First Interstate Decides To Talk To Wells Fargo -- First Bank's Bid Suffers Second Blow

LOS ANGELES - First Interstate Bancorp said it started merger talks with Wells Fargo & Co., dealing a second major blow to First Bank System Inc.'s $9.8 billion bid for First Interstate.

First Interstate's decision follows a Securities and Exchange Commission ruling last week that made First Bank's bid much less attractive to shareholders. The Los Angeles-based bank earlier opted to merge with First Bank and opposed Wells Fargo's higher-priced offer.

"I think we're about to see a deal with Wells Fargo turn friendly," said analyst David Berry of Keefe, Bruyette & Woods Inc.

At their current stock prices, Wells Fargo's bid is worth $11.3 billion and First Bank's worth $9.8 billion. In late trading, First Interstate shares were up $4.50 at $143.375; Wells Fargo shares were up $4.875 at $222.375, and First Bank's stock rose $1.375 to $49.875.

First Interstate is the nation's 14th-largest bank. In Washington state, First Interstate is the fourth-largest commercial bank, with 137 branches, $5.3 billion in assets and about 2,200 employees.

First Interstate's move could provide a quick end to a three-month takeover fight, the biggest in U.S. banking. The first major setback for Minneapolis-based First Bank's bid came Friday.

First Bank said the Securities and Exchange Commission ruled that it won't be able to buy back its own shares for two years after acquiring First Interstate if it uses its preferred accounting method for the merger.

An important part of the bank's plan was to buy back its own shares starting 90 days after a merger as a way to boost earnings per share.

Executives from First Bank and First Interstate held talks over the weekend about a possible increase in First Bank's bid, people familiar with the talks said.

First Bank is reluctant to bid more because a higher price would cut into its earnings, these people said. First Bank hasn't ruled out a higher offer, however, they said.

San Francisco-based Wells Fargo is offering two-thirds of a share for each First Interstate share. First Interstate said it doesn't expect to get a higher price.