The Wells Fargo-First Interstate Merger : Strategies for a Takeover : ANATOMY OF A DEAL : Wells Went for Shareholders

The news was grim Friday when the directors of First Interstate Bancorp met in Los Angeles for an update on the bank’s proposed merger with First Bank System Inc. of Minneapolis.

Most important, the value of a competing, hostile bid for First Interstate by Wells Fargo & Co. was soaring. Keyed to Wells’ stock price, the bid was more than $18 a share higher than First Bank’s. The argument First Interstate executives were making to shareholders--that the two deals were virtually equivalent--looked increasingly preposterous.

In order to win shareholder approval for the merger, “they knew they were going to have to come out with a statement saying [First Bank] was the best deal,” recalls one financial expert knowledgeable about the deal. “When you’re staring at an $18 spread, that’s an awful hard story to tell.”

And a perilous one. Among the speakers were lawyers representing First Interstate’s outside directors (those who are not executives of the bank). Although what they told the board is not public, it is known that directors who fail to present advantageous takeover bids to shareholders are vulnerable to shareholder lawsuits and Securities and Exchange Commission complaints.

The board read the writing on the wall.

Before breaking up that day, it instructed First Interstate Chairman William E.B. Siart to reopen merger talks with Wells Fargo. Siart called Wells Fargo Chairman Paul Hazen that evening and the two met the next day, Saturday, at Oakland International Airport. Three days later, they agreed on the largest bank merger in U.S. history.

The $11.6-billion merger of San Francisco-based Wells and Los Angeles-based First Interstate--which still requires shareholder and regulatory approval--would cost as many as 8,000 jobs and close 350 bank branches.

But according to official documents and interviews with people close to the deal, the outcome of Wells’ three-month hostile takeover campaign hinged not on the reaction of First Interstate’s workers or even its customers.

Instead, Wells’ ability to execute the takeover in the face of intense local political opposition and public scrutiny is a testament to its efforts to win over the only people who really counted: First Interstate’s big shareholders.

The key moment in its pursuit of those shareholders’ hearts and minds, knowledgeable sources say, was a Dec. 7 meeting that represented a major departure from company practice.

The meeting, in the Sky Club atop the Metropolitan Life building in Manhattan, was a presentation to securities analysts and large investors at which Wells executives disclosed far more details about their business plan and strategies than they ever had before.

“Wells never liked to toot their own horn,” said one advisor to the company. “They didn’t like to go to these analysts conferences because they don’t want to educate their competitors. If they have a good idea they go do it, they don’t talk about it.”

But the company’s investment advisors were warning that more was needed in this case. First Bank was heavily promoting its merger deal among the same constituency.

“Given that First Bank was touting itself, the impetus was there for Wells Fargo to get out there and sell itself,” said one advisor close to the deal.

In any event, Hazen and his lieutenants turned in a bravura performance.

They gave the analysts and investors a history lesson in the bank’s successful earlier acquisition of Crocker Bank, which allowed it to build a deposit base at a rate well beyond that of the growth of the overall California market in the 1980s. They detailed Wells’ leadership in market innovations, including Saturday branch hours and telephone banking.

And they outlined plans to double Wells’ “customer contact points” in California by the end of this year, chiefly by opening up offices in hundreds of supermarkets, often staffed by one banker with a laptop computer. In fact, they said, without fanfare, Wells had already locked up four of the five top supermarket chains in California, erecting a powerful barrier to competitors hoping to follow their lead.

Because the presentation was so unusual, Hazen’s narrative of Wells’ success in California and its gung-ho plans for the future left the analysts dazzled. “Some investors said it was the best presentation they had ever seen,” according to one Wells advisor.

The meeting paid off in more than goodwill: By bidding up Wells stock, investors were in effect sweetening its offer for First Interstate, which amounted to two-thirds of a share of Wells for every share of First Interstate.

First Bank’s deal was similarly keyed to its stock price, so executives at all three banks kept an eagle eye on the daily fluctuations in the market. At Wells Fargo, where the executive suite received a daily report from its financial advisors, the news only got more gratifying.

In mid-November, both bidders’ offers were essentially equal, at about $138 per share of First Interstate. But on Dec. 7, the day of the analysts meeting, the spread widened to more than $10 in favor of Wells. For 33 straight trading days it never dropped below double digits, peaking at $21.69 on Tuesday, the day the deal was signed.

The widening gap made moot all of the advantages First Interstate and First Bank were citing in favor of their merger agreement: that their interstate merger would pass antitrust muster more easily than Wells’ deal, which involved two banks with heavy concentrations in the California market; that it would provoke less political opposition; and that it would save more jobs.

“They were pressing on antitrust and other issues, but not on value,” recalls one advisor to Wells Fargo.

But Wells knew that with 70% of First Interstate’s shares resting in the hands of institutional investors focused almost exclusively on price, “it would be difficult, if not impossible, to get their vote.”

That was presumably what executives of Georgeson & Co., the proxy solicitation firm that was tracking investor sentiment for First Interstate, told its board at a meeting Jan. 16. (First Interstate will not disclose the exact nature of Georgeson’s presentation.)

At his Saturday meeting with Hazen at the Oakland airport, Siart tried, for at least the third time, to persuade Wells to increase its bid by raising the “exchange ratio” at which Wells stock would be paid for First Interstate from 0.667 share to 0.67 or more. Hazen refused, reasoning that the market had already increased the value of his bid by nearly $15 a share.

With that issue behind them, the two chief executives resolved most of the remaining major points between them. These included severance packages for Siart, top executives and other First Interstate employees destined to lose their jobs; the absorption of seven First Interstate board members on a newly expanded 20-member Wells board (with the actual choices to be made later); and a commitment in principle for the new bank to maintain dual headquarters in San Francisco and Los Angeles.

That would be Siart’s and Hazen’s last face-to-face meeting until their joint news conference Wednesday announcing the merger. Most of the subsequent negotiations were done by phone, which was “just as well,” said one advisor close to the talks. Hazen and Siart were at odds over Hazen’s unfriendly bid for First Interstate, and the subsequent maneuverings had only increased the institutions’ enmity.

“Distance and the separation helped reduce the tension when there was so much at stake and some degree of upset on both sides,” the advisor said.

On Sunday, the First Interstate board met in Los Angeles--some out-of-town members participated by conference call--and agreed on the price. Although Wells at first balked, it eventually agreed to pay First Bank a $200-million fee for the breakup of its own deal.

“Life is short,” one Wells advisor said later. “Both banks had better things to do than spend zillions of dollars in legal fees and get involved in a prolonged battle in the press.”

Times staff writer Chris Kraul contributed to this report.

More Banking Coverage

* IT’S A DEAL: Banks agree to merge. A1

* Lessons from past. D4

* Epitaph for a bank. D4

* Siart’s future. D4

* Chronology of deal. D4

* Real estate impact. D4

* Competitive outlook. D5

* Regulatory issues. D5

* Community vigilance. D5

* Customer impact. D6

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Consolidations Continue

After a record-breaking year for bank mergers, Wells Fargo & Co.’s planned acquisition of First Interstate Bancorp for $11.6 billion tops a deal between Chemical Banking Corp. and Chase Manhattan Corp. for the largest bank merger in U.S. history. A look at the nation’s 10 biggest bank deals: *--*

Banks Date Wells Fargo & Co./First Interstate Bancorp January 1996 Chemical Banking Corp./Chase Manhattan Corp. August 1995 First Union Corp./First Fidelity Bancorp June 1995 First Chicago Corp./NBD Bancorp July 1995 BankAmerica Corp./Security Pacific Corp. August 1991 NCNB Corp./C&S;/Sovran Corp. July 1991 Key Corp./Society Corp. October 1993 Fleet Financial Group/Shawmut National Corp. February 1995 Fleet Financial Group/National Westminster December 1995 CoreStates Financial/Meridian Bancorp October 1995

Value Banks (in billions) Wells Fargo & Co./First Interstate Bancorp $11.6 Chemical Banking Corp./Chase Manhattan Corp. 11.4 First Union Corp./First Fidelity Bancorp 5.4 First Chicago Corp./NBD Bancorp 5.1 BankAmerica Corp./Security Pacific Corp. 4.7 NCNB Corp./C&S;/Sovran Corp. 4.5 Key Corp./Society Corp. 4.0 Fleet Financial Group/Shawmut National Corp. 3.6 Fleet Financial Group/National Westminster 3.3 CoreStates Financial/Meridian Bancorp 3.2

*--*