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After a two week trial, IBP Inc.’s suit to force Tyson Foods Inc. to honor their $4.7 billion merger agreement has gone from a long shot to a dead heat. “IBP has made up a lot of ground,” one legal expert watching the trial said. Tyson called its last witnesses Friday, including Merrill Lynch & Co. vice president Carl Stickel, University of Chicago law professor Daniel Fischel and Milbank, Tweed, Hadley & McCloy partner Lawrence Letterman, who handled the sale for Tyson. They capped off nine days of testimony that included appearances by Tyson chairman John Tyson, IBP Chairman Bob Peterson and Seth Kaplan, a partner at Wachtell, Lipton, Rosen & Katz who handled the sale for IBP. Lawyers following the case said Tyson’s best chance for victory is if the judge, Vice Chancellor Leo E. Strine Jr., decides that as a matter of law beef and pork processor IBP violated the merger agreement when it restated earnings at the insistence of the Securities and Exchange Commission. The judge could do this by granting Tyson’s motion for summary judgment, which was argued the week before the trial started. The case gets much trickier if Strine rejects the motion. The law requires him to evaluate what the parties knew and intended when they signed the merger agreement rather than just assessing the language of the document. During trial, IBP elicited some damaging testimony from Tyson officials that could make it tough for the judge to find for the poultry giant. The closeness of the case has some risk arbitrageurs predicting a settlement shortly after Strine rules, which is expected in mid-June. Tyson terminated its Jan. 1 agreement on March 29 to buy IBP for $30 per share. IBP sued March 30 to force Tyson to honor the half-stock, half-cash transaction. At trial, Tyson claimed IBP withheld information and violated a guarantee pertaining to the accuracy of its financial statements — breaches which give it the right to void the deal, Tyson argued. IBP countered that it disclosed all of the problems, including a potential restatement at its DFG subsidiary, cited by Tyson as a reason for killing the deal. It also argued that a provision in the merger agreement carves out problems at DFG from the financial filing guarantee. From the start, the case was Tyson’s to lose. Legal experts gave the poultry giant a better than 80 percent chance of success because a technical reading of the contract did not appear to support IBP’s claim that the carve-out for DFG problems applied to the SEC filing guarantee. Yet IBP was never completely written off because the merger agreement is governed by New York law, which gives judges greater latitude to consider testimony about intent than Delaware law does. IBP made up ground during the trial by showing that Tyson twice raised its bid for the company after learning of the DFG problems. It also questioned how the loss of $10 million a year in expected EBIT could be material, given that IBP’s annual EBIT is $500 million. On Friday, Strine pressed Stickel, the lead financial adviser to Tyson, on why the problems at DFG (as cited in a Dec. 29 comment letter from the SEC) would affect his conclusion that the company was worth $30 per share on Dec. 31 but now is only worth about $22. The comment letter was not given to Tyson until Jan. 10 and is cited by the company as a reason for voiding the deal. Strine noted that Tyson and Merrill Lynch were aware of most of the problems at DFG prior to Jan. 1 but did not change their valuations. Such testimony is important because Tyson only may kill the deal for a “material” misstatement by IBP. Stickel argued that his analysis assumed that $35 million of charges taken by IBP were one-time hits. He did not learn until March that the charges were larger and recurring, he said. Letterman, Tyson’s lead merger lawyer, said IBP’s guarantees relating to the accuracy of SEC filings and its attesting that its financial documents complied with Generally Accepted Accounting Principles were crucial because Tyson pledged to conduct its due diligence “quickly.” Such a vow requires that much of its review be based on publicly available documents, he said. Fischel testified that there were several material events that occurred since the deal was signed that give Tyson the right to back out of the merger. First quarter earnings, projected Dec. 5 at 53 cents per share, were actually 19 cents per share, he said. Analysts have lowered their full-year estimates for IBP from $2.46 per share down to $1.44 per share. These earnings shortfalls indicate that IBP is worth about $1 billion less than in December, he said. Under cross examination, Wachtell partner Marc Wolinsky suggested Tyson was responsible for some of the decline in IBP earnings estimates. He cited an internal Tyson e-mail suggesting the company quietly tell analysts that IBP would miss its numbers, and later comments from analysts lowering their estimates for IBP. Copyright (c)2001 TDD, LLC. All rights reserved.

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