Co. has escalated, the zingers have increasingly touched on an unlikely topic -accounting. Last week, the struggle between the two suitors of First Interstate Bancorp turned into a debate about First Bank's plan to use a pooling, or stock swap, structure. "Our accounting firm, Peat Marwick, has said they don't see how" First Bank can use the pooling method, Wells Fargo's chief financial officer Rodney Jacobs told analysts last week. First Bank System fired back that its own accounting firm, Ernst & Young, said the bank can so do a pooling. First Bank went on to blast Wells' use of purchase accounting, which First Bank argues will result in depressed earnings for shareholders of the merged company. Though accounting rules rarely take center stage in big bank mergers, they are shaping up as a decisive factor in the bidding war over First Interstate. Wells Fargo & Co.'s bid raised eyebrows even before First Bank System arrived as a white knight, because Wells' use of purchase accounting - or cash - for its $10 billion hostile bid is highly unusual in banking. Now, First Bank System's plan to use pooling has come under fire. Critics say it may run afoul of accounting rules because of First Bank's big share repurchase program. Under accounting rules, repurchased shares are considered "tainted" for two reasons: Because repurchased shares are paid for in cash, using them in a pooling could be seen as an indirect cash purchase, which would be subject to higher taxes; and because share repurchases commonly inflate stock prices, they could give an unfair advantage to the buyer. In First Bank's case, a determination of whether its repurchase program precludes pooling will depend on exactly when shares were repurchased and on some technicalities that allow some repurchased shares to be "detainted." Wells officials note that they are not accounting for their bid as a pooling because of Wells' enormous share repurchase program. Under generally accepted accounting principles, a company cannot use more than 10% repurchased shares in a pooling. First Bank System is planning to issue 201.5 million shares for the First Interstate deal. Because the bank is planning to repurchase 24 million shares through the end of 1996, repurchased shares could account for more than 10% of the pooled shares. However, repurchased shares can be "detainted" if used for specific business purposes, such as employee benefits plans and other acquisitions, like First Bank's pending acquisition of Firstier Financial Corp. "We have every confidence that pooling is available," said Lee Mitau, First Bank's corporate legal counsel. "I don't think Peat Marwick is at all in a position to comment on our pooling transaction. The firm is just trying to throw some doubt into the transaction, and it is irresponsible." SEC guidelines, while not clear, appear to throw some doubt on First Bank's plan to repurchase shares after the merger is complete. "The commission intends to caution registrants and auditors that the substance of reacquisitions closely following consummation of a combination should not be ignored," the SEC wrote in its 1970 opinion on business combinations, section 146A, which is still the clearest guidance on commission thinking on this issue. The period after a merger is usually two years. It is not clear how many of the 24 million shares have already been repurchased or will be by the time the deal closes. But First Bank had already repurchased eight million shares by the end of September, and was aggressively buying millions of shares in the weeks after its bid for First Interstate earlier this month. First Bank's total treasury shares repurchased will exceed 10% of the planned pooling shares, but many of those will be "detainted" so the percentage will be acceptable, said David Parrin, First Bank senior vice president and comptroller. However, the bank probably will seek approval from the Securities and Exchange Commission during its proxy filing, said Jefferson Strider, a director with Ten Eyck Associates Inc., a litigation and accounting consulting firm in King of Prussia, Pa. "If there is an opposing letter from Peat Marwick, First Bank will almost certainly have discussions with the SEC staff to ensure that pooling is acceptable," he said. Wells has so many repurchased shares that it would have been impossible for the company to have pooled its bid. By using purchase accounting, Wells sidesteps the very issue over which it is now haranguing First Bank System. And with purchase accounting Wells is not restricted from buying back stock before and after a merger. But purchase accounting has its own set of problems. First Bank argues that Wells use of purchase accounting would create $7 billion of goodwill. The intangible asset would have to be amortized, suffocating the new company's earnings. The $7 billion figure would be the highest ever in a banking deal. Purchase accounting would result in a $400 million yearly hit to reported earnings, which would not happen if Wells were to employ the pooling method. Wells Fargo officials have argued that the reported earnings hit is an accounting snag that does not reflect reality, and therefore should not derail the deal. But at least one Wall Street analyst has warned that First Interstate's board might not buy Wells' reasoning. Instead, the board could decide that a competing offer that uses pooling-of-interests accounting would be more attractive. "A competitive offer which does not require this leap of faith may be more palatable to First Interstate's board," S.G. Warburg & Co. analyst Francis X. Suozzo wrote in a recent note to investors. But if Wells does succeed, experts said the bank could make the industry much more accepting of purchase accounting for big bank acquisitions. "Wells' stamp of approval on the method raises the visibility of it and gives it new credibility," said James K. Schmidt, Boston-based portfolio manager of the Hancock regional bank fund. Investors and analysts said Wells' analysis was on the mark. "Analytically, they're right," said Raphael Soifer, a bank stock analyst with Brown Brothers Harriman. Mr. Schmidt said it could be argued that BankAmerica Corp., which has accounted for all of its big acquisitions in the past decade as purchases, has been hurt by the earnings reduction from goodwill. "People never gave them credit," he said. But Mr. Schmidt and other experts said that Wells' management appears to have more credibility with investors than BankAmerica's management, primarily because Wells has been more disciplined about buying back stock. Furthermore, investors initially reacted enthusiastically to Wells' bid, driving up both its stock price and First Interstate's. The argument for purchase accounting "seemed to have new credibility when Wells used it," Mr. Schmidt said. "I guess that's the difference between being BofA and being Wells."

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