First Interstate, Wells in Talks, Sources Say

In an apparent break in the hostile takeover battle for First Interstate Bancorp, executives of First Interstate and rival Wells Fargo & Co. were conferring late Sunday, according to sources close to the action.

The talks are the first between the two warring sides since First Interstate rejected Wells’ $11-billion offer last October and then agreed to merge with Minneapolis-based First Bank System Inc.

The talks could signal that First Interstate has dropped its resistance and wishes to negotiate a buyout by Wells.

First Bank’s merger hopes suffered a severe blow Friday when the Securities and Exchange Commission barred the company from buying back any of its own shares for a full two years after a merger with First Interstate. Repurchasing shares--which increases the value of the shares that remain in public hands--was one of the key ways that First Bank had hoped to add value to its offer.

After the SEC ruling, Wells Fargo’s stock jumped, leaving First Bank’s merger offer more than $1.4 billion behind--a gap that would virtually guarantee a Wells victory in the coming shareholder vote.

Reached in his room at the Sheraton Grande hotel in Los Angeles last night, Wells Fargo Chairman Paul Hazen said: “It would be inappropriate for me to comment” on Sunday’s developments.

Hazen had flown to Los Angeles from Wells Fargo’s San Francisco headquarters to attend this morning’s opening of an extraordinary four-day public hearing that federal regulators are holding on the First Interstate takeover fight.

A spokeswoman for Los Angeles-based First Interstate said the bank would have no comment on the situation.

Before it began talks with Wells over the weekend, First Interstate had been preparing to unveil today a $12.5-billion commitment to community reinvestment activity in California over the next decade. The pledge was timed to neutralize whatever advantage Wells may have gained last month with its own $45-billion, 10-year community lending plan. It also was meant to impress advocacy groups that will gather at this week’s hearings, hosted by the Federal Reserve Bank of San Francisco.

Much of Wall Street was dismissing the Fed hearings as a sideshow. “In terms of who wins or loses in the battle for First Interstate, I think it will be a negligible factor,” said analyst Thomas Brown of Donaldson Lufkin & Jenrette.

But Wells and First Interstate are taking the hearings seriously. Wells has been waging an advertising campaign in newspapers and on radio in Los Angeles touting its reinvestment pledge as the largest in U.S. banking history. And the professorial Hazen has been getting pointers from media consultants on how to sharpen his speaking style.

First Interstate had been planning to ferry as many as 1,000 employees to a rally outside the Los Angeles hearing site at Kinsey Auditorium in Exposition Park. However, in a memo dated last Thursday and obtained by The Times, First Interstate Vice Chairman Bruce G. Willison abruptly canceled the demonstration, citing concerns it might cause traffic problems or undermine the impact of pro-First Interstate testimony from local politicians and community groups.

The Fed hearings are intended to explore the potential effects of a First Interstate takeover, especially upon access to credit and bank services by low-income and minority groups and other “underserved” populations.

Perhaps because of the hostile nature of Wells’ bid or the intense political interest it has attracted in First Interstate’s hometown of Los Angeles, the hearings are by far the most extensive ever conducted in a U.S. banking deal.

The Wells bid is the subject of hearings today, Wednesday and Thursday, and First Interstate and First Bank’s joint proposal will be discussed Tuesday. Hazen and First Interstate Chairman William E.B. Siart will anchor their bank’s testimony in Los Angeles, and First Bank Chairman John F. Grundhofer will appear Tuesday in San Francisco.

Although Wells’ lending program dwarfs First Interstate’s pledge in absolute size, First Interstate’s Willison said in an interview that the two are not strictly comparable. The Wells lending target is for the entire 13-state area where it would operate after a merger, and First Interstate’s deals only with California. Both pledges come to 4.5% to 5% a year of the assets of the respective institutions, Willison said, $25-billion First Interstate Bank of California and the $100-billion institution that would be created by a Wells-First Interstate combination.