0103110 IBP Sues Tyson Over $3.2 Billion Merger Deal

New York - Meat packing firm IBP Inc. filed a lawsuit seeking to force poultry giant Tyson Foods to honor the $3.2 billion merger agreement the poultry giant terminated.

“Tyson's actions are completely unjustified by anything that has transpired and we will do what is necessary to protect our shareholders and our company,” said Robert Peterson, IBP's chairman and chief executive officer, in a prepared statement. “We can only speculate that this is a classic case of buyer's remorse.”

The lawsuit is the beginning of what some legal experts believe will be a prolonged legal tussle between the two companies as they try to sort through a nearly four-month engagement that ended suddenly following allegations of improper inducement and the withholding of important financial information.

“Both sides appear to be preparing themselves for lawsuits here,” said one mergers & acquisitions legal expert who asked not be named.

At the heart of the dispute is a U.S. Securities and Exchange Commission probe into accounting irregularities at IBP's DFG Foods unit, which it acquired in 1998. The probe started around the same time Tyson agreed to acquire the Dakota Dunes, S.D.-based firm.

The investigation ultimately resulted in IBP taking two separate charges: a 2000 fourth-quarter pretax impairment charge of $60.4 million against DFG's goodwill carrying value and an additional $44.9 million pretax charge to account for misstatements and accounting irregularities at DFG.

DFG's financial problems also forced IBP to restate its results for the first three quarters of 1999, and later the company said its 2001 first quarter profit would fall well short of analysts' expectations. However, that shortfall was blamed mainly on higher cattle prices, and the firm gave no indication the probe would impact its 2001 results going forward.

IBP's lawsuit, filed in Delaware Chancery court, notes Tyson officials were provided “routine and accurate” updates of the ongoing DFG investigation. IBP claims it informed Tyson in the days leading up to the merger agreement that a write-down of $35 million or more would result from DFG's troubles.

But Tyson, in a statement released Thursday, said it was terminating the merger agreement because it relied on “misleading information” as part of its due diligence. Legal experts interviewed Friday said the company most likely will try and prove it was fraudulently induced into the deal.

Specifically, Tyson alleges IBP first became aware of potential problems at DFG after receiving a letter from the SEC on Dec. 29, just four days before the merger agreement was signed. Tyson claims that it was not informed of potential charges related to DFG, a Chicago-based company that makes hors d'oeuvres and appetizers, until Jan. 10.

IBP called Tyson's decision to cite the SEC letter as it's reason for backing out of the deal as a “smokescreen,” noting the eventual charges related to the accounting irregularities had no material impact on the company's overall finances.

The decision by IBP to file a lawsuit surprised some legal experts who, before the suit was filed Friday, said the company was not likely to pursue legal action because a prolonged court battle would only highlight its recent financial woes.

“I suspect that the exploration process (of a lawsuit) is not something that they are going to want to shed a lot of light on, especially when there is some question about the financials of the company,” said Morton Pierce, chairman of the mergers & acquisitions practice at law firm Dewey Ballantine.

Tyson, however, has already said it intends to pursue legal action in order to recoup undisclosed compensation from the failed deal, which many believe will include the $59 million break-up fee Tyson paid to scuttle a merger agreement between IBP and a Donaldson, Lufkin & Jenrette subsidiary.

That, legal experts say, may have pushed IBP to retaliate with a suit of its own. To collect damages from Tyson, legal experts say IBP will have a heavy burden to definitively prove that Tyson was not mislead into entering the deal.

Experts said the scenario of events seems to indicate Tyson felt confident in its decision to back out entirely as opposed to renegotiating, which most industry watchers expected.

“When you make a claim like Tyson did, my guess is you don't make it lightly,” Pierce said.

“You really are at the buyer's mercy,” agreed Kathryn Harrigan, a business leadership professor at Columbia University's Graduate School of Business. “You have to open up the vault and let them troll around and if a deal doesn't measure up to their expectations, there are so many outs for a buyer that you really just have to hold your breath.”

Still other legal experts said IBP could have a strong case if it can prove it kept Tyson adequately informed about the ongoing probe and show DFG's troubles are behind it.

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