Wells Fargo & Co. took an important step forward Thursday in its hostile bid for First Interstate Bancorp as the Federal Reserve Bank of San Francisco accepted its completed merger application.
If there are no delays or postponements, the Fed would issue a ruling on the application no later than Feb. 18.
The acceptance lessens the chances that either Wells or its rival bidder, First Bank System Inc. of Minneapolis, will gain a procedural advantage as the Federal Reserve System takes up their respective applications.
Last week, the Federal Reserve Bank of Minneapolis accepted First Bank's merger application, with a ruling planned by Feb. 12.
It is generally expected that both applications will be approved and that shareholders will choose the ultimate victor in proxy votes in the first quarter.
The leveling of the regulatory playing field is a blow to First Bank, since its officials had been arguing that one edge they have over Wells is that their merger application was likely to be approved several months ahead of Wells'.
First Bank said it could expect a speedier approval because it has fewer branch overlaps and antitrust issues to deal with than would San Francisco- based Wells in buying a big California rival.
A quicker approval, in turn, would make it possible for First Bank to complete a merger deal before Wells, and start cutting costs sooner. But the San Francisco Fed's beginning of the Wells application process weakens that argument.
"It is important for investors to note that our offer is on essentially the same time line as the competing offer from First Bank System," said Paul Hazen, Wells Fargo chairman and chief executive, in a statement.
But on Thursday, Los Angeles-based First Interstate pointed to other signs that Wells could have timing problems. In a statement, it said the Justice Department had asked for information about the competitive impact of a Wells merger in 37 of the 48 California markets in which the two banks have overlapping operations.
William E. B. Siart, chairman and chief executive of First Interstate, said in the statement that the request raises "serious questions about Wells' ability to match the speed and certainty of our agreed merger with First Bank."
The Fed acceptance of the Wells application came at a midpoint in the bidding contest, as First Bank's prospects for success have been looking increasingly slim.
Over the last two weeks, the per-share value of Wells Fargo's unsolicited offer of 0.667 share for each one Los Angeles-based First Interstate has exceeded the value of First Bank's friendly offer of 2.6 shares by more than $10.
Based on Wednesday's share prices, Wells' offer was worth a total of $10.8 billion, compared with First Bank's $9.9 billion.
Given such a price difference, nearly everyone, including some of First Interstate's biggest shareholders, believes that First Bank would lose a proxy vote. In a recent interview, Richard A. Zona, vice chairman and chief financial officer of First Bank, didn't disagree.
"The level we are at right now is certainly more problematic," he said.
Of course, such price gaps are as meaningful as scores in the middle of a ball game. What's more important is where the prices are when the First Bank offer comes up for a shareholder vote - likely in February or March.
If a majority of First Interstate shares vote in favor of the First Bank proposal, the Minneapolis superregional almost certainly would win the contest. If that proposal fails, then Wells' advisers believe they will be able to negotiate a merger with First Interstate. If First Interstate isn't willing to deal, then Wells is prepared to go ahead with a hostile takeover attempt.
To stave off such a possibility, First Bank is doing everything it can to increase the value of its offer relative to Wells'. For now, this means challenging Wells in court and before regulators, and piling on the detail in support of its own analyses.
For example, First Bank said in a filing last week that it believes the market eventually will value the First Bank offer at $156.31 per First Interstate share, and the Wells offer at $131.66. To reach these numbers, First Bank multiplied what it maintains would be the reported earnings per share for First Interstate shareholders by recent price-to-earnings ratios.
for the competing bidders.
First Bank has also defended its estimated $500 million of cost cuts. The bank maintains these cuts would be in line with expense reductions it has made in other out-of-market acquisitions, although Wells' is claiming these cuts are far higher.
than those in other transactions.
First Bank has also argued that its transaction is likely to be approved by regulators several months before Wells' application is approved. The bank maintains that antitrust concerns will slow the approval process for Wells.
First Bank got some positive news on that front last week, when the Federal Reserve Board formally accepted its application, and set a Feb. 12 deadline for a ruling. But Wells' application was accepted only a week later, on Dec. 21. Wells' application had not yet been accepted when this article went to press. However, Wells filed a week later than First Bank.
First Bank also has accused Wells in court and in filings with the Securities and Exchange Commission of making overly optimistic revenue and earnings forecasts.
Mr. Zona said First Bank merely has to use these kinds of arguments to pull within $5 per share of the Wells offer. If this happens, First Bank would "clearly win," he said.
"As the market absorbs the information provided, the momentum will shift back in our favor and shareholders will vote for our offer," Mr. Zona predicted.
Others, noting the two bids' persistent valuation gaps, weren't so sure.
"Rick (Zona) has made his case well," said Raphael Soifer, an analyst with Brown Brothers Harriman & Co. But "at this point I think Wells is more likely to win."
Daniel Kaplan contributed to this article.
