Naturally, I left the board meeting to take his call,” Grundhofer said.

In fact, the two institutions had been aware of each other for much longer as potential strategic or corporate partners. Investment bankers at J.P. Morgan & Co., who had done business with both sides, had been trying over a period of a year to interest both executive suites in the benefits of such a transaction. (After Oct. 18, Morgan was retained as an adviser to First Bank in the First Interstate merger.)

But Wells Fargo’s unsolicited bid clearly hastened First Interstate’s search for an alternative deal.

Wells executives and their advisers watched the search go on from the outside. Almost from the first, three large super-regional bank companies took center stage: Columbus, Ohio-based Banc One Corp. and two Minneapolis-based banks, Norwest Corp. and First Bank.

Wells’ advisers were convinced that none of the possible mergers made better economic sense than their own proposal: It was richer, offered more potential for cost cutting and was valued more conservatively.

They also saw little sign that First Interstate was moving decisively toward a transaction. First Interstate reportedly provided Banc One, Norwest and possibly others with financial information to enable them to consider a bid.

“Reality was being obscured by so many rumors,” said one person familiar with the talks, “that there was absolutely not a sign that today there would be a bid.”

But Siart and Grundhofer were moving forward quickly. In the 2 1/2 weeks following the Wells bid, the executives held at least two face-to-face sessions. One of these encounters was even facilitated, coincidentally, by another California bank.

Bank of America, which had just sold its corporate trust business to First Bank, had invited Grundhofer and his senior staff to Los Angeles for a reception Oct. 24 to meet their new trust customers and execute the handoff. Grundhofer came for the reception and stayed in Southern California for two more days, engaging in serious talks with Siart and his team, discussing such topics as how to integrate the corporate cultures of the two potential partners.

Along the way, Siart clearly concluded that he had a greater affinity for Grundhofer--himself a former executive at Wells Fargo and Union Bank of California--than with Wells’ Hazen.