Wells Bid for First Interstate Nears Success


First Interstate Bancorp on Monday all but capitulated to Wells Fargo & Co.’s hostile takeover bid, creating a near certainty that California’s second- and third-largest banks will combine in an $11-billion-plus merger--the largest in U.S. banking history.

After a weekend of intensive meetings among executives of the two banks, Los Angeles-based First Interstate issued a statement before dawn Monday acknowledging that it had begun negotiating with its upstate rival.

“Start whistling taps. This one’s over,” said Thomas Brown, banking analyst at Donaldson, Lufkin & Jenrette in New York.


No deal had been reached as of late Monday, but sources involved in the talks said that a written agreement could be completed as soon as today.

And First Interstate said in its statement that if a deal is reached, “it is not expected to be at a price higher than Wells Fargo’s current [offer].” In other words, analysts said, First Interstate at the end lacked the leverage to hold out for more money.

The news met with outrage from some politicians and community leaders, especially in Southern California, who oppose the Wells Fargo deal as a job-killer that will eliminate up to 10,000 jobs and more than 300 bank branches in California.

By contrast, these groups noted, First Interstate’s alternative proposal--a friendly merger with much smaller First Bank System Inc. of Minneapolis--would have resulted in no branch closings and only 6,000 job cuts spread over the two banks’ combined 22-state territory.

One of Wells’ most vocal critics was Los Angeles Mayor Richard Riordan, who assailed the San Francisco bank when it unveiled its hostile bid in October and then led a downtown Los Angeles rally of First Interstate employees in support of the First Bank proposal when that was announced in early November.

But on Monday morning, calling himself “a realist,” a chastened Riordan had dropped his all-out opposition and was pressing instead for a strong commitment by Wells to creating jobs in Southern California and “a meaningful dual headquarters” in Los Angeles and San Francisco. A sore point for First Interstate partisans throughout the ordeal has been the prospect of Los Angeles losing its only large banking headquarters.


Riordan said he spoke with First Interstate Chairman William E.B. Siart during the weekend and with Wells Chairman Paul Hazen Monday morning. Asked whether Hazen had committed to the dual headquarters idea, Riordan said: “I’m not going to put words in his mouth.”

First Interstate’s board of directors moved Sunday to provide some security for company executives. According to a Securities & Exchange Commission filing, the board voted Sunday to change language in the corporate bylaws to ensure that “golden parachutes” for 39 company executives would be effective in the event of firings.

The severance agreements mean that First Interstate officers who lose their jobs because of the takeover would receive cash and stock payments totaling about $29 million.

The top five executives would be entitled to more than $2 million apiece, topped by Siart’s $4.57 million, according to a separate SEC filing.

First Interstate’s stock jumped $4.875 to an all-time high of $143.75 Monday in trading on the New York Stock Exchange. Wells Fargo was up $5.50 to $222.75. First Bank also gained strongly, up $1.50 to $50. Analysts said that investors believe First Bank is a good bank with or without First Interstate; besides, it stands to collect a “breakup fee” of up to $200 million if its merger deal fails.

By an accident of timing, First Interstate’s announcement Monday came just hours before the Federal Reserve Board convened an unprecedented, four-day set of public hearings in Los Angeles and San Francisco to explore the ramifications of the two opposing deals. Similar hearings are held in most big bank mergers, but never before had the Fed seen such an outpouring of requests to give testimony, with more than 500 individuals signing up.


Hazen, testifying for Wells at the hearing in Exposition Park in Los Angeles, declined to address the First Interstate announcement but outlined the 10-year, $45-billion community reinvestment plan that it has pledged in connection with its merger deal.

Siart, who is scheduled to speak this morning at a similar hearing on the First Bank-First Interstate proposal, declined to be interviewed. In a public letter to the bank’s supporters Monday, he said: “There is no question that the critical public policy issues you and First Interstate have raised together have resulted in a banking industry even more sensitive than before to community concerns.”

First Bank Chairman John F. Grundhofer, a former Wells Fargo executive who maintains a home in Southern California, released a one-sentence statement Monday saying he was “disappointed” with First Interstate’s decision to talk with Wells, but “we remain committed to our merger agreement.”

First Interstate also noted that it has not canceled its deal with First Bank, but observers feel the chances of its ever being consummated are next to nil.

First Bank’s offer never achieved the kind of credibility among investors that might have forced the opportunistic Wells to back off.

Given the cost-cutting advantages of a merger between companies whose markets overlap broadly in California, trying to stop the Wells offer was “like trying to keep water from running downhill,” said Harry Keefe, an influential New York bank investor.


Indeed, Wells Fargo’s stock kept gaining strength, to the point that the market value of its all-stock offer grew to $19.36 a share--nearly $1.5 billion in total--higher than First Bank’s.

The final blow was a surprising ruling by the SEC last Friday forbidding First Bank from buying back shares of its stock for a full two years after the merger. Since buying back shares increases the value of the ones that remain in circulation, the decision blocked one of the key ways that First Bank had hoped to improve its offer.

Although agreeing on a price is no longer an issue, there remain some obstacles to the Wells-First Interstate deal. Perhaps the major one is antitrust concerns. Because the two banks would have dominant market share in some areas--notably parts of San Diego and Sacramento--the U.S. Justice Department is likely to require the combined institution to divest a large number of branches.

But the Justice Department approved the creation of an even larger California bank when it allowed BankAmerica Corp. to merge with Security Pacific Corp. in 1991, so few experts think that antitrust concerns will kill this deal.

A Wells-First Interstate merger would be a record in terms of the value being paid for First Interstate’s shares--$11.3 billion at the close of stock market trading Monday.

In terms of the size of the combined institution--about $110 billion in assets--Wells-First Interstate would rank only No. 8 in the United States, far behind $250-billion behemoth Citicorp and No. 2 BankAmerica, with $215 billion.


* MIXED VIEWS: Community groups strongly divided over Wells deal. D1