SAN FRANCISCO - Stock analyst George Salem's recent and widely publicized prediction that Wells Fargo & Co. is likely to merge with First Interstate Bancorp has done more than light a fire under First Interstate's stock.
It has also exposed a difference of opinion between Mr. Salem, a New York-based analyst with Gerard Klauer Mattison & Co., and other analysts, who argue that a merger isn't likely.
"I don't believe a merger at the current time or in the near future is likely," said James Marks, an analyst here with Hancock Institutional Equity Services.
Those who side with Mr. Marks include New York-based analysts Lawrence R. Vitale, with Bear, Stearns & Co. Inc., and James Hanbury, of Schroder Wertheim & Co.
Spokeswomen for the two banks declined to comment.
Mr. Salem's views carry substantial weight because of his prescient Aug. 9 recommendation that clients buy shares of Chemical Banking Corp. and Chase Manhattan Corp. in expectation of a merger.
In reports issued July 31 and updated Sept. 8, Mr. Salem labeled $56 billion-asset First Interstate, based in Los Angeles, as "perhaps the most attractive takeover franchise in the industry." He also said there is a 50% to 60% chance that $50 billion-asset Wells, based here, will buy First Interstate in a stock pooling transaction.
Analysts said they believe the merger speculation Mr. Salem fueled is responsible for the nearly 10% increase in First Interstate's stock in the past four weeks. First Interstate's stock closed recently at $101.75, down $1.25, while Wells was down 12.5 cents to $187.50.
Mr. Salem said he figures the most likely transaction is one in which First Interstate shareholders get about .6 shares of Wells Fargo stock, valuing the First Interstate shares at $110, or nearly 2.4 times book value.
Mr. Salem said he expects cost savings from the merger of $700 million, or about 30% of First Interstate's noninterest expense base. This would come from a 55% reduction in First Interstate's California expense base, where its branch network overlaps extensively with Wells Fargo's. Outside of California, where Wells Fargo doesn't have any branches but where First Interstate operates branches in 12 western states, Mr. Salem said he expects a 15% cost reduction.
With that kind of cost cutting, Mr. Salem figures that within a year the combined bank's stock would rise to $250, making the First Interstate shareholder's stake worth $140, and also providing a 33% gain to Wells' shareholders.
He added that a merger can be seen as a strategic necessity. Absent a merger, both Wells and First Interstate would produce "unexciting results" he said, because their "earnings power is declining."
But many other analysts take a markedly different view of both the economics of a merger, and of Wells Fargo's and First Interstate's prospects on their own. For example, Mr. Vitale said a merger doesn't jibe with Wells' emerging strategy of limiting reliance on traditional branches and doing more banking through alternative delivery channels.
"Investing in branch-based banks is something that they're trying to get away from," Mr. Vitale said.
Mr. Hanbury took a much more modest view of the possible cost savings, pegging it in the 7% to 10% range. He is estimating Wells Fargo's earnings at $20 per share next year and $22 in 1997. He figures the combination of First Interstate and Wells Fargo would earn only $20 in 1996 and $22.80 in 1997.
"Whether this modest boost to profits is enough reason to do this deal is questionable," Mr. Hanbury wrote in a note to clients.
Mr. Marks said he too doesn't think that 30% cost savings, net of revenue declines, are achievable. But even bigger cost cutting, in the range of 40% to 50% of First Interstate's expenses, still wouldn't make a merger especially attractive.
With cost savings of this magnitude, Mr. Marks said the merged bank would produce earnings per share gains of 25% to 30% by 1998.
