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NEWS ANALYSIS : Not All Is Well and Good With Wells Fargo's Bid, Analysts Say : Banking: Several factors point to the possibility that First Interstate may yet be able to remain independent.


Much of the speculation coming after Wells Fargo & Co.'s hostile takeover bid for First Interstate Bancorp has focused on which of First Interstate's potential suitors--if not Wells itself--will end up owning the big Los Angeles-based bank.

Another possible outcome seems to get scant attention: that First Interstate could survive with its independence intact.

Yes, some experts say, First Interstate still could fend off a merger, but they believe the process might force it to undertake some of the same painful measures that Wells or another acquirer would impose, including cutting jobs or selling one or more of its operations in other states.

When San Francisco-based Wells made its unsolicited offer public on Oct. 18, many banking analysts considered it so rich a bid that First Interstate would be forced to either cave in and negotiate a marriage with Wells or find a more friendly partner--a "white knight."

Last week, reports surfaced that First Interstate had invited two major regional banks, Norwest Bancorp of Minneapolis and Banc One Corp. of Columbus, Ohio, to inspect its books with an eye toward a counteroffer.

Also mentioned as potential bidders are First Bank System Inc. of Minneapolis; Boatmen's Bancshares Inc. of St. Louis; NationsBank Corp. of Charlotte, N.C., and even New York giant Citicorp.

So far, First Interstate, which initially greeted the Wells bid frostily, has given no indication that it is selling out, encouraging speculation that it may try to make a case for remaining on its own.

They point to weaknesses in Wells Fargo's offer--five-eighths of a share of its stock for each First Interstate share--and concerns about what the merger would do to First Interstate's 13-state franchise, which arguably doesn't need fixing. And they note the trouble that other banks would have in topping Wells' bid, since the outsiders lack the same cost-saving potential from trimming overlapping operations in California.

At Wells Fargo's closing price Tuesday of $210.125, its bid is worth $131 a share, or $9.9 billion. First Interstate stock closed Tuesday at $129.125. Both are traded on the New York Stock Exchange.

One investment banker who is watching the developments closely said First Interstate is worth far more. "To think about selling this company," he said, "they'd have to get something in the $150-a-share neighborhood."

Even without a takeover bid, the investment banker said, First Interstate is arguably worth $130 a share based on its own operations.

Industry analysts expect First Interstate to make a profit of about $12 a share next year, he noted. If the bank could boost earnings to $13, and if the market priced its stock at 10 times earnings--a modest price-earnings ratio these days for good-performing banks--then voila , it would sell for $130 a share.

It sounds simple, but analyst Francis X. Suozzo of S.G. Warburg & Co. cautioned that it would be anything but easy to achieve.

One quick but painful way to boost earnings per share would be to sell an out-of-state operation and use the proceeds to buy back stock. First Interstate's Texas franchise, for example, could fetch as much as $1.3 billion, or perhaps $900 million after tax, Suozzo said. Such a move would shrink First Interstate's revenue, he noted, but it could be a way to stave off a takeover.

Working against Wells' bid, in Suozzo's opinion, is that it overstates both the cost-cutting potential and the combined companies' ability to increase revenue in coming years.

By some measures, such as growth in earning power over the last four years, First Interstate has outperformed Wells, he said. And since the two banks have different operating philosophies, a merger could cause customers to flee, Suozzo said.

Wells has estimated that it can attain savings of $700 million a year--about 35% of First Interstate's total overhead--by consolidating operations, including eliminating anywhere from 7,000 to more than 9,000 jobs.

But the investment banker noted that there would be enormous political pressure on Wells to lighten the job losses and the effects on state and regional economies. Already Los Angeles Mayor Richard Riordan has attacked the deal as a job killer.

First Interstate's directors, who would vote on any merger proposal, "have a perfect right to step back and take the long view and say no to this," Riordan told The Times the day after the bid was announced.

Corporate directors have a fiduciary responsibility to their stockholders, but they also have the discretion to consider other factors such as the welfare of the community and the employees, legal authorities say. The highest bid doesn't necessarily win.

Ultimately, the key to the deal could be how badly Wells wants it. At some price, First Interstate would be virtually forced to capitulate.

Banking analyst Bert Ely said that a First Interstate acquisition may represent Wells' only decent chance of breaking out of California to find growth in other markets.

"Wells' survivability is very much a function of their ability to do this deal," Ely said.

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