Troubled BankAmerica Corp. announced Monday that it is considering a buy-out offer, valued at about $2.8 billion, from First Interstate Bancorp of Los Angeles.
BankAmerica, which has lost nearly $1 billion over the last year, has been the subject of months of intense takeover speculation but First Interstate's offer is unprecedented in its detail and seriousness.
BankAmerica is the parent company of Bank of America, the nation's second-largest bank. FirstInterstate, with subsidiary banks throughout the Western United States, is the country's ninth-largest banking company.
A combination of the two banks would be by far the biggest banking merger in U.S. history and would create a mammoth nationwide financial force, with $168 billion in assets and offices in 13 states west of the Mississippi. The combined bank would control about 40% of California's banking business.
The merger would cap the career of First Interstate's aggressive and expansionary chairman, Joseph J. Pinola, a former BankAmerica executive. The resulting bank would trail New York's Citicorp, the nation's largest bank, by only about $5 billion in assets.
Unavailable for Comment
Pinola and BankAmerica President Samuel H. Armacost were not available for comment Monday night.
BankAmerica's board, which met Monday at the bank's San Francisco headquarters, requested additional information from First Interstate and said it will study the bid and respond quickly.
Announcement of the potential merger came at the end of the BankAmerica directors' meeting and after the stock market closed for the day. BankAmerica stock closed at $12.25 a share Monday on the New York Stock Exchange. First Interstate closed at $54.75.
First Interstate last year made an informal merger offer to BankAmerica, which was rejected. For both financial and legal reasons, BankAmerica is compelled to take the current offer seriously.
BankAmerica's underlying capital has been weakened by 18 months of huge losses on loans in every sector of its portfolio. The bank has been under strong regulatory pressure to strengthen both its capital base and the quality of its management.
Possibility of Suits
The bank's officers and directors could face shareholder lawsuits if they do not consider any legitimate merger proposal.
The complex First Interstate acquisition bid has two parts, one involving an exchange of shares and the other the creation of new "participating preference shares," which would pay dividends based on the combined banks' performance.
Under terms of the offer, each of the 153 million shares of BankAmerica common stock would be exchanged for 0.22 of a share of First Interstate common stock and one of the new participating preference shares.
For the five-year period 1987-1991, the dividend payments on the participating preference shares would be equal to 50% of the earnings of the merged company from BankAmerica and First Interstate's California operations above certain levels.
Under the proposal, such participating dividend payments could be made in cash, common stock or other primary capital securities.
In its proposal First Interstate said that its investment banker, Goldman, Sachs & Co., believes that the participating preferred shares "would be valued in today's market at approximately $6 per share."
BankAmerica is being advised by the Wall Street investment firm of Salomon Bros. and Wachtell, Lipton, Rosen & Katz, a New York law firm.
Revelations in February of First Interstate's earlier offer drove the value of BankAmerica's shares up markedly. Analysts and investors have been pessimistic about BankAmerica's prospects for some time because of perceived weaknesses in management and a continuing stream of bad news from the bank.
During the last 1 1/2 years, BankAmerica has suffered embarrassing losses on a mortgage scandal, the defections of numerous key executives, more than $2 billion in loan losses and an unrelenting battering on Wall Street.
In a related development, the bank said Monday that Armacost and other top bank officers will receive generous severance payments if they are dismissed in an unsolicited takeover.
The "golden parachutes," which could give the executives payments as much as three times their annual salaries, were approved by the bank's board of directors at its August meeting.
The severance plan was adopted by the directors after several months of study, the bank said in a statement. It took the action "to insulate senior management from concerns about possible changes in control of the corporation and to enable them to concentrate their undivided attention on the business health of the company and on safeguarding the interests of shareholders."
It was not clear whether the board had received the First Interstate bid when it approved the severance plan.
"Fewer than 12" BankAmerica officers, including Armacost, are covered by the severance program, the statement said. A committee of outside directors decides who qualifies.
Others Not Named