First Interstate: Up For Grabs?

Investors who took George Salem's advice last month certainly made a bundle. He sent clients an alert on Aug. 9 to snap up shares of Chemical Banking and Chase Manhattan in anticipation of a "potential merger." Events bore him out on Aug. 28, when the announcement drove up shares sharply. Salem, senior-vice president at New York investment firm Gerard Klauer Mattison, is now high on another bank: First Interstate Bancorp (I).

Why? Salem thinks this Los Angeles bank, now at 96 a share, will be acquired by San Francisco's Wells Fargo at about 120. "First Interstate has become the most attractive target in the industry," argues Salem, who says the two need each other to maintain competitiveness, boost earnings, and roll back costs.

First Interstate, with 1,137 retail branches in 13 Western states--mainly California, Texas, and Washington--is an alluring target for other banks, too: NationsBank, Banc One, and Norwest, says Salem. But he reckons Wells Fargo will be the one to snare First Interstate: Wells Fargo's position would suffer if somebody else got it. "Wells Fargo has a strong geographical fit with First Interstate," he says.

Wells is the 15th-largest U.S. bank holding company and the owner of California's second-largest bank. But with a one-state market and assets of only $50 billion, "it may not be large enough to be competitive in the emerging banking world," Salem says. With its stock at 186 and market cap of $9 billion, Wells Fargo is trading at a lofty 261% of its book value. First Interstate, with assets of $56 billion, trades at 187% of book.

A buyout of First Interstate at 120 a share may appear pricey, concedes Salem. But he says such a deal would push up Wells's 1997 earnings "by at least 10% at the outset."

Wells Fargo Chairman Carl Reichardt has been after First Interstate since 1992, says Salem. But Interstate's then-CEO, Ed Carson, was unwilling to sell until the turnaround he had been orchestrating was complete. Now, "management can collect full value for its hard work," notes Salem.

Both banks have relatively new CEOs--Bill Siart at Interstate and Paul Hazen at Wells. Salem believes they are more willing to negotiate a merger in light of the recent wave of consolidation. All major bank holding companies "are now considering merger alternatives that had not been in their plans a few months ago," asserts Salem. Spokespersons for Interstate and Wells Fargo declined comment.

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