The stock market didn't change its mind about First Interstate Bancorp on Thursday, but some analysts expressed doubts.
First Interstate stock, which rose 33% Wednesday to $140.25 on news of a hostile buyout bid by Wells Fargo & Co., dipped only 37.5 cents Thursday, to $139.875.
Pressure on the First Interstate board to accept the $10 billion offer grew more intense, in the form of a class action filed in a California superior court. And Jeff Simion, of Mackay Shields, owners of 1.4 million First Interstate shares, said his firm believes the deal would be "excellent" for shareholders.
But Salomon Brothers, S.G. Warburg, Schroder Wertheim, and Hancock Institutional Investors all lowered their ratings on First Interstate, noting the risk of a price decline it the deal falls through.
"It is not a certainty that these two will merge, and we are downgrading First Interstate from a strong buy to hold," said Carole S. Berger of Salomon Brothers.
Ms. Berger said her price target for First Interstate is in the $115 to $120 range, and there is a risk that the shares will fall back toward that level if no merger occurs.
She reiterated her buy rating on Wells, saying her target price for its stock, which closed trading Thursday at $228.375, down 62.5 cents, stands at $250 a share. She said she believes the acquisition of First Interstate would be accretive to Wells' earnings, and that she expects to raise her target accordingly.
Francis X. Suozzo, of S.G. Warburg, said he believes First Interstate will continue to resist the deal. "First Interstate's board put up a sizable stink" when it was approached privately with the offer, "and I'm not sure why they would want to do the deal when it becomes public," Mr. Suozzo said.
Mr. Suozzo, while acknowledging that Wells has "the upper hand" in the hostile takeover battle, said he is "loathe to discount" First Interstate's potential arguments against the deal.
"First Interstate's initial argument would be to suggest that Wells' shares are fundamentally overvalued," wrote Mr. Suozzo, who believes Wells should trade at $176.
He noted that Wells shares sold at a 27% premium to the bank group prior to the announcement of its bid, and that they were trading at a 35% premium to the group Thursday.
He said Wells' share price and the arguments for the deal are based on overly rosy earnings projections. In pitching the First Interstate deal to analysts, for example, Wells used projections that include a loan loss provision that would annualize to $320 million in 1995, Mr. Suozzo said. That provision should be more like $430 million, Mr. Suozzo argued, given normal levels of loss in Wells' rapidly growing small business and credit card lending divisions.
Analysts continued to focus on California thrift stocks as merger plays in the wake of the Wells-First Interstate news.
Smith Barney analyst Thomas O'Donnell raised his ratings on H.F. Ahmanson & Co., Great Western Financial Corp. and Golden West Financial Corp., saying he believes the takeover market in California is "heating up."
Elsewhere, shares of New York money-centers and credit card specialists fell sharply on Thursday, reflecting concern about consumer credit, Mr. Suozzo said.
He said earnings reports by the credit card specialists, notably Capital One Financial, point to slower earning growth in the year ahead.
Capital One shares fell 37.5 cents to $30.75, after falling $1 on Wednesday. First USA fell $1.75 to $50.875, and MBNA Corp. shares dropped 87.5 cents, to $39.125.
Among the money-centers, Citicorp was off $1.75 to $67.375; Chemical Banking Corp. fell 62.5 cents to $60.625; and Chase Manhattan Corp. fell 50 cents, to $61.625.
