Investors Yawn at Davis’ Call for First Interstate to Find a Buyer : Banking: The number of prospective buyers for an institution this size is small already and shrinking fast. But the L.A. company is vulnerable to a proxy fight.

For nearly three years, Wall Street has viewed First Interstate Bancorp as a ripe takeover candidate waiting to be picked. So when someone with the clout of Los Angeles billionaire Marvin Davis tells the banking firm to shape up or find a buyer, one would expect some excitement among investors.

That hasn’t happened. A letter that Davis sent last week to First Interstate’s directors suggesting that it may be the “ideal time” to sell the Los Angeles-based banking firm has been greeted with a big yawn. First Interstate’s stock closed at $25.625 per share on Wednesday, almost exactly the price it traded at the day Davis’ letter was made public.

“My reaction is ho-hum,” said one New York takeover speculator.

The indifference stems from several reasons. Bank acquisitions are anything but a sure bet in these uncertain times. The number of prospective buyers for a bank the size of First Interstate is small already and shrinking fast because banks are struggling with problem loans and pressure to bolster capital. Any acquisition or merger would be expensive because it most likely would require the buyer to make a big infusion of capital--funds that serve as a bank’s financial cushion--into First Interstate.

What’s more, First Interstate executives show no interest in selling. Regulators must approve any deal. And the layers of state and federal approvals needed to buy First Interstate makes any unfriendly deal virtually impossible.

Still, First Interstate, parent of First Interstate Bank of California, can hardly take Davis lightly. Takeover specialists agree that the bank’s corporate structure makes it more vulnerable than most corporations to pressure through either a proxy fight or its cousin, a “consent” solicitation. Both methods are used by dissidents to oust directors.

Unlike many large corporations, First Interstate never did away with its consent solicitation process, which allows dissidents to try to remove directors at any time. The bank has also never staggered the terms served by its board, so all the directors come up for election at once. So a dissident stockholder such as Davis needs only to gain support from those owning more than half of First Interstate’s shares to replace its directors.

In addition, most of First Interstate’s shares are held in a handful of institutions. That would make it easier for Davis to gather the support he needs to replace directors with his own slate. But there is one catch: Regulators would have a say in any such move.

Corporate battles are nothing new to Davis, who made his fortune in oil, real estate and the film business. Last year, he tried to oust directors of the parent of Northwest Airlines before the company was sold to another investment group. Indeed, the letter he sent to First Interstate was released publicly by D. F. King, a proxy solicitation firm, although there is no evidence that Davis has retained the firm specifically for those services.

Under former Chairman Joseph J. Pinola, First Interstate and its lucrative branch system throughout the West became the widespread subject of takeover rumors. The bank angered shareholders with surprise losses in Texas and its continuing high overhead costs. Earlier this year, Pinola turned over the reins to Chairman Edward M. Carson and President William E. B. Siart.

Disenchantment by investors and stock analysts has eased some. Last month, Kidder, Peabody & Co. banking analyst Thaddeus W. Paluszek became one of the few analysts to recommend the bank’s stock to investors. “In our view, Carson and Siart are taking the company in the right direction strategically,” Paluszek said.

The giant investment firm Kohlberg Kravis Roberts & Co. bought nearly 10% of the stock, agreeing in writing to ally itself with First Interstate until 1992. Even longtime First Interstate critic John Neff, who controls a large chunk of stock through mutual funds he manages, credits the bank with taking many of the right steps. He says now that the ideal time to sell First Interstate has passed.

Davis declined to comment, as did First Interstate executives. In his letter, however, Davis said he believes that the bank’s financial condition has deteriorated the past few months. Davis also disclosed that he and his family “own a significant amount” of First Interstate shares. Stock traders said they are puzzled why Davis would go public with that information, adding that they believe that it means he wants out of his investment.

“You only go public because you want the stock up,” said Tom Barton, a Dallas trader who “shorts” bank stocks by betting they will fall. “That means you are probably not going to buy any more. Why would you run the stock up if you wanted to buy more?”

Working most against any deal now is the growing uncertainty each day about banking and the economy. Banking executives say regulators would give extraordinary attention to any proposed deal and probably would approve it only if the emerging bank had an exceptionally strong balance sheet.

Any buyer would also be contending with a slowing economy. As one California chief executive puts it, all banks now have “built-in poison pills”--meaning that anyone buying a bank takes a big risk that there are loans that will deteriorate badly. First Interstate itself found this out when it bought Allied Bancshares in Texas, a bank that turned out to be loaded with small to medium-sized loans that were bad.

What’s more, the number of prospective buyers is shrinking daily. Two banking firms once viewed as good candidates to buy First Interstate, Citicorp and Security Pacific Corp., have just disclosed they will post huge fourth-quarter losses. Japanese banks that might be interested, such as Sanwa Bank, are under pressure because of Japan’s falling real estate and stock prices. Many large regional banks are facing increased problem loans.

That pretty much leaves Wells Fargo & Co. and BankAmerica Corp. as the leaders on the short list of banks that analysts believe could do a deal. Both are digesting thrift acquisitions and face uncertainties themselves with California’s slowing economy.

“Who is going to buy this thing? If Davis forces management to find a buyer, will it make a difference?” asked Barton, the Dallas trader.

TAKEOVER: PROS AND CONS Marvin Davis’ letter last week telling First Interstate to shape up or find a buyer came after three years of continuous speculation that the banking firm is a takeover candidate. Based on interviews with industry executives, shareholders, analysts and stock speculators, here are some factors working for and against a prospective takeover.

AGAINST A TAKEOVER * First Interstate executives show no interest in selling. A hostile bid would be virtually impossible because of numerous state and federal regulatory hurdles that a suitor would have to clear. Nearly 10% is owned by the investment firm Kohlberg Kravis Roberts & Co., which has agreed until 1992 not to vote against management.

* The number of banks, both domestic and foreign, that could pull off an acquisition is shrinking rapidly as loan problems surface.

* Any bank is considered a risky acquisition now with the economy softening. A buyer might inherit a large number of loans that turn bad.

* Regulators would closely scrutinize any merger and are unlikely to approve any deal unless the surviving bank emerges with an exceptionally strong balance sheet. Capital that a bank would need to inject to satisfy regulators is difficult to raise.

* Some analysts and shareholders have been placated by First Interstate Chief Executive Edward M. Carson’s moves to try to turn the bank around.

* Bank shares, which would most likely be issued to First Interstate shareholders in a merger, are depressed.

FAVORING A TAKEOVER * Two-thirds of First Interstate’s stock is held by a few large institutions, with six holding nearly half of it.

* First Interstate could be vulnerable to a proxy fight or similar “consent” solicitation because those holding a majority of its shares could oust the bank’s directors.

* First Interstate’s stock is selling at a depressed price, trading at less than $25 a share this week. It nearly reached $71 a share in 1989.

* First Interstate has historically been plagued by high overhead costs that might be reduced through a merger.

* Wells Fargo & Co., BankAmerica Corp. and Security Pacific Corp. have indicated interest in merging with First Interstate for some time. First Interstate also represents a rare opportunity for an out-of-state bank to enter the West’s lucrative banking market.