Battle for First Interstate Is Broad, Bitter : Finance: As top executives try to win support for First Bank merger, Wells Fargo privately presses its own case.

First Interstate Chairman William E.B. Siart, with deadpan understatement, recalled his encounter this week with a group of Boston money managers as “a relatively hostile meeting.”

“They all walked in and slammed their note pads down and said, ‘Why aren’t you doing this deal?’ ” Siart said.

The deal they wanted was the $10-billion-plus hostile offer that Wells Fargo & Co.--one of Wall Street’s favorite banks--had made three weeks ago. The deal they vehemently didn’t want was the similar but slightly leaner one that First Interstate accepted on Monday from its much smaller “white knight,” Minneapolis-based First Bank System.

And the managers’ opinions count because they all control large investments in First Interstate and will influence a coming shareholder vote on the merger.

The flare-up in the Boston conference room is part of the extraordinary behind-the-scenes infighting going on as the takeover struggle between Wells Fargo and First Interstate--once cordial rivals, much like their home cities of San Francisco and Los Angeles--has exploded into bitter corporate warfare that is rare in the staid world of banking.

It is a conflict that involves not only two of California’s biggest companies but some of the nation’s most powerful financiers, including America’s second-richest man, Warren E. Buffett, who holds shares in both First Bank and Wells Fargo.

And it is a fight that has an unusual public face as First Interstate has appealed to civic pride and the welfare of its employees in touting the proposed First Bank marriage. In a tightly scheduled and well-orchestrated demonstration Wednesday in the shadow of First Interstate’s Downtown headquarters, more than 1,000 supporters--mainly bank employees--applauded as Mayor Richard Riordan gave his blessing to the deal.

Like determined politicians on the stump, Siart and First Bank Chairman John F. (Jack) Grundhofer have been crisscrossing the country trying to persuade unsentimental investment managers that they are not being shortchanged just so that Siart and his fellow First Interstate executives can hang onto their well-paying jobs. The two executives plan to make many more such visits in the weeks ahead.

At the same time Wells Fargo, while publicly holding its fire, is privately trying to sow discontent among the same small group of professionals who represent the institutions that hold the bulk of First Interstate’s stock.

Unless Wells Fargo gives up the fight--and insiders say it will state its intentions within a week--the battle promises to drag on through the winter.

Bank mergers move on a slower schedule than most corporate alliances because they require the approval of federal regulators as well as shareholders. First Interstate says the transaction could take as long as six months to consummate.

In a lengthy conversation with The Times on Wednesday, Siart and Grundhofer told how the battle has gone so far and candidly detailed some of the private steps that led up to the public drama that began Oct. 18 when Wells Fargo Chairman Paul Hazen unveiled his hostile bid.

Siart disclosed that both Wells and First Bank were on the short list of desirable merger candidates that he and other First Interstate directors compiled during long strategy sessions this summer.

In September, during a 4 1/2-hour meeting to explore a possible alliance, Siart said Hazen told him: “You’re our primary--maybe our only--strategic alternative.”

Hazen could not be reached for comment.

The two men set an Oct. 30 date to continue the discussion, Siart said, but then Hazen called him on the afternoon of Oct. 17 to say that he could not wait any longer and was going public the next day with his bid.

After alerting his fellow board members, Siart’s first phone call that day was to notify George Roberts, the San Francisco-based partner of the New York investment firm of Kohlberg, Kravis, Roberts & Co. Roberts manages the firm’s 8% stake in First Interstate.

It was not until the next day that Siart spoke with Riordan.

Siart’s solicitude for his biggest shareholder underlines the role that big investors will play in the struggle over First Interstate.

More than 80% of the company’s shares are held by only 50 institutions, including investment partnerships such as KKR, mutual funds and state employee retirement funds. In political terms, the institutions are like states with big electoral votes where the presidential candidates focus most of their campaign efforts. Mom and pop shareholders, like the Idaho primary election, will largely be ignored.

The biggest shareholders will be courted by both sides.

In that respect, nobody is bigger than Buffett, one of the country’s wiliest and most respected investors and second in wealth only to Microsoft’s Bill Gates. Buffett controls 13.3% of Wells Fargo, by far the largest stake, but he is also one of the top holders of First Bank, with about 3%.

“The Wizard of Omaha” has made no pronouncements on the battle for First Interstate, but in his 1993 letter to shareholders of Berkshire Hathaway, his main investment vehicle, Buffett stated flatly: “We will not engage in unfriendly takeovers.”

And Buffett, like other investors, hates overpaying for anything.

Such sentiment highlights a danger for both Wells Fargo and First Bank in engaging in a protracted bidding war: At some point--and nobody knows where it is--the market will decide that the price is too high for First Interstate and will punish the spendthrift suitor by bailing out of its stock.

There is no cash involved in either offer; the currency in both is shares of the acquiring bank’s stock.

Thus, a drop in either Wells or First Bank shares could ruin its chances.

Grundhofer put it simply: “If your stock tanks, the deal’s over.”

Money managers have been griping this week that the First Bank bid doesn’t match the Wells offer, saying they doubt the $500 million in annual savings that First Bank has promised. At the same time, somewhat contradictorily, they are pushing Wells Fargo to go higher, in effect to bid against itself.

“The only way the First Bank deal could even be considered equivalent is if they’re truly able to get the $500 million,” said Tony Orphanos, manager of Warburg Pincus Counsellors’ 480,000-share holding in First Interstate. He predicted that the real savings would be more like $200 million to $300 million, less than half the $700 million that Wells anticipates.

Experts concede that Wells offers greater cost-saving opportunities because its California operations overlap extensively with First Interstate’s, enabling it to close hundreds of branches and lay off many more workers than First Bank could.

Under the First Bank proposal, 6,000 jobs would be cut from a combined base of 41,000. The cuts would be spread across the two banks’ 21-state service area. Because the banks overlap only in Colorado, Montana and Wyoming, there would be virtually no branch closings.

Wells has not specified, but analysts believe it would trim as many as 9,000 workers, with the harshest cuts in Southern California.

Doug Pratt, a fund manager at Denver-based Invesco, which holds Wells and First Bank shares, was dismissive of Siart. “He’s never shown a lot of interest in the shareholder in my opinion,” Pratt said.

He accused First Interstate’s top brass of “clothing themselves in the flag” by invoking the issues of job cuts and loss of a major banking presence in Los Angeles.

Siart, in his interview with The Times, insisted that “those things are shareholder value issues. People decide to bank with you for various reasons, and how you treat your people might be one of them. This relates to revenue and revenue relates to the bottom line.”

More measured in his criticism was James Schmidt, manager of Boston’s John Hancock Freedom Regional Bank Fund, another First Interstate holder. “I’m a little annoyed [with Siart], but until the final chapter is written, you can’t be sure how egregious his actions are.”

Although he prefers the Wells offer, Pratt said he expects the San Francisco bank to walk away rather than try to strong-arm First Interstate with an expensive and exhausting proxy fight.

Siart agrees.

“They don’t have any more powder to shoot,” he said.

After the tense opening of his meeting with the Boston money managers, Siart believes he scored some points in explaining the technological and geographic advantages of the First Bank bid. “I don’t know if I sold them, but I neutralized them,” he said.

While massaging shareholders is absorbing most of Grundhofer and Siart’s attention, they took time out Wednesday morning for the unusual employee rally in front of the Los Angeles Public Library.

As Riordan addressed the well-dressed crowd, some workers waved handmade signs saying, “Thank You, Jack and Bill!” and similar messages.

Riordan got a laugh by offering his “full year’s salary”--$1--as the first deposit in the new bank, which will keep the First Interstate name.

Grundhofer, a Los Angeles native who still has two homes in the area, topped the mayor by noting: “That’s the first time in 25 years that I ever got a buck off of Dick Riordan.”

Sheree Jones, a loan quality control analyst, echoed the sentiments of many in the crowd when she said she feels that her job is now “pretty safe,” and she has no concerns about the changes the First Bank deal might bring.

“It’s a wonderful opportunity for us to keep our jobs,” she said. “The city overall is going to be better off.”

Pratt, the Invesco fund manager, cautioned that the celebration may be premature, noting that Grundhofer’s job-slashing at First Bank in the early 1990s earned him a grim nickname.

“The good news is you’re not getting bought by Wells,” Pratt said. “The bad new is you’re getting bought by Jack the Ripper.”

Staff writers Ealena Callender and Tom Petruno contributed to this story.