The news was grim Friday when the directors of First Interstate Bancorp met in Los Angeles for an update on the bank's proposed merger with First Bank System Inc. of Minneapolis.
Most important, the value of a competing, hostile bid for First Interstate by Wells Fargo & Co. was soaring. Keyed to Wells' stock price, the bid was more than $18 a share higher than First Bank's. The argument First Interstate executives were making to shareholders--that the two deals were virtually equivalent--looked increasingly preposterous.
In order to win shareholder approval for the merger, "they knew they were going to have to come out with a statement saying [First Bank] was the best deal," recalls one financial expert knowledgeable about the deal. "When you're staring at an $18 spread, that's an awful hard story to tell."
And a perilous one. Among the speakers were lawyers representing First Interstate's outside directors (those who are not executives of the bank). Although what they told the board is not public, it is known that directors who fail to present advantageous takeover bids to shareholders are vulnerable to shareholder lawsuits and Securities and Exchange Commission complaints.
The board read the writing on the wall.
Before breaking up that day, it instructed First Interstate Chairman William E.B. Siart to reopen merger talks with Wells Fargo. Siart called Wells Fargo Chairman Paul Hazen that evening and the two met the next day, Saturday, at Oakland International Airport. Three days later, they agreed on the largest bank merger in U.S. history.
The $11.6-billion merger of San Francisco-based Wells and Los Angeles-based First Interstate--which still requires shareholder and regulatory approval--would cost as many as 8,000 jobs and close 350 bank branches.
But according to official documents and interviews with people close to the deal, the outcome of Wells' three-month hostile takeover campaign hinged not on the reaction of First Interstate's workers or even its customers.
Instead, Wells' ability to execute the takeover in the face of intense local political opposition and public scrutiny is a testament to its efforts to win over the only people who really counted: First Interstate's big shareholders.
The key moment in its pursuit of those shareholders' hearts and minds, knowledgeable sources say, was a Dec. 7 meeting that represented a major departure from company practice.
The meeting, in the Sky Club atop the Metropolitan Life building in Manhattan, was a presentation to securities analysts and large investors at which Wells executives disclosed far more details about their business plan and strategies than they ever had before.
"Wells never liked to toot their own horn," said one advisor to the company. "They didn't like to go to these analysts conferences because they don't want to educate their competitors. If they have a good idea they go do it, they don't talk about it."
But the company's investment advisors were warning that more was needed in this case. First Bank was heavily promoting its merger deal among the same constituency.
"Given that First Bank was touting itself, the impetus was there for Wells Fargo to get out there and sell itself," said one advisor close to the deal.
In any event, Hazen and his lieutenants turned in a bravura performance.
They gave the analysts and investors a history lesson in the bank's successful earlier acquisition of Crocker Bank, which allowed it to build a deposit base at a rate well beyond that of the growth of the overall California market in the 1980s. They detailed Wells' leadership in market innovations, including Saturday branch hours and telephone banking.
And they outlined plans to double Wells' "customer contact points" in California by the end of this year, chiefly by opening up offices in hundreds of supermarkets, often staffed by one banker with a laptop computer. In fact, they said, without fanfare, Wells had already locked up four of the five top supermarket chains in California, erecting a powerful barrier to competitors hoping to follow their lead.
Because the presentation was so unusual, Hazen's narrative of Wells' success in California and its gung-ho plans for the future left the analysts dazzled. "Some investors said it was the best presentation they had ever seen," according to one Wells advisor.
The meeting paid off in more than goodwill: By bidding up Wells stock, investors were in effect sweetening its offer for First Interstate, which amounted to two-thirds of a share of Wells for every share of First Interstate.
First Bank's deal was similarly keyed to its stock price, so executives at all three banks kept an eagle eye on the daily fluctuations in the market. At Wells Fargo, where the executive suite received a daily report from its financial advisors, the news only got more gratifying.