There is growing sentiment that First Bank System Inc. may not be able to use one of the best tools it had for the takeover war for First Interstate Bancorp.
An increasing number of investors and analysts are saying that if First Bank were to raise its proposed exchange ratio - currently 2.6 of its shares for each First Interstate share - its own stock price would decline, negating the benefit of the change.
An exchange ratio increase has been seen as one way for First Bank to close a persistent, month-long price gap of roughly $1 billion between its friendly offer for First Interstate and Wells Fargo & Co.'s hostile offer.
At Thursday's close, First Bank's offer was worth $122.85 per First Interstate share, or $9.3 billion, while Wells' bid was worth $135.28 per share, or $10.24 billion. First Interstate closed at $130.125.
But the value of each offer as a percentage of book value ranks at the high end of prices paid in all big mergers last year. Based on Wednesday's close, First Bank's offer was worth 2.53 times First Interstate's book value, and Wells' was worth 2.7. This means investors in Wells and First Bank may not look favorably upon a higher offer from either bank.
Because Wells' bid is now valued higher than First Bank's bid, such price constraints favor San Francisco-based Wells.
"At this point, raising the price doesn't necessarily raise the value of the bid," said Brent Erensel, a bank stock analyst at UBS Securities in New York.
To be sure, this is by no means a universal sentiment. Some investors and analysts think an increased bid by First Bank is a distinct possibility, and perhaps an urgent one from First Bank's point of view.
"The spread is big enough between the two bids that First Bank has to come back with a 2.9 exchange ratio or better," one investor said.
The most likely timing would be about two weeks before a First Interstate shareholder vote on the First Bank offer. Such a vote has not been scheduled, but is seen as likely in late February or early March.
First Bank officials have refused to comment on the possibility of increasing their bid. Instead, First Bank and First Interstate officials have repeatedly predicted that the price gap between their two bids will narrow once investors better understand their offer.
Likewise, they have predicted that Wells will suffer legal and regulatory setbacks.
However, since Wells sweetened its bid on Nov. 13, the value of First Bank's bid has declined relative to Wells'. At the same time, there has been no clear sign of regulatory or legal obstacles on the horizon.
Among those who said in interviews that they opposed a higher bid from First Bank was one investor with a stake of nearly one million First Bank shares. Speaking on the condition that he not be named, the investor said he "would not be happy to see First Bank System make a higher offer.
"One of the advantages (First Bank chairman John F.) Grundhofer has had is his credibility and his discipline with what he is willing to pay for deals," the investor explained.
"The more aggressive he gets in price, the more investors will question whether Jack has his old discipline or whether this is an ego issue," he added.
Another investor, with more than a half million First Interstate shares, warned that if First Bank raised its exchange offer, First Bank's stock would "get watered down, and there would be earnings dilution."
But another big First Interstate investor took a different view. He said that if First Bank were to increase its exchange ratio to 2.8 or 2.9, "People might actually believe they will win this thing." This in turn could keep its stock from declining, since First Bank has predicted a substantial earnings boost from the deal.
Likewise, Ronald I. Mandle, senior research analyst with Sanford C. Bernstein & Co. in New York, said he believes that the bank that is behind when the shareholder vote nears will raise its bid. If First Bank is in this position, it could go as high as 2.75 shares before it would get into a "death spiral" and hurt its stock price.
Wells Fargo, Mr. Mandle said, could go up to 0.7 shares.