But look deeper, and you see something quite different: this is probably the first big takeover battle ever decided by how many people Wall Street thought each bidder could fire. The players here were Wells and First Bank System of Minneapolis, both of which lusted to buy Interstate, which has banks in 13 Western states. Interstate made a deal to sell out to First Bank in November. Interstate was seeking protection from Wells, which launched a hostile bid in October. But what made First Bank attractive to Interstate made its offer a loser on Wall Street. To wit: First Bank, with no branches in California, couldn’t dose as many branches and fire as many people as Wells could. Thus, it would make less money from Interstate than Wells would make. Wells will close about 400 of the two banks’ 1,400 California branches and will fire about 9,000 people from the combined work force of 47,000. First Bank would close a relative handful of branches outside California and fire a mere 6,000 people.
Wall Street got to decide which bid would prevail, because the bidders were offering a fixed amount of stock rather than a fixed price. Wells was offering two thirds of a Wells share for each Interstate share, while First Bank was offering 2.6 First Bank shares. Stockholders would accept the higher offer. So the game began: get your stock up and the other guy’s stock down. At the end of November, First Bank’s 2.6 shares were worth $134 per Interstate share while Wells’s offer was worth $140. That was essentially a tie, because First Bank could do its friendly deal faster than Wells could do its hostile deal. And because Interstate would pay First Bank a $200 million “breakup fee” if it went to another bidder. But by last week, the difference in the bids was approaching $20.
What happened? The pivotal event came in early December, when Wells’s top execs journeyed to New York City for the first time in years to meet analysts and investors. Wells wowed Wall Street with the prospect of big cuts. Wells is renowned for cost-cutting and general toughness. Its takeover of crosstown San Francisco rival Crocker Bank 10 years ago, in which it wiped out most of Crocker’s employees, is Wall Street’s model for combining banks. The more blood, the more Wall Street likes it.
As Wells’s numbers circulated, its stock rose while First Bank’s stagnated. This despite the fact that Wells would have to reduce its reported profits by more than $300 million a year for 25 years if it bought Interstate. These accounting charges wouldn’t cost Wells any cash, despite reducing reported profits. Normally, investors obsess over reported profits. But Wells convinced the Street that this charge, which would reduce profits of the combined enterprise by around 20 percent at the start, was just bookkeeping, not real life. Which is exactly right. First Bank, which is less blase about the charge, said it would avoid it by using fancy accounting called pooling of interests. Oops! On Jan. 18, First Bank announced that the Securities and Exchange Commission wouldn’t let it buy back stock for two years if it used pooling. Buying back stock was vital to First Bank’s offer, because those purchases increase per-share profits and help prop the stock price. Wells, too, buys back lots of stock, and promised to keep doing so if it bought Interstate.
When its pooling hopes drained away, First Bank’s chances of prevailing went down the drain. It agreed to walk away if Wells promised to pay the $200 million fee Interstate had promised instead of fighting over it. Wells agreed. First Bank says it spent only $10 million on its Interstate caper, which puts it $190 million ahead. That’s certainly easier than making $190 million in the banking biz.
So there you have it. Wells, the biggest cost cutter, prevails. Interstate stock closed Friday at more than $40 above its price of $106 before Wells pounced. Wells stock was up almost $20 from its pre-offer price of $207. First Bank has made $190 million. The losers? Guess who? The Interstate and Wells employees who will lose their jobs when the banks are combined. Meanwhile, Wall Street’s blood lust for job cuts rages on, looking for the next set of victims.
