First Interstate Rides Merger's Coattails
For traders with a good memory, the proposed merger of BankAmerica Corp. and Security Pacific Corp. produced some big gains.
Nearly six million shares of class A common stock in First Interstate Bancorp, issued when the Los Angeles bank holding company acquired Allied Bankshares of Texas in 1987, changed hands immediately after the merger announcement last month.
"I was hero for a day," said an executive at one West Coast investment firm who told his brokers to load up on the stock.
A Change in Perception
With speculation suddenly rampant that Wells Fargo would acquire First Interstate, the shares, which now have little value apart from a conversion feature, suddenly looked more attractive.
The shares leaped in price to about $1.50 from less than $1 because the conversion feature can raise the stock price to $6 a a share if First Interstate is acquired by the end of 1992.
Some analysts now view a Wells-First Interstate union as unlikely. Wells chairman Carl Reichardt issued a memo expressing satisfaction with the bank's current size, cooling merger speculation.
At the same time, analysts said a merger with U.S. Bancorp to the north or Valley National Corp. to the East would make more sense for Wells.
Price Could Climb Soon
And some would advise First Interstate against rushing into merger talks. Now perceived as being on the rebound from credit problems, the bank's stock price is a strong candidate for improvement.
Still, Cheryl Swaim, an analyst for Oppenheimer & Co., noted that Security Pacific Corp. and C&S/Sovran managed to get a good price for shareholders, despite weaknesses at the time of a merger. "I think things are getting better" at First Interstate, she said. "But clearly the recovery of the company has gone more slowly than most investors would like."
Ms. Swaim rates the stock a "buy" in part on the theory it could become a takeover candidate. Like other analysts, she views an expected restructuring charge as evidence of how far back the bank has come.
A Costly Maneuver
The restructuring could be in the $80 million to $100 million range, Salomon Brothers analyst Thomas H. Hanley said recently, reducing his estimate of this year's earnings to a loss of 80 cents a share, from a $1.70 profit.
Norman H. Jaffe, an analyst for Fox-Pitt Kelton, figures that at the present price, the class A stock isn't a very good investment.
He said a buyer of First Interstate would have a "keen incentive to renegotiate a lower price" on the stock, which, at the full $6 a share would add $258 million to the cost of buying First Interstate.
Other Possibilities
A simpler solution, he noted, would be for an acquirer to wait until 1993 to close the deal. At that point, the class A common will not be a factor.
Or the deal could be structured so that First Interstate is the surviving entity after the merger.
A similar issue prompted Chemical Banking Corp. and Manufactures Hanover Corp. to structure their merger so Chemical will be the surviving entity, Mr. Jaffe said, referring to some class B common stock issued when Chemical acquired Texas Commerce Bank in 1987.
Chemical had no comment on Mr. Jaffe's assertion.
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