First Interstate, employees welcome out-of-state bid: but shareholders watch for Wells counter-offer.

First Interstate Bancorp employees last week celebrated a friendly merger proposal from First Bank System Inc., while shareholders of the big L.A. bank waited for a counter-offer from hostile suitor Wells Fargo & Co.

Rumors were flying that San Francisco-based Wells Fargo soon would increase its offer from 0.65 share of Wells for every share of First interstate to about 0.7 share.

The other major alternative for Wells Fargo was to launch a proxy fight, sources said.

"Wells isn't just going to walk away," said Lloyd Greif, president of downtown L.A.-based investment banking firm Greif & Co. He said Wells expected a fight.

Minneapolis-based First Bank System announced Nov. 6 it had signed a definitive agreement to buy First Interstate in a stock swap worth $10.1 billion. First Bank has agreed to swap 2.6 shares of its stock for every share of First Interstate.

At the Nov. 9 closing price of $52.37 a share of First Bank stock, its deal would be worth $136.16 a share to shareholders.

Wells stock closed at $215.37 Nov. 9, making a swap of 0.65 of a share worth $139.99 each and a swap of 0.7 shares worth $150.75 each.

First Interstate shares closed at $132.75 a share on Nov. 9, up $2.87.

The merger of $37 billion-in-assets First Bank System with $55 billion-in-assets First Interstate Bancorp would create the nation's ninth largest bank with branches in 21 Western states. The new bank would be headquartered in Minneapolis, with corporate offices in Los Angeles.

Los Angeles Mayor Richard Riordan blessed the proposed merger: "It is an excellent boost for our economy and it means that one of the nation's largest premier banks will continue to run its core business operations in Los Angeles."

The new deal is expected to result in $500 million in cost savings and 6,000 job cuts distributed throughout 21 states, according to First Bank and First Interstate officials.

Wells officials have declined to say how many jobs would be cut in their deal, but have said they exact to save $800 million.

Banking experts and First Interstate officials have said Wells would cut 7,000 to 9,000 jobs and virtually all of those will be in California since Wells does not have any operations out of state.

Wells Chairman Paul Hazen said in a statement, that the new merger plan would not serve the best interests of First Interstate shareholders.

Wooing institutions

First Interstate Chief Executive Officer William E.B. Siart and First Bank System Chairman and CEO John (Jack) Grundhofer spent Oct. 6 and Oct. 7 in New York and Boston meeting with major institutional shareholders, promoting the benefits of their deal, according to Brace Willison, CEO of First Interstate of California, which is First Interstate's California bank subsidiary.

Major First Interstate shareholder James Schmidt, manager of the Boston-based John Hancock Regional Bank Fund, said he hasn't been convinced First Bank would be a better merger partner than Wells Fargo.

Many are speculating Wells would raise its offer to 0.7 share for each First Interstate share, he added.

"That 0.7 (figure) is compelling to me," and Wells stock is expected to rise if it makes such an offer, Schmidt said.

Price may rise

He said if Wells offered 0.7 share, its stock could rise to about $220 a share, which would make the deal worth $154 a share for First Interstate shareholders.

Another source, who asked not to be named, said. "First Interstate is not necessarily totally and absolutely hostile to Wells. But there were some key areas they couldn't come to agreement on."

Those areas include either management or headquarters location "or both," said the source.

If First Bank wins out, Grundhofer would be the chairman and CEO of the combined entity, and Siart the new president and chief operating officer.

Willison would become vice chairman of corporate banking. Linnet Deily, CEO of First Interstate's Texas bank, would become the new vice chairman of retail banking.

William Randall, president of First Interstate Bancorp since May, would retire when the merger is completed, a First Interstate spokesman said.

Also last week, a Wells source attacked the projected cost savings of a First Interstate-First Bank systems merger as unlikely.

And Siart attacked Wells' projections of a total cost savings of $700 million - which is $800 million in cost cuts, minus $100 million in lost revenues.

Siart said the Wells proposal involves eliminating people who regularly deal with First Interstate customers. "If you cut jobs at that level, that's going to upset customers and customers are going to go somewhere else," he said. And consultants estimate that could cost $200 million to $300 million in lost revenue, Siart said.

He said the First Bank proposal was about building revenues, while Wells' was about cutting costs.