The Wells Fargo-First Interstate Merger : WHAT’S NEXT? : Giants’ Clout May Alter Takeover Game


And then there were two.

If Wells Fargo swallows First Interstate as planned, the California banking landscape will be dominated by two mega-banks--Wells and BankAmerica Corp.--with every other bank and S&L; far down the list in size.

That may not be as detrimental to the competitive environment as it might appear at first glance. As Wells Chairman Paul Hazen noted Wednesday, California has about 500 commercial banks, many of them very small yet quite profitable operations that have learned to prosper in niche markets.

But from investors’ viewpoint, the size gap between the two giants and their competitors poses a considerable problem for out-of-state banks that may want to enter California: There are no remaining California banks through which an acquiring Eastern or Midwestern bank could quickly gain significant market share to compete with Wells and BankAmerica.


“This makes it extremely difficult to get into California” in a meaningful way, says Doug Pratt, manager of the Invesco Financial stock mutual fund in Denver.

Indeed, Sanwa Bank proudly announced on Wednesday that it will become the largest Los Angeles-based commercial bank once First Interstate disappears. Sanwa’s total assets: a mere $8 billion, compared with $108 billion for the combined Wells-First Interstate and $232 billion for BankAmerica.

Meanwhile, although California’s major S&Ls; boast of considerable assets, analysts say it is increasingly unlikely that out-of-state banks will attempt to buy into California via thrifts.


That’s because the S&Ls;, such as Home Savings of America parent H.F. Ahmanson ($50.5 billion in assets) and Glendale Federal Bank ($14.6 billion) are widely viewed as being a difficult “fit” with aggressive commercial banks.

“Most banks are reluctant to consider buying thrifts as a business extension,” argues Henry C. Dickson, bank analyst at Smith Barney Inc. in New York. “The corporate cultures are different,” he says, and many S&Ls; are relatively high-cost operations that are still heavily focused on one business--mortgage finance.

There also are large legal issues surrounding some of the S&Ls;, relating to their claims against the federal government over costly accounting changes forced on the S&Ls; in the 1980s.


What’s more, suspicions remain high about the long-term health of some big California S&Ls.; Although the state’s economy is on the rebound, that hasn’t yet stopped housing prices from eroding further in Southern California.

“The real estate market has not turned around,” says Charlotte Chamberlain, analyst at Wedbush Morgan Securities in Los Angeles. “What causes nonperforming loans [at S&Ls;] is deteriorating home equity.”

On Wednesday, Ahmanson reported lower-than-expected fourth-quarter earnings, reflecting a surprising rise in problem loans and higher-than-expected operating expenses. Ahmanson’s fourth-quarter profit of $60.7 million, or 40 cents a share, so stunned Wall Street that the stock plunged $2.50 to $21.875 on the New York Stock Exchange, a decline of 10%.

Glendale Federal, which on Wednesday reported operating earnings of 22 cents a share, double year-earlier results, also disappointed Wall Street, though to a smaller degree. Its shares fell 25 cents to $16.375 on the NYSE.

Just a month ago, rumors swept the market that Glendale could fetch as much as $30 a share in a takeover bid by a larger institution.

Analysts say that Ahmanson in particular is becoming less appealing as a buyout candidate because it is pursuing an expensive strategy to build up an infrastructure as a “full-service consumer bank.”


Many big out-of-state banks may simply decide that it’s far cheaper to compete in California as they do now--through the mail or over the phone, such as with credit-card operations and business-loan solicitations.

Wall Street “has no tolerance for building costs before building revenue,” notes Chamberlain.


Still, with shares of Ahmanson, Great Western Financial, Golden West Financial and other big California S&Ls; trading well below their 1995 highs, some analysts say it’s unwise to completely discount the idea of takeover offers from hungry banks such as Chase Manhattan and Banc One.

The S&Ls; “are still plausible acquisition candidates,” contends Jonathan Gray, S&L; analyst at Sanford C. Bernstein in New York.

In addition, the big could get much bigger: BankAmerica and NationsBank talked merger last year before scuttling the idea.

And even if out-of-state bidders don’t step up, analysts say the pace of mergers among S&Ls; and banks within California may accelerate.


In fact, some experts say it’s absurd that leading California S&Ls; aren’t already combining, when they could realize the same economies of scale that Wells-First Interstate will achieve.

“I don’t know what’s wrong with the managements of these companies,” fumes one analyst who requested anonymity. “It would clearly be in the best interests of their shareholders to combine.”

That message may resonate in the wake of Wells’ successful hostile bid for First Interstate, says James Schmidt, manager of the John Hancock Regional Bank stock fund in Boston: S&L; managers “may now see that if they have a chance to merge on a friendly basis, they should do it.”


The Top 10

Top 10 U.S. banks after proposed acquisitions: *--*

Bank Assets (in billions) 1 Chase Manhattan Corp. $304.1 2 Citicorp 257.0 3 BankAmerica Corp. 232.4 4 NationsBank Corp. 199.7 5 J.P. Morgan Co. 184.9 6 First Union Corp. 134.2 7 First Chicago NBD Corp. 122.0 8 Wells Fargo & Co.-First Interstate Bancorp 108.4 9 Bankers Trust New York Corp. 104.0 10 Banc One Corp. 95.9


Note: Assets include all recent merger agreements.

Source: SNL Securities

Researched by JENNIFER OLDHAM / Los Angeles Times