Wells, Interstate Agree to Merge
After a hardball campaign rare in the staid world of banking, Wells Fargo & Co. won a definitive agreement to acquire First Interstate Bancorp in America’s biggest bank merger ever--an $11.6-billion marriage that will profoundly change the way millions of Westerners do their banking.
The agreement, signed Tuesday evening by the boards of both companies and announced jointly by their chairmen on Wednesday, ended Los Angeles-based First Interstate’s three-month struggle to control its own destiny in an industry being swept by rapid consolidation and technological change.
The merger--in which First Interstate shareholders will receive Wells Fargo stock valued at $11.63 billion as of Wednesday’s market close--must still be approved by shareholders of both companies and by state and federal regulators. But Wells Fargo Chairman Paul E. Hazen said he was confident that any regulatory hurdles can be overcome and that the merger will be completed “early in the second quarter” of this year.
In the end, First Interstate was unable to resist Wall Street’s hunger for the deal. Voting every day in the stock market, investors eventually gave Wells Fargo’s hostile offer a price advantage that grew to $1.5 billion more than the friendly merger proposal from Minneapolis-based First Bank System Inc.
“Clearly the market was talking,” said a rueful William E.B. Siart, First Interstate chairman, at a press conference with Hazen Wednesday morning in Los Angeles.
Job losses in the deal are estimated at 7,000 to 8,000 in California, and Wells Fargo will eliminate about 350 of the two banks’ combined 1,386 retail offices in California.
“The customers can leave, but what do I do?” said Nilda Herrera, a First Interstate teller in downtown Los Angeles. “I am 56 years old and I might not have a job soon.”
Besides throwing a lot of people out of work, the merger is likely to worsen the office-space glut in downtown Los Angeles, where the 73-story First Interstate World Center stands a stone’s throw from Wells Fargo’s own office tower. The merger is also likely to leave suburban office centers around the state with more empty bank branches.
The merger agreement accelerates the consolidation in California’s banking industry that has been going on for years.
Among the well-known banking names that have disappeared are Security Pacific, swallowed by Bank of America in 1992, and Crocker National Bank, bought by Wells Fargo in 1986. Once the merger is complete, Bank of America and the new Wells Fargo will control nearly two-thirds of the commercial bank deposits in California.
Overnight, the deal is expected to make Wells Fargo a major banking player outside California, its traditional base. (Since Wells Fargo has virtually no retail operations outside the state, there is expected to be far less disruption in the 12 other Western states where First Interstate does business.)
The victory reaffirms Wells Fargo’s reputation as one of the tigers of American banking, a relentless competitor that has achieved high profit margins through a combination of aggressive cost-cutting and innovation, epitomized by its fleet of supermarket bank branches throughout California.
One of the major rationales for the deal was cost-cutting: Because of tremendous overlap in the companies’ California operations, Wells Fargo says it can achieve net savings of $700 million a year by consolidating.
“We certainly wouldn’t want to sugarcoat it,” Hazen said, referring to the job losses.
The pain of layoffs is to be shared by employees of both banks, but although Hazen said it was too early to say where the cuts will come, First Interstate employees are expected to be hit harder.
Bowing to one of the concerns of Los Angeles Mayor Richard Riordan--an early and vigorous opponent of the deal--Wells Fargo committed itself to maintaining “dual headquarters” in San Francisco and Los Angeles. One of the main fears of the deal’s Southern California critics was that Los Angeles would lose prestige and economic power with the departure of its last major banking headquarters.
Hazen said the Los Angeles presence would be more than “window dressing,” but the shots clearly will be called from San Francisco, where Wells Fargo has been centered since it opened its doors in 1852. Hazen and Wells Fargo Vice Chairman William F. Zuendt will retain the top two executive positions in the combined bank, and it will keep the Wells Fargo name.
Siart, intense and youthful-looking at 49, will leave First Interstate this spring when the merger is expected to close. He will take with him a $4.57-million severance package, including cash, stock and insurance.
“The federal government gets about half of that and the remainder comes to me,” Siart said. He said he had no firm plans for after the merger.
Last Sunday, as it was directing Siart to go forward with the merger, the First Interstate board of directors also voted to ensure that the “golden parachutes” for Siart and 38 other executives would take effect if they lose their jobs. The severance packages total $29 million.
Severance packages will be less substantial for lower-level employees, but they are considered generous in the industry. Generally speaking, fired workers will get four weeks’ pay per year of service, prorated for part-time employees.
Hazen said that when he compared the two banks’ severance packages for line workers, “First Interstate’s were a bit more generous than ours, so we’ll adopt theirs.”
Hazen, 54, who has worked with a media coach to achieve a crisper speaking style, was calm but pointed during the one-hour press conference at the gigantic polished-wood table in First Interstate’s directors’ meeting room.
His only flash of temper came when a news reporter asked how Wells Fargo proposed to ease the transition for laid-off workers, implying that many would end up behind fast-food counters.
“I don’t think McDonald’s is necessarily a bad place to work,” Hazen said, “but I don’t think that’s the only alternative for people trained in banking.”
Trying to assuage community advocates who opposed the deal because of job losses, Hazen said that Wells Fargo, doubled in size after the merger, will be able to expand on its success as the nation’s No. 1 lender to small businesses, creating many more jobs than will be lost through layoffs at the bank.
For Siart, seated next to Hazen before a fat cluster of microphones, the press conference appeared painful. On the wall next to him were the photographs of the bank’s five previous chairmen, none of whom had been able to reach the level of profitability for First Interstate that Siart achieved in his brief tenure. He became chief executive last January and chairman in May.
Until Siart and his immediate predecessor, Edward M. Carson, started producing respectable returns in the last two years, Wall Street investors had branded First Interstate as an also-ran that had never been quite able to realize the potential of its unique 13-state franchise.
Asked about First Interstate’s decision to throw in the towel, Siart said: “We’ve done our job--created a winner for our shareholders.”
Indeed, as Wells Fargo’s victory approached certainty, First Interstate’s stock hit all-time highs on three straight days, closing Wednesday at $149.25, up another $2.25, in trading on the New York Stock Exchange. That price is up 40% from where it was last Oct. 17, when Wells Fargo unveiled its startling hostile offer.
Meanwhile, First Bank System, First Interstate’s jilted suitor, has a $200-million “breakup fee” to show for its efforts.
Wells Fargo’s advisors pondered challenging the payment in court but finally decided it wasn’t worth the time or legal fees. Wells Fargo agreed to pay First Bank $125 million now and $75 million when the deal closes.
John F. “Jack” Grundhofer, the Wells Fargo veteran who runs First Bank, said in a statement Wednesday: “The original merger agreement created significant value for our shareholders; however, increasing the offer would not have been in our shareholders’ best interests.”
First Interstate customers may find the transition to Wells Fargo disorienting. Wells Fargo has been among the most aggressive banks in the country in moving customers toward a “higher-tech, lower-touch” environment, as one analyst put it.
Wells Fargo’s rapidly expanding network of supermarket branches, staffed by employees with powerful laptop computers, has been hailed as a milestone in both marketing and cost effectiveness.
But the high-tech approach turns some customers off. Some analysts predicted that Wells Fargo could lose up to 10% of First Interstate’s retail customers.
Some consumers who may find it particularly hard to cope with the changes are the poor, according to Rep. Lucille Roybal-Allard (D-Los Angeles). Testifying at Federal Reserve Board hearings into the Wells Fargo deal this week in Los Angeles, Roybal-Allard said: “Supermarket branches may meet the needs of affluent areas, but not lower-income communities.”
Hazen, in an interview, said he doubted many customers would leave once they get used to Wells Fargo’s style of doing business.
Analysts said operating in the unfamiliar territory beyond California might present a more significant management challenge for Wells Fargo, which has focused almost exclusively on California throughout its history.
Times staff writer Margaret Ramirez contributed to this story.