In a provocative analysis called "First Interstate: Wanted Dead or Alive," one of the nation's premier bank stock specialists said Tuesday that the Los Angeles banking company is a prime acquisition target that could be dismantled and sold for well above its current stock price.
The report by Keefe, Bruyette & Woods adds fuel to the speculation that has helped push First Interstate's stock up $15 a share since the beginning of May. The stock jumped $1.875 in trading Tuesday on the New York Stock Exchange to close at $64.50, a new 52-week high.
But Keefe Bruyette estimates the breakup value of the banking company to be far higher, somewhere between $90 and $110 a share.
While other analysts and investors also view First Interstate as a potential takeover target, Keefe Bruyette provides the most detailed examination yet of the company's value and of the possible buyers.
Donald K. Crowley, the Keefe Bruyette senior vice president in San Francisco who wrote the report, described several scenarios for a takeover of First Interstate, including a merger with one of its three big California rivals before the state opens its doors to out-of-state banks in less than 18 months.
The best fit, Crowley said, would be an acquisition by Wells Fargo in San Francisco, the state's third-largest bank. He said Wells Fargo would get improved penetration in Southern California and a presence in 12 other Western states, especially Texas.
A merger with Wells, Bank of America or Security Pacific, said the report, would "create the dominant Western (bank) and the most formidable national banking franchise presently conceived."
Crowley also suggested that a foreign bank or a group of non-banking investors could try to acquire First Interstate before interstate banking arrives in California on Jan. 1, 1991. After that, First Interstate could be a target for a New York bank or a financially strong super-regional bank from the Midwest or Southeast.
First Interstate could resist an offer or could go willingly. Hostile takeovers in the banking industry were once unthinkable. But Bank of New York won a protracted battle last year to take over Irving Bank, and other hostile deals have been attempted since then.
"However, an aggressive acquirer, as always in banking, must be prepared for a protracted and unpleasant fight from the start," the report said.
Ironically, First Interstate and its chairman, Joseph J. Pinola, attempted one of the first hostile takeovers in banking in late 1986 with an unsuccessful effort to acquire Bank of America, California's largest bank.
Since then, First Interstate's performance has lagged behind that of the other big California banks and its stock price remains at a lower percentage of its book value than B of A's, Security Pacific's and Wells Fargo's, Crowley said.
Simon Barker-Benfield, First Interstate's chief spokesman, said the company does not respond to market speculation. He did point out, however, that the bank is engaged in a program to improve operations.
Crowley reasoned that the bank can fend off a takeover offer only by sharply improving its earnings in the near future, which would presumably keep the stock price headed up. If the bank fails to do that, he said, its vulnerability to a takeover will increase.
About 70% of First Interstate's stock is held by institutional investors, who could be expected to side with a hostile bidder for profit reasons if performance at the bank does not pick up.
Vast Geographic Reach
The company has taken definite steps in recent months to cut costs, eliminate jobs and consolidate operations to focus on consumer and commercial banking. But continuing problems with domestic loan quality, particularly at its Texas bank, have been a drag on its progress.
For a buyer, a chief appeal of First Interstate, the eighth-largest banking company in the United States, is its geographic reach. Along with California's fourth-largest bank, it owns banks in 12 other Western states and has franchise operations in still another 11 states and the District of Columbia.
Keefe Bruyette suggests that a buyer could sell the non-California banks and substantial real estate holdings, and retain only First Interstate of California and some merchant banking operations.
The report said various alternatives for dismantling First Interstate and selling the parts could create a breakup value of as much as $110 a share.
"As a result," the report said, "we believe First Interstate would face substantial pressure from shareholders to participate in some kind of transaction should an offer come along."
FIRST INTERSTATE STOCK LAGS BEHIND
Keefe, Bruyette & Woods reports that First Interstate Bancorp's stock has failed to appreciate as fast as that of its biggest California competitors: Wells Fargo, Security Pacific and BankAmerica.