BankAmerica appears to have spun out of takeover territory

BankAmerica's spinning wheels have finally found some traction. Now it looks as if its pursuer will have a far tougher chase on its hands. On Monday, BankAmerica asked First Interstate to withdraw its sweetened bid, valued by First Interstate at $3.39 billion, or $22 per share. In so doing, BankAmerica board members bought time and temporarily shielded themselves from shareholder lawsuits for rejecting an offer that is well above the company's $15.87 stock price.

Now banking industry sources say BankAmerica plans to sell Schwab & Co., its highly profitable discount brokerage house and a crown jewel for the nation's second-largest bank. Analysts expect the sale to fetch between $260 million and $312 million.

That, along with a perhaps $300 million gain for its Italian subsidiary (the sale of which the bank hopes to complete this year) would put BankAmerica in the black for this quarter and next. Showing some profit is crucial if BankAmerica wants to stave off First Interstate, a company less than half BankAmerica's size.

The sale of Schwab ``will reduce the probability that First Interstate will succeed,'' says John Danforth, principal at Golembe Associates, a bank consulting firm. It shows that management, under the guidance of A.W. Clausen, who returned as chairman last month, is willing to move quickly. It also bolsters the strength of BankAmerica as an ongoing entity, he says.

And it puts pressure on First Interstate, which must move quickly before BankAmerica is remodeled right under its nose.

``First Interstate will have to do something equally dramatic,'' says Mr. Danforth, probably ``going ahead with its tender offer or boosting it.''

Previously, First Interstate had said it wanted only a friendly merger. But some analysts believe that if it keeps the bid on the table or raises it, there could be a hostile play - something highly unusual in the banking industry.

``The water's stirred up, and a lot of other smart people are looking at the pieces,'' Danforth says.

Charles Schwab, the brokerage's founder; Citicorp; and California-based Security Pacific are all reportedly interested in the discount brokerage. BankAmerica's Washington State subsidiary, Seafirst, has also attracted some attention, though BankAmerica has indicated it doesn't want to sell it. And Japanese banks - Daiichi Kango Bank and Sumitomo Bank are among those mentioned - are rumored to want a stake in BankAmerica's retail banking operations.

If First Interstate does launch an all-out hostile takeover war, its maneuverings will be closely watched. To date, there have been only a handful of hostile takeovers in the banking industry, and nothing approaching BankAmerica's size.

The major hurdle is regulatory. The Federal Reserve Board must consider and endorse each merger, which can take 120 days. If First Interstate makes a tender offer to shareholders, says John Hawke Jr., a banking lawyer at Arnold & Porter, a Washington law firm, ``they're looking at a protracted regulatory period.... The offer may get stale. People won't tender their shares until there's a reasonable certainty that [First Interstate] will win.''

BankAmerica's shareholder profile - about two-thirds of its stock is held in small lots by individuals - poses another problem for First Interstate. It is far more difficult to get individuals to sell their shares to a hostile suitor than to move large blocks held by institutions.

Other problems loom larger for banks than for other companies in making hostile takeovers. Guidelines on shedding assets (like nearby branches) to meet antitrust requirements are fuzzier. Raising the cash to buy up shares of the target company - a quicker and easier way to make a hostile bid than a stock swap - is also more difficult for banks, given regulators' increasing insistence on capital adequacy.

And in First Interstate's case, bank regulators may be concerned whether ``it has the capacity managerially to digest that large an acquisition and address the kinds of problems BankAmerica has, for example in the foreign loans,'' says Neil Peterson, an interstate banking specialist at the law firm Hogan & Hartson.

But, says a lawyer close to First Interstate, ``I don't think those [problems] create an insuperable barrier to a hostile takeover.''

He cites several cases, including the two-way race for Union Commerce in Ohio, in which Huntington Bancshares beat out the white knight, Central Bancorporation. Commerce Bancshares in Missouri acquired County Tower Corporation in a hostile bid, as did Joe Allbritton in his purchase of Riggs National Bank, the largest bank in Washington, D.C.

In fact, this lawyer says, ``the success ratio [for hostile takeover attempts] has been substantial.''

Whether that ratio will hold up under the weight of a $3 billion purchase of the country's second-largest bank, however, is another matter.