2 Maneuvers by B of A Were the Final Blow to 1st Interstate’s Bid

Two recent moves by BankAmerica tipped the scales against First Interstate’s effort to acquire the ailing San Francisco banking firm: BankAmerica’s sale of its profitable Charles Schwab & Co. discount brokerage and its decision to offer as much as $1 billion in new securities.

Knowledgeable sources said Wednesday that First Interstate officials decided more than a month ago that the $3.25-billion deal probably would not fly but were uncertain when and how to announce withdrawal of the offer. BankAmerica’s planned securities sale and the $230-million spinoff of the Schwab firm, both announced within the past two weeks, prompted First Interstate to retract the takeover proposal sooner rather than later.

On Monday, First Interstate said it was dropping the bid because BankAmerica’s sale of assets had lowered its value and made it an undesirable merger partner. But First Interstate left open the possibility of a later takeover offer if BankAmerica continues to flounder.

First Interstate Chairman Joseph J. Pinola was known to have been disappointed in BankAmerica’s sale of the Schwab unit because he coveted the brokerage’s coast-to-coast offices and its 1.7 million customers. He wanted to add the Schwab network to his 18-state system of wholly owned and franchised banks.

But, First Interstate sources said, BankAmerica’s decision in late January to file for permission to sell as much as $1 billion in new securities to bolster its weak capital position finally convinced Pinola to give up the fight--at least for now.

The reason is complicated. If First Interstate had continued to press its offer, analysts explained, BankAmerica stock would have sold at a “takeover premium� of $2 to $3 a share over its true market value, based on investors’ expectations that the company would eventually be sold for more than the current market price of its stock.

First Interstate’s last offer was for $21 a share. Until First Interstate dropped its bid, BankAmerica stock was selling for $14 to $15 a share.

If BankAmerica were to sell new securities while the First Interstate offer was pending, their price, too, would carry the takeover premium. And, if First Interstate had withdrawn its offer after BankAmerica had begun to sell the new securities, a First Interstate source said, it would have opened itself to allegations that it was undermining market confidence in BankAmerica, a serious charge in the investment community.

To avoid that possibility, First Interstate decided late last week to drop its offer.

Although First Interstate decided recently to back away from the deal, things had not been going well for Pinola almost from the beginning. Several analysts said that while the idea of a merger had merit, Pinola underestimated BankAmerica’s determination to remain independent and the forces it was able to marshal on its side.

“His basic mistake was he pursued it too long and too aggressively,� said Stephen Berman, a bank analyst with Nomura Securities International in New York. “Unfriendly bank mergers are extremely unlikely to occur, and the vast majority of such attempts have run into regulatory and other obstacles.�

A number of BankAmerica defensive moves had made the merger less and less attractive to Pinola in the months after he originally proposed the deal last October, company sources said. The original First Interstate offer, delivered to BankAmerica on Oct. 3, was a $2.78-billion buyout bid for all of BankAmerica’s outstanding shares.

Pinola’s timing was widely seen as brilliant. BankAmerica was reeling from an unexpected $640-million second-quarter loss, and at least three BankAmerica outside board members were calling for drastic action. Then-President Samuel H. Armacost had lost credibility because he repeatedly delivered upbeat projections and terrible results.

‘Pinola Galvanized Board’

Pinola made his offer believing that BankAmerica’s restive board would quickly see the value of the combination and begin negotiations on a friendly merger. Instead, after a period of apparent inertia, BankAmerica moved decisively into battle. “Pinola galvanized the board,� Berman said.

The directors ousted Armacost and replaced him with A. W. (Tom) Clausen, who was charged with keeping the company independent. The firm brought in top anti-takeover specialists from New York. It rallied its troops and sought political support in San Francisco, Sacramento and Washington. It circulated an analysis of the First Interstate offer that raised serious doubts about the offer’s financial and regulatory viability.

None of these moves deterred Pinola, who first sweetened the offer by more than $500 million, then, in December, sought permission for the merger from federal regulators.

But by then, BankAmerica asset sales had already substantially altered the nature of the company Pinola was bidding for. In December, BankAmerica announced the divestiture of its Italian subsidiary and the sale of its consumer trust business to Wells Fargo--two assets that Pinola felt were essential to the deal. It was at this point that he began to reconsider his offer, sources said.

With the sale of Schwab, announced last week, Pinola had seen enough. BankAmerica had ceased to be the firm he wanted to buy.