All eyes turn to First Interstate Bancorp.

All eyes turn to First Interstate Bancorp

It's the last big L.A. bank after Security Pacific goes

What now the fate of $50.3 billion-in-assets First Interstate Bancorp?

It will become the largest Los Angeles-based bank holding company once the Bank of America-Security Pacific merger is completed. And Wall Street said last week another big bank bonding is likely.

First Interstate stock rallied $6.125 to $33.875 on Aug. 12, after the BofA-SecPac marriage was announced. San Francisco banking giant Wells Fargo, with $54.4 billion in assets, is touted as First Interstate's likely mate.

"First Interstate is going to be squeezed into a merger by economic and shareholder forces," said Campbell Chaney, bank analyst with Sutro & Co. in San Francisco. "Wells Fargo is the one to merge with."

Added Gary Thompson, bank industry investment banker with Oppenheimer & Co. in Westwood, "Wells Fargo doesn't have much of a choice, they are going to have to buy First Interstate."

Bank industry denizens said that Wells Fargo and First Interstate are going to need the branch system and economies of scale that only a merger can bring to compete with the huge, $193.6 billion-in-assets BofA-SecPac combine. And stronger Wells Fargo would emerge as the survivor the way BofA will in its Security Pacific deal.

If that industry scuttlebutt is true, soon Los Angeles -- the much-ballyhooed Pacific Rim financial capital -- will not have a single major bank based here. Policy and major loan decisions of banking giants that operate here will be made in Tokyo and San Francisco, home offices of the bankers that have bought Southern California's biggest banks.

Several more thousands of bank jobs could evaporate from the local business landscape following a Wells Fargo-First Interstate combination -- although a few jobs could be created in re-christening First Interstate's expensive headquarters in downtown Los Angeles. Too, a niche could open up for local banks willing to be nimble with mid-sized borrowers.

For their part, First Interstate officials last week had muzzles on. "As a policy, we don't comment on mergers or acquisitions," a bank spokesperson intoned. The talk freeze is on at Wells Fargo, too.

Few large publicly held companies have danced around the altar, but never been married, as often as First Interstate.

In 1986, under then-chairman Joseph Pinola, First Interstate pursued Bank of America ardently, even pressing its $3.4 billion bid on BofA after the San Francisco-based bank's board flatly refused the offer. Pinola's offer ultimately petered out.

One year later, an analyst for San Francisco-based brokerage house Keefe, Bruyette & Woods caused a stir in a June 1987 report entitled "First Interstate: Wanted Dead or Alive."

In the report, First Interstate was described as perfect for buyout and dismantlement, and analyst Donald Crowly opined that Wells Fargo would make a move.

The First Interstate merger-takeover rumors hardly ever halted from then on. For example, in September 1989 New York-based brokerage house Dean Witter issued a report that said, "We should note there are also a number of brokerage firms that have commented upon the likelihood and logic of fitting the First Interstate organization into Security Pacific."

A year later the brokerage was back at it. A Dean Witter report in March 1990 said, "First Interstate is clearly vulnerable to a takeover. The large institutional holding, the small number of owners that dominate the shareholder list, and the expressed interest of competitors to acquire First Interstate, all suggest that a takeover bid for the company is a strong possibility."

And last week, the marriage talk was as heated as ever, as analysts said a merger was inevitable given marketplace reality and shareholder discontent.

"There is a lot of pressure on at Wells Fargo and First Interstate to merge," said Barry Rubens, chief executive at the Santa Monica-based California Research Corp., a financial industry research shop. "I think we will see a merger in the next six months, although First Interstate could merge with another bank."

This go-'round analysts and bank industry denizens are looking to First Interstate's big-time shareholders to strong-arm management into a deal.

Among First Interstate's big shareholders is the New York-based merchant banking shop Kohlberg Kravis & Roberts, which holds a 9.86 percent stake, and the New York-based brokerage house Sanford Bernstein, which has 9.55 percent. Heavyweight Los Angeles investor Marvin Davis is said to own a large stake, but less than 5 percent.

In all, institutional money managers control more than 60 percent of First Interstate stock, so shareholder pressure to deal could

One thing is for sure: First Interstate common stockholders have been a long-suffering lot. Back in 1979 one share broached $35 a share, not much different from last week's trading range -- but before 12 years of inflation. be strong.

"The big shareholders are pushing for a merger," said Sutro's Chaney. "They want a return."

But it won't be the first time the investment community has weighed in on First Interstate leadership to merge. In late 1989, a New York analysts' meeting turned ugly when analysts and institutional money managers repeatedly badgered First Interstate officials about why they wouldn't sell the bank. Former chairman Pinola, who moved his top brass into Los Angeles' tallest building in 1990 -- leaving a First Interstate-owned tower a few blocks away -- resisted selling the banking company.

Since then Pinola has retired and been replaced by Edward Carson, 62, chairman and chief executive. Sutro's Chaney said the new leadership may be more willing to deal. "Pinola was opposed to any merger where he didn't come out on top," said Chaney. "The new management is not as opposed, but then I don't think anybody could be as opposed as Pinola was."

Well, First Interstate may be safe for now

While most of Wall Street last week was abuzz with commentary linking San Francisco bank Wells Fargo to Los Angeles bank First Interstate, there were pockets of opinion that the two banks wouldn't get hitched up.

One reason First Interstate may not take the trip up the aisle: More than 43 million shares of First Interstate class "A" common stock, each of which can be traded in for about $6 bucks in the event of a change in ownership. In essence, a $250 million poison pill for a First Interstate buyer. The stock rights evaporate in 1993.

First Interstate has 62 million shares of regular common stock outstanding, which traded last week at $34.375, for a market capitalization of about $2.15 billion.

One local arbitrageur said last week the class "A" stock could put the kibosh on a big bank combo, at least for awhile.

"Basically, this stock becomes worthless after December 1992. It represents a $250 million liability. If Wells wants to buy, it will wait until after then to make it official."

Scott also said, "Wells Fargo is having problems in their loan portfolio. I don't think they want to add on another weak link to the chain."

Nevertheless, if an investor is convinced that a merger is under way, Scott advised, "If you really believe there is going to be a Wells Fargo-First Interstate merger soon, I would buy the FIB class "A" stock. It is trading for about $1.50 a share, and would sell out at about $6."

FIRST INTERSTATE

                                    Earnings
Year   Assets(1)   Net income(2)   per share   Share price
1991    $50.30       $(20.6)         $(0.63)   $25.25-33.87
1990     51.36         468.7            7.30    15.62-45.87
1989     59.05       (124.5)          (3.30)    40.75-70.37
1988     58.19         124.4            2.63    39.12-53.50
1987     50.85       (604.0)         (13.01)    35.00-62.75
1986     55.36         321.5            6.78    50.75-67.37
1985     48.96         304.0            6.45    41.50-55.37

Note: Figures for 1991 are for first half. (1) In billions (2) In millions Source: First Interstate Bancorp