California rival Wells Fargo & Co., has agreed to be acquired by Minneapolis-based First Bank System Inc. for about $10.3 billion. But the deal, announced Monday, is almost certain to be contested by Wells. The San Francisco bank immediately blasted the First Bank agreement as unfair to First Interstate shareholders. The new deal values the Los Angeles bank's stock at about $129.675 a share, roughly the same as a bid by Wells on Oct. 18. But Wells indicated on Monday that it was willing to pay as much as $150 a share for First Interstate. The skirmishing set the stage for what is likely to become one of the hardest fought takeover battles in the history of banking. "It will be interesting warfare over the next four to six weeks," said Cary Thompson, manager of the financial institutions practice of Natwest Markets. Bankers said the combination of First Bank System and First Interstate would make for a formidable institution. It would rank as the country's ninth-largest bank with $92.4 billion of assets, and would have a network of 1,514 branches in 21 states, after combining First Bank's presence in 11 states with First Interstate's presence in 13 states. The merged company would expect to eliminate about 22% of First Interstate's expenses, or about $500 million a year. About half of the cost savings would come from the elimination of 6,080 full-time jobs, and the rest would come from consolidations of systems and other facilities. First Interstate chairman William E.B. Siart acknowledged that Wells' hostile bid prompted "just about anybody potentially interested in us to contact us." The company concluded that "the First Bank System proposal represents the best available alternative," he said. Specifically, Mr. Siart said, the hostile nature of Wells' bid, the difficulty of combining the two banks, the relatively high valuation of Wells' stock, and Wells "somewhat controversial purchase accounting treatment" made the First Bank bid better. Wells Fargo revealed yesterday that it had offered to increase its bid to 0.65 shares of its stock for each share of First Interstate, from 0.625. The higher offer would have amounted to $150 a share for First Interstate, based on the share price of Wells after its hostile bid was announced. But Mr. Siart said the First Bank offer - 2.7 times book - was even better for strategic reasons than the second offer from Wells Fargo. A First Bank-First Interstate combination would have overlapping branch operations only in Colorado, Montana, and Wyoming, meaning that branch closings would be minimal. The combined banks' branch network would be the country's third-largest, after those of BankAmerica Corp. and NationsBank Corp., and it would be focused in many of the country's fastest-growing states. "This makes them far and away the highest-share, broadest-range player in the country," said Richard Hartnack, vice chairman at San Francisco- based Union Bank. Pending approval by regulators and shareholders, First Bank and First Interstate expect their transaction to close in the second quarter of 1996. John F. Grundhofer, First Bank System's chairman, chief executive and president would be chairman and CEO of the new company, which would retain the First Interstate name and be based in Minneapolis. Mr. Siart, 48, would be president and chief operating officer of the combined entity, and would be based in Los Angeles, directing the core retail, corporate, private banking, payment system, trust, and investment management units. The two executives say they have known each other for 20 years, going back to Mr. Grundhofer's days in Orange County as an employee of Union Bank, and later, in Los Angeles, as an executive vice president of Wells Fargo. They said they have been evaluating a merger for at least two years. But serious talks did not begin until the day after Wells Fargo's unsolicited bid, Mr. Siart said. Mr. Grundhofer, 56, moved to the helm of First Bank System in 1990, and gained a reputation as a ruthless cost cutter. Under his leadership, the stock price rose to 250% of book value, one of the highest such multiples enjoyed by any big bank. First Bank executives would get a big share of running the new First Interstate. Richard A. Zona, 51, First Bank's chief financial officer and a vice chairman, would retain those titles, while Philip G. Heasley, 46, the company's retail and technology chief, would also keep his job in the merged bank. Linnet F. Deily, 50, currently chief executive of First Interstate's Texas bank, would be vice chairman of retail banking, while Bruce G. Willison, the 47 year-old chief executive of First Interstate's California bank, would be vice chairman of corporate banking. Half of the combined company's board would come from First Interstate, and half from First Bank System. According to plans presented to analysts, the cost cuts would break out this way: operations staffs would lose 2,280 positions, for savings of $110 million; retail units would lose 1,830 jobs, for savings of $100 million; 850 jobs would be cut from staff and executive ranks for savings of $110 million; data processing units would lose 450 jobs for savings of $80 million; payment systems would lose 290 jobs for savings of $20 million; and trust operations would close 130 jobs for savings of $10 million. First Bank would account for the merger as a pooling of interests, while Wells would use purchase accounting. Purchase accounting would create some $7 billion off goodwill that would have to be written off against earnings in yearly chunks of $400 million. As a result, reported earnings for the combination of Wells and First Interstate would be cut by 10% next year, and the deal would only be neutral in 1997, according to Wells. Pooling-of-interest accounting does not result in the creation of goodwill. As a result, the combined First Bank-First Interstate expect their merger to boost earnings by 18% in the first year. Wells argued persuasively for many investors that while reported earnings would suffer, cash earnings would not. As a result, Wells officials maintain that its offer is the better one for shareholders, and many investors seem to agree. "Wells has already done better" than the First Bank proposal, said James Schmidt, portfolio manager of the Hancock regional bank fund in Boston.
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