First Bank System Inc., which tried in vain to win First Interstate Bancorp away from Wells Fargo & Co.'s hostile embrace last year, may itself launch an unfriendly deal soon, two of Wall Street's senior bank analysts predict.
First Bank today confronts the same dilemma that forced Wells to launch a hostile acquisition offer for First Interstate, said Thomas Hanley of UBS Securities.
First Bank's returns on its massive share repurchase program are no longer sufficient to meet the bank's internal investment goals, he said in a session with investors Friday and in an interview this week.
Now only a large cash acquisition can generate adequate returns while disposing of the bank's excess capital, Mr. Hanley said. The acquisition would probably have to be hostile because none of the potential merger partners in the region are willing to be bought, he said.
Nancy Bush of Brown Brothers Harriman & Co. went a step further, writing recently that First Bank may already be considering a hostile deal.
"It is apparent that they have given the idea a great deal of thought and continue to do so," she wrote in a First Call report after a recent visit to the bank. "There are obviously several large banks headquartered in the Midwest that have severely disappointed investors in the last few years and who are seen by the Street as being vulnerable to (aggressive overtures) from credible acquirers."
Mr. Hanley identifies possible targets as Firstar Corp., Milwaukee, First of America Corp., Kalamazoo, Mich., and to a lesser extent Old Kent Financial Corp., Grand Rapids, Mich., and Marshall & Ilsley Corp., Milwaukee.
Ms. Bush, who did not respond to questions for this story, did not identify the banks she thought were vulnerable.
First Bank rejects Mr. Hanley's view that it needs to make a bank purchase to have positive future returns, and that its share repurchases are no longer economical.
"We are able to add to shareholder value without acquisitions. Our earnings are growing at double-digit rates," said a bank spokeswoman. "The value of our stock is in excess of what the price is," so share repurchases still represent a sound investment.
Last year, Wells Fargo stunned the banking industry by initiating a hostile offer for in-state rival First Interstate.
Within weeks of the move, First Bank emerged as a friendly suitor for Interstate.
But Wells Fargo completed the $13.2 billion First Interstate acquisition April 1.
Now First Bank's role could be reversed.
"There is only one thing they can do, and that is an acquisition," said Mr. Hanley. "It doesn't have to be a hostile, but in their case to get somebody the size they want within their market, they may have to choose to go hostile."
Many banks, and in particular First Bank, are awash in capital that waters down shareholder returns and depresses economic leverage.
Like Wells Fargo, First Bank has been aggressively returning capital to shareholders. Between 1993 and 1995, First Bank bought back $1.2 billion in equity. And it plans to buy back as much as $1.5 billion, or 17% of its current market capitalization, by the end of 1997.
But if a company's stock price rises - and First Bank is now trading at a lofty 271% of book value - the costs of share repurchase can exceed the cost of capital. This is what Wells Fargo faced, and this is what First Bank now confronts, said Mr. Hanley of UBS Securities.
At this juncture, the bank must find a use for its unwieldy capital, and a large cash acquisition is the best prospect, he said.
Mr. Hanley calculates there are five banks for whom share repurchase cost equals or exceeds the cost of capital, and of those First Bank has the most to lose by repurchasing more shares.
The other four are Northern Trust Corp., CoreStates Financial Corp., Norwest Corp. and Fifth Third Bancorp, Mr. Hanley said.
Were First Bank to initiate a hostile bid, however, it would face formidable challenges, investment bankers say.
"To be successful you have to have overwhelming superiority, the commercial logic has to be strong, and the buyer has to be the best buyer by a wide margin," said a Wall Street investment banker, who requested anonymity.
Unlike Wells Fargo, First Bank might have to contend with several possible white knights emerging within the region, where a friendly buyer might offer large cost-cutting gains that could make a counter offer attractive.
There were no realistic challengers to Wells' bid within California, so Interstate looked elsewhere.
In the Midwest, however, First Chicago NBD Corp., Comerica Corp., and Boatmen's Bancshares could all act as white knights.
"While (First Bank officials) know that they are the most rational and disciplined player in the game, they also (can) survey the landscape and see a number of possible white knights who would be irrational in their responses," Ms. Bush wrote.
