THE BATTLE FOR FIRST INTERSTATE : Wells, First Interstate Shares Again Soar

While First Interstate Bancorp and Wells Fargo & Co. continued to negotiate Tuesday toward agreement on America’s biggest bank merger ever, the stocks of the two companies soared for a second straight day as investors gained confidence that the $11.5-billion deal would be signed quickly.

Despite a down day for the broader markets, First Interstate shares topped Monday’s all-time high, gaining $3.25 to $147 in trading on the New York Stock Exchange. Wells Fargo leaped $5.75 to $228.50. Shares of Minneapolis-based First Bank System Inc., First Interstate’s would-be friendly merger partner, gained 25 cents to $50.25.

Executives of both Wells and First Interstate maintained an official silence Tuesday on the progress of the negotiations, which began in earnest over the weekend. Investors and industry experts say a deal could be struck at any time.

Meanwhile, First Bank, whose merger deal with First Interstate is still technically in effect, is crying foul.

First Bank Chief Financial Officer Richard Zona faxed a letter to First Interstate Chairman William E.B. Siart accusing First Interstate of being “in material breach” of the agreement the two banks signed in early November, First Interstate said in a filing Tuesday with the Securities and Exchange Commission.

First Bank on Monday sued Wells Fargo in Los Angeles Superior Court, accusing the San Francisco-based bank of interfering with the First Bank-First Interstate merger. The lawsuit was filed in response to First Interstate’s announcement early Monday that after three months of bitter resistance to Wells’ hostile overture, the target bank had decided to pursue merger talks with Wells.

Zona, in his letter to Siart, said that First Interstate’s announcement “may constitute an implicit withdrawal of its board’s recommendation of our merger.”

Such a breach by First Interstate could trigger payment of a “breakup fee” of up to $200 million to First Bank, a legal expert on bank deals said.

Noting that the agreement called for First Interstate to use its best efforts to see the deal through, Zona complained that First Interstate had failed to “release as scheduled the results of the Gallup survey of customer preferences showing significant dissatisfaction with a prospective Wells Fargo-First Interstate combination.”

First Bank would not discuss details of the survey Tuesday or comment on any other aspects of the letter.

In a strange twist, Siart and Zona appeared together Tuesday morning at a public hearing conducted by the Federal Reserve into the First Bank-First Interstate proposal. The two men shook hands and smiled at each other before delivering prepared remarks on how the deal would affect access to credit and banking services among minority and low-income people.

After their 20-minute testimony, Siart and Zona were hustled off to separate limousines by Fed security officers who restrained news reporters and photographers who wanted to talk to them.

With Wells offering two-thirds of a share of its stock for each First Interstate share, the indicated value of the deal hit a peak of $152.33 per share, more than $11.5 billion total. First Bank’s offer of 2.6 shares for each First Interstate share came to $130.65, or $9.9 billion. Tuesday marked first time that the gap between the competing bids broke the $20 mark.

Arbitragers, who profit by making large short-term bets on merger deals, were confident that Wells would soon have a deal in ink.

Guy Wyser-Pratte, who heads a New York arbitrage firm, said he expected an agreement almost immediately but was more worried that the consummation of the merger would be delayed by officials “trying to make political hay in an election year.”

The deal is likely to get considerable antitrust scrutiny from the Justice Department, which is expected to order significant divestitures by Wells in places where the two banks have dominant market share.

Last week, California Atty. Gen. Dan Lungren issued a statement that he is reviewing the antitrust implications at the state level. The attorney general has authority to order divestitures that go beyond those required by federal regulators. That office took just such action in the 1992 merger of BankAmerica Corp. and Security Pacific Corp., a Lungren spokesman said.