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The failure of a lawyer to fully read a fax the U.S. Securities and Exchange Commission sent to IBP Inc. Dec. 29 could cost shareholders of the food industry giant more than $1 billion. Tyson Foods Inc. is citing the fax in a lawsuit as one reason it voided its $4.7 billion acquisition of IBP. The meat packer has countered with its own lawsuit seeking to compel Tyson to complete the transaction. The suit said the lawyer never read a section of the fax, sent to a special committee of IBP advisers, that raised concerns with accounting practices. If the countersuit fails, IBP is likely to find few other suitors. Wall Street analysts said the lack of a competing bid could open the door for Smithfield Foods Inc. to acquire IBP for as little as $20 a share. That is one-third less than Tyson agreed to pay Jan. 1 and equates to an overall bid of about $3.7 billion including assumed debt. “I’d be surprised if Smithfield paid more than $20,” said Jeffrey G. Kanter, an analyst at Prudential Securities Inc. “There is just no need to.” A Tyson spokesman declined to comment. IBP officials did not return calls. The competing lawsuits, filed with the Chancery Court in Washington County, Ark., by Tyson and IBP paint a picture of frantic, last-minute negotiations between the companies as they rushed to finalize a deal before the markets reopened Jan. 2. The merger saga began Oct. 2 when IBP and Donaldson, Lufkin & Jenrette Inc. announced a leveraged buyout of the company for $22.25 per share in cash. To consider the offer, IBP established a special committee of outside directors, which was advised by James Elliot of J.P. Morgan Securities Inc. and Seth Kaplan and Richard Katcher at Wachtell, Lipton, Rosen & Katz. At about the same time, internal auditors uncovered inventory valuation issues at DFG Foods, an appetizer maker subsidiary that contributed less than 1 percent of IBP sales and represented about 3.7 percent of its total assets. IBP restated earnings Nov. 7 by about $9 million to account for the problem. The restatement did not scare off other bidders. Smithfield offered $25 a share Nov. 13 and Tyson countered Dec. 4 with $26. Both companies signed confidentiality agreements with IBP, which shared detailed financial data with them during December. What happened next is in dispute. IBP said its chairman, Robert Peterson, told Tyson in December there could be at least another $20 million of write-downs from DFG. Despite this knowledge, Tyson increased its bid to $27 a share on Dec. 28, IBP said in its suit, which was filed March 30. The bidding and briefings continued all month. IBP said its CFO, Larry Shipley, conducted due diligence calls with Tyson and Smithfield Dec. 29. It said Shipley told both companies in separate conversations that the DFG write-down would be at least $35 million. The New Year’s weekend was shaping up as the climax of the two-month fight. Smithfield raised its bid to $30 per share, then Tyson countered with $28.50, which IBP viewed as better than Smithfield’s higher offer because the combination raised fewer antitrust issues and was half in cash as opposed to all stock. Smithfield countered again Dec. 31 with a $32 offer, prompting Tyson to increase its bid Jan. 1 to $30. IBP then agreed to the Tyson bid, and the companies released a statement New Year’s Day announcing the union. Apparently forgotten during this process was the SEC fax. According to IBP’s lawsuit, a copy of the SEC letter was faxed to “counsel” for the special committee of outside directors. Its identity was not disclosed, but a source said Wachtell Lipton was that counsel. The suit said the counsel “glanced” at the letter and determined it dealt with the LBO, which had effectively been shelved in favor of bids from Smithfield and Tyson. It said the lawyer never read the section about accounting practices at DFG and with the recently filed forms 10-K and 10-Q. The suit also states that the company received its copy of the letter by regular mail Jan. 8. Once it arrived, IBP said it immediately gave a copy to Tyson. IBP said Tyson repeatedly stated its intention to proceed with the merger after getting the letter, which indicates that the financial restatements were not a concern. IBP also cites the merger agreement, which includes a warning that the DFG subsidiary could require further earnings restatements because of improper accounting practices. “Tyson bid eyes wide open to the possibility of additional write-downs at DFG,” IBP said. “The prospect of such additional write-downs did not deter Tyson from bidding $30 per share for IBP because it understood that DFG was an immaterial portion of IBP’s total business.” Tyson, by contrast, argued in its suit that IBP “fraudulently induced” the company into a merger. “The merger agreement represents the fruition of IBP’s plan to artificially raise the price of its common stock and lure Tyson into vastly overplaying.” In its suit, Tyson charges that IBP began its fraudulent scheme in February 2000 when it released inflated financial results. It allegedly compounded the fraud when it issued results in April 2000, July and October. Tyson, referring to the Dec. 29 fax, also argued that by that point IBP had “actual or constructive” notice from the SEC that its financial statements may have contained inaccuracies. By failing to immediately share that information, IBP illegally enticed Tyson into basing its $30-per-share bid on inaccurate data, Tyson charged. “IBP intentionally concealed the existence and content of the SEC comment letter, which revealed IBP’s fraudulent conduct until after the merger agreement was signed,” Tyson said. Tyson also argued that IBP continued to mislead it about the seriousness of the SEC questions. It said IBP led it to believe the investigation would be swiftly resolved, when in fact the dispute dragged on for three months. It also said throughout this period the problems at DFG appeared to grow more serious. Legal experts said this fight could rage in court for months or years because neither side has a clear-cut case. Minor financial restatements such as those done by IBP are typically considered immaterial and are not a basis for litigation, one securities lawyer said. “IBP has a pretty strong argument that it was not material and they had disclosed it,” the attorney said. Yet receipt of the SEC letter could sink this otherwise solid defense, the lawyer said. Tyson may be able to argue that IBP’s counsel was “reckless” by failing to completely read the letter. “People who practice securities law ignore an SEC letter at their peril,” the lawyer said. “If I had gotten that letter, I would have read it, even if it dealt just with those proxies.” Steven L. Meltzer in the McLean, Va., office of the Shaw Pittman law firm, said Tyson’s argument also has another potential weak link. IBP officials disclosed the SEC letter to the company Jan. 8. Tyson then waited more than 10 weeks to void the deal, during which time it issued a statement reaffirming its support of the deal. “If Tyson said it wanted to go forward after they had the information, then you could argue they waived their right to object to it later,” Meltzer said. Related chart: Food fight Copyright (c)2001 TDD, LLC. All rights reserved.

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