First Interstate OKs Deal to Merge With First Bank System

By THOMAS S. MULLIGAN

Nov. 7, 1995 12 AM PT

TIMES STAFF WRITER

First Interstate Bancorp, trying to beat back a hostile takeover by Wells Fargo & Co., agreed Monday to be acquired by Minneapolis-based First Bank System Inc. in a $10.1-billion deal that would cost Los Angeles its last major banking headquarters but could spare the region some of the wrenching job cuts expected under the Wells Fargo deal.

The two banks announced in New York City early Monday that they have signed a definitive agreement to merge in an exchange of stock, the climax of negotiations that began in earnest Oct. 18, the day Wells Fargo announced its unsolicited bid.

The merger would create the nation’s ninth-largest bank, with assets of $92 billion and a 21-state service area, the broadest of any bank west of the Mississippi River. It would rival the pending merger of New York’s Chemical Banking Corp. and Chase Manhattan Corp. as the biggest in U.S. banking history, depending on the final stock prices of the companies at the time the mergers are completed.

The latest deal would be yet another in a record wave of mergers that is changing the landscape of American banking. The consolidation--with more than $50 billion worth of bank alliances announced already this year--is causing institutions to scramble for partners out of fear that bigger competitors will grab their customers and their territory.

In Orange County, First Interstate employs the equivalent of 410 full-time workers at 35 branches and five regional centers. While most of those offices would be consolidated under Wells Fargo’s bid, little would change under First Bank’s offer.

A First Bank-First Interstate union is by no means certain, however, as Wells Fargo is widely expected to mount a counteroffer, perhaps even a legal challenge. And bids might also come from some of the other large regional banks that have looked over First Interstate since the drama began.

“First Interstate is going to get sold--that’s the one thing we learned today,” said Scott Edgar of the Sife Trust Fund, a mutual fund that holds about 110,000 First Interstate shares. “We still don’t know who’s going to be the buyer.”

Los Angeles Mayor Richard Riordan, who strongly opposed the Wells Fargo offer, chose to welcome Monday’s agreement as a done deal.

“This is wonderful news for our city,” Riordan said in a statement. “It means that thousands of jobs and incredible talent will stay here.”

Although it is only two-thirds the size of First Interstate in terms of assets, the highly profitable First Bank System would be in the driver’s seat after the merger.

John F. (Jack) Grundhofer, 56, a Glendale native and former Wells Fargo executive who is chairman and chief executive of First Bank System, would keep those titles after the merger.

The combined bank would take the First Interstate name but, significantly, would be headquartered in Minneapolis.

William E. B. Siart, 48, First Interstate’s chairman and chief executive, would serve as president and chief operating officer of the combined bank and would remain in Los Angeles to run the banks’ “core business lines--retail, corporate, private banking, payment systems and trust and investment management,” according to their statement.

While many lower-level jobs in the Los Angeles area would be preserved, analysts believe much of First Interstate’s senior executive corps would either move to Minneapolis or leave the bank entirely. Grundhofer and Siart made it clear in a telephone conference with analysts that duplicative positions at the corporate level would be eliminated.

The deal also casts a shadow on the Downtown Los Angeles real estate market, where First Interstate occupies space in two skyscrapers, including its landmark headquarters, the tallest building west of Chicago.

Grundhofer and Siart, in joint interviews Monday, said the banks would pare 6,000 jobs from their combined 41,000-employee base to help achieve annual cost savings of $500 million.

Wells Fargo, by contrast, had said it could cut $700 million a year in a merger with First Interstate. Analysts said job losses under the Wells Fargo proposal would have totaled 7,000 to more than 9,000 in the 13 states where First Interstate operates, with the brunt of the cuts coming in California.

Because Wells Fargo and First Interstate have so much overlapping territory in California, that deal also would have entailed scores of branch closings and disruption to retail customers, analysts said. The retail operations of First Interstate and First Bank, on the other hand, overlap only in Colorado, Montana and Wyoming, so there are few, if any, branch closings expected.

In general, First Interstate customers should still expect some disruption if the First Bank merger takes place, as the two companies graft their operations together. But Siart and Grundhofer portrayed the agreement as a plus for California consumers for two reasons: First, the bank would remain a major competitor in the state rather than be absorbed into Wells Fargo, giving consumers more choices. Second, Californians would be exposed to new products and services from First Bank, which Siart acknowledged has a wider variety of offerings and a more efficient delivery system.

First Interstate employees, in interviews at bank branches and over the telephone Monday, generally expressed relief and happiness at the announcement, saying they expected fewer layoffs than in a Wells Fargo merger.

Some of the job losses in a First Bank-First Interstate marriage would come through attrition, Grundhofer and Siart said, noting that their work forces turn over at a rate of 15% to 20% a year. Clearly, though, there would be many layoffs.

“You don’t get to $500 million [savings] by not watering the plants,” said an investment banker who has followed the negotiations closely. “The only way you get those numbers is through people.”

Under the terms laid out Monday, First Interstate shareholders would receive 2.6 shares of First Bank System stock for each of their shares. With First Bank shares closing Monday at $49.875, down $1 from Friday’s close, the deal would be worth $129.68 a share, or $10.05 billion in all.

Wells Fargo had offered to exchange five-eighths of a share of its stock for each First Interstate share. That would give a value of $131.64 a share, or $10.28 billion total, at Wells Fargo’s closing price Monday of $210.625, down $1.625 from Friday’s close.

And Wells Fargo Chairman Paul Hazen disclosed Monday that in a recent meeting with Siart, he offered to sweeten Wells Fargo’s bid to 0.65 of a share for each First Interstate share, which would boost the value to $136.91 a share, or $10.69 billion total.

First Interstate stock closed at $126.875 Monday, down 87.5 cents.

Stock of all three banks trades on the New York Stock Exchange.

Analysts said the fact that First Interstate’s stock did not drop much below the First Bank offer price means that investors expect more bidding. Typically, if the market believes that a deal will go through as announced, the stock of the company being acquired will drift farther downward as investors cash out, seeing little hope of a price increase.

Several money managers whose institutions own large First Interstate stakes said Monday that they were holding on to their stock in hopes of a higher bid.

“Wells would not have begun a hostile deal if they were going to take off at the first sign of an obstacle,” said analyst Sandra Flannigan of Merrill Lynch.

Hazen, in a statement, said of the First Bank-First Interstate agreement: “In our opinion, this decision does not serve the best interests of First Interstate’s shareholders. We do not believe that First Interstate’s shareholders will settle for something less than what they would have obtained through a merger with Wells Fargo.”

Wells Fargo said it would weigh its options and respond “soon.”

William Lerach, a San Diego-based lawyer who frequently brings lawsuits on behalf of shareholders, said of Monday’s announcement: “It’s an absolute outrage.” He accused Siart and First Interstate directors of trying to hang on to their jobs by cutting the deal with First Bank.

“To believe that this bank in Minneapolis is a better horse to ride in the long term than Wells Fargo, you’d have to have plastic surgery on your face to make a statement like that without cracking a smile,” Lerach said in a phone interview.

Lerach has already filed several lawsuits against First Interstate directors, accusing them of breaching their fiduciary duty to shareholders by rebuffing the Wells Fargo bid.

“Once you decide to sell your company, you have an absolute duty to auction it to the highest bidder,” Lerach said.

Other lawyers interpreted First Interstate’s options differently.

Joseph Grundfest, a Stanford law professor and former member of the Securities and Exchange Commission, said that in a so-called merger of equals such as the First Bank-First Interstate deal, directors have considerable flexibility, providing that they judge a deal to be in the best long-term interest of the company and shareholders.

Grundfest cited the 1989 battle for control of Time Inc., where Paramount Communications launched a hostile bid, which Time fended off by merging with Warner Communications Inc.

Paramount fought the deal unsuccessfully in Delaware courts, where a First Interstate deal would probably be challenged, since that state is where First Interstate and most other U.S. corporations are incorporated.

Siart and Grundhofer, in their prepared statement and interviews, were careful to say that the board had carefully explored all alternatives.

“Our board concluded that the First Bank System proposal represents the best available alternative, even if Wells Fargo is prepared to increase from 0.625 to 0.65 the number of Wells Fargo shares it would exchange for each First Interstate share,” Siart said in the statement.

He added in an interview that First Interstate views the Wells Fargo merger as riskier because it would result in far heavier concentration in California with its iffy economy, would attract more political heat and could pose antitrust problems because the combined banks would be so dominant in some communities.

* LOCAL IMPACT: Deal seen as better for Southland than Wells’ offer. D1.

* RELATED STORIES. D1, D6-D7

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First Interstate In O.C.

Here are details on First Interstate Bank’s Orange County presence:

Branches in O.C.: 36 in 21 cities

Branches companywide: 1,148

Employees in O.C.: 410

Employees companywide: 27,901

Deposits in O.C.*: $1.7 billion

Deposits companywide: $48.2 billion

* As of June 30, 1994