The takeover war for First Interstate Bancorp has entered a new phase where regulators will have to decide whether or not to approve the competing proposals - and under what terms.

As the regulators begin their analyses, the rival suitors are stepping up their rhetoric about an especially sensitive topic - how antitrust rules would be applied if San Francisco-based Wells Fargo & Co. were to succeed in its hostile bid to acquire its Los Angeles-based rival.

Wells Fargo acknowledges that such a merger would have antitrust implications. Indeed, the company predicts that it would have to divest branches with $900 million of deposits in 14 California markets if it bought First Interstate.

Such divestitures would be responsible for a portion of the $100 million annual reduction in revenues that Wells expects from the merger.

But Minneapolis-based First Bank System Inc., which has a friendly agreement to buy First Interstate, maintains that Wells has understated the amount of divestitures it would have to make.

Instead, the First Bank says divestitures of $2.3 billion of deposits is a more reasonable estimate of what would occur in a Wells merger.

The Wells deposit-divestiture estimate is "substantially understated, based on what we have seen in recent deals," said Richard A. Zona, who is First Bank's vice chairman and chief financial officer.

First Bank assumes that $2.3 billion of deposit divestitures would result in a $140 million reduction of annual revenue. Even accepting Wells' divestiture estimate, First Bank says that the branch sales would cost $55 million in revenues. It pegs total revenue losses in this case at $180 million. The rest of the losses would come from customer defections.

First Bank is relying on such calculations to support its claim that Wells' cost savings, net of revenue losses, are close enough to First Bank's estimates that other concerns tip the scales in First Bank's favor.

Behind the antitrust debate is a differing assessment of how officials at the Federal Reserve Board and the Justice Department will view bank competition in California.

For its part, the Federal Reserve identifies antitrust problems by applying a formula called the Hershman-Herfendell index to deposit market shares.

To calculate deposit market shares, the Fed includes all bank deposits in a particular city or region, and only half of the thrift deposits. Thrifts are discounted since they are assumed to be less competitive than banks in gathering deposits and in making commercial loans.

If a merger would cause the index to increase above a preset threshold, the Fed frequently assumes the deal is anticompetitive. Branch sales often are required to lower the index.

The Fed looks only at deposit market shares, based on the assumption that lending market shares are similar.

The Justice Department differs by looking at competition in each business a bank engages in separately. In particular, the Justice department looks closely at how much competition thrifts give to banks in making loans to small and midsize companies.

The upshot is that the Justice Department often has stiffer divestiture requirements than the Fed. In some instances, it decides that the fairest approach is to use only 20% of a thrift's deposits in calculating market shares, lawyers familiar with the department said.

First Bank said it used a 20% thrift market weighting to come up with its $2.3 billion divestiture estimate. First Bank officials said this weighting was fair, because California thrifts are not big players in lending to small businesses.

The bank has also noted in a filing with the Securities and Exchange Commission that there is a possibility the California attorney general may require even more divestitures.

A source close to Wells acknowledged that thrifts were not as competitive as banks in making business loans in California. But the source added that Wells believes the Justice Department will accept its divestiture estimate after looking closely at First Interstate's presence in small-business lending. The source maintained that First Interstate was a surprisingly small player in that market.

Michael Greenspan, a partner with the Washington law firm of Thompson & Mitchell who specializes in antitrust issues in banking, said that only time will tell what divestiture requirements the Justice Department will make.

The only thing that is certain is that the department will investigate the matter thoroughly and try to be fair to both bidders, he added.

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