An early and passionate backer of H.F. Ahmanson & Co.'s hostile bid for Great Western Financial Corp. is switching sides.

In a biting critique, analyst Jonathan E. Gray of Sanford C. Bernstein & Co. concluded that Ahmanson's natural advantage as a local bidder, able to save money by cutting redundant branches and product lines, is offset by its "suboptimal" strategy of shrinking its mortgage business.

Mr. Gray concluded, in a report published Monday, that by 2001 Great Western shareholders would be 5% richer as holders of stock in white-knight bidder Washington Mutual Inc.

Mr. Gray isn't the only analyst who has been warming to Washington Mutual's bid in recent days. At least one other analyst-Thomas F. Theurkauf of Keefe, Bruyette & Woods Inc.-said he is growing increasingly comfortable with the Seattle company's revenue projection.

The shifts are important because analysts can shape investor sentiment and thus influence the outcome of a bidding contest.

In the battle for Great Western, many have refused to take sides for fear of angering either company. But after Mr. Gray's critique and upgrading of Washington Mutual's stock, which was released to Bernstein's brokers last Wednesday, the value of the two bids shifted subtly in Washington Mutual's favor last week.

Ahmanson's deal value was 6.2% higher at the close of trading last Monday, but the gap had narrowed to 4.1% by the end of the week.

Separately Monday, Ahmanson won a shareholder vote aimed at bringing its bid to Great Western shareholders before they can vote on Washington Mutual's offer. The votes had to be recounted because a major shareholder had voted twice.

Mr. Gray, meanwhile, argued that profits would grow faster at Washington Mutual, the friendly bidder, because it is aggressively pursuing the mortgage business Ahmanson is shunning. He also said that investors would pay a higher multiple of earnings for Washington Mutual's stock.

Allowing for a 10% higher price-earnings multiple for Washington Mutual, he projected that each Great Western share would be worth $63.13 by 1999 under Washington Mutual's offer-just 2% less than H.F. Ahmanson's offer. And by 2001, the Washington Mutual offer would be worth 5% more-with each Great Western share worth $71.87 versus $68.64 under Ahmanson's offer.

"The momentum is with Washington Mutual since it's a friendly strategy," Mr. Gray said in an interview, "and I think the growth strategy will have more appeal than Ahmanson's strategy will have."

Mr. Theurkauf, for his part, doesn't fault Ahmanson for ditching the mortgage business. With margins so thin, players have to choose to "fish or cut bait," he said. Ahmanson is choosing to pull back, while Washington Mutual is hunting down volume to make the business pay, he said.

But Washington Mutual's mortgage strategy is key to his change of heart as well.

"Our knee-jerk reaction was to deeply discount the revenue enhancements" that are the centerpiece of Washington Mutual's deal, Mr. Theurkauf said.

Since then, he's learned that a "significant portion" of Washington Mutual's projected revenue growth would come from holding mortgages that it (or Great Western) already make but sell into the secondary market. By holding those loans, Washington Mutual would be able to boost net interest income significantly-without having to go after new customers or products, Mr. Theurkauf said.

For the record, he asserted, "I haven't changed my position; the information has been better described to me."

Mr. Gray is betting that, if Wamu wins Great Western, it will move to buy Ahmanson by early 1999.

This isn't the first time the veteran mortgage analyst has taken strong exception to the strategy adopted by Ahmanson's chairman, Charles R. Rinehart.

Mr. Rinehart wants to cut back the thrift's mortgage holdings by as much as 40%, investing in consumer loans and share buybacks instead. But Mr. Gray argued that, with California's home prices and economy rising, mortgage investments will again be profitable-earning a 20% return on equity versus about 12% on share repurchases.

"They are dismantling their company," he said. It "used to be a powerhouse in the mortgage market, a battleship, if you will, and its guns are rusting to the point where they'll barely fire a shot."

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