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It is a relatively short 120 miles between Portland, Ore., and Federal Way, Wash., the headquarters, respectively, of paper and lumber manufacturing rivals Willamette Industries Inc. and Weyerhaeuser Co. But for the past 13 months, as the larger Weyerhaeuser pursued Willamette with an unsolicited $6 billion buyout, the two companies have been oceans apart. As 2001 waned, however, the distance between the negotiating positions the two companies staked out began to shrink. Spurred by a defensive move from Willamette and a sweetened offer from Weyerhaeuser, the bankers advising the combatants, sources say, have started to discuss a deal. COMMON TRAITS The two companies have much in common. Their product mixes, for example, include paper, containerboard and building materials. But the most important nexus may be Weyerhaeuser CEO Steve Rogel, who spent two years at the top spot in Willamette. Lured in 1997 by the larger, more corporate style of Weyerhaeuser, Rogel’s mandate from his new board was unambiguous: Make us like Willamette. An engineer by trade, Rogel started methodically, offering several times to buy Willamette, first with a stock swap in August 1998 and then with a cash-and-stock offer two years later. Weyerhaeuser then in November 2000 offered $48 per share in cash privately, then went public with the offer. Willamette, a lean company with a distinctive culture of decentralized mid-level management flexibility known as the “Willamette Way,” answered with a distinctive response: You wish. Rogel and Willamette chairman William Swindells met to discuss the August 2000 offer but have since let the financial advisers handle the phone calls. The companies’ executives also have worked to avoid each other at industry conferences and let full-page newspaper ads and harshly worded news releases do the hand-to-hand combat for Wall Street and, critically, Willamette shareholder acceptance of a merger. That said, Willamette’s and Weyerhaeuser’s recent announcements that some sort of a discussion of Weyerhaeuser’s latest $55 per share offer would take place heartened analysts who had watched the two slug it out in public. “You can’t really say this has been, on either side, well managed,” said Mark Wilde, an analyst with Deutsche Banc Alex. Brown. “It’s not good to have it going on for a year.” CULTURAL DIFFERENCES Looking beyond the financials, said Lise Shonfield of J.P. Morgan Chase & Co., the concern is that culturally, after such a bitter fight, the acquisition will be difficult to fully integrate. The financial advisers, Morgan Stanley for Weyerhaeuser and Goldman, Sachs & Co. for Willamette, resumed talks in late December for the first time in weeks, according to sources. Willamette, as it said it would, also met with Georgia-Pacific Corp., an Atlanta-based forest products company, to discuss a transaction involving Georgia-Pacific’s building products business. News of that possible combination — exactly what paper or lumber mills Willamette would buy from Georgia-Pacific has not been disclosed — prompted Weyerhaeuser to raise its offer, something it long promised to do if Willamette sat down to negotiate a sale. The latest $6.05 billion buyout offer is a take-it-or-leave-it $55 cash per share. “Our offer is not a negotiating tactic; it represents the absolute maximum price we are prepared to pay for Willamette,” Rogel said. Willamette will abandon its bid if any Willamette-Georgia-Pacific deal is made. The next move is Willamette’s and should come in mid-January when its board, already one-third in Weyerhaeuser’s favor, takes up the various proposals. VARYING SCENARIOS Industry watchers say any number of scenarios could play out. Willamette will wait for the expiration of the latest tender offer on Jan. 9 before agreeing to waive its poison pill defense, said Don Roberts, an analyst at CIBC World Markets. That provision discourages any single shareholder from acquiring 15 percent or more of Willamette stock by triggering a flood of new shares and vastly diluting their value. “If the support for [Weyerhaeuser] is not high,” about 60 percent, “our bet is that Willamette will continue to ignore [Weyerhaeuser],” Roberts said. Should that happen, look for Weyerhaeuser to prevail in the next proxy fight for board seats, expected in June, giving it six members on the nine member board. He noted that if Willamette somehow unites with Georgia-Pacific, Weyerhaeuser has other options for its $6 billion war chest. He and other analysts put Canadian lumber company Nexfor Inc., Boise Cascade Corp., without its office products division, and Packaging Corp. of America as likely acquisition targets. If Willamette declines the higher offer it will have few other options than proceeding with a combination with GP, Roberts said. “In this scenario, shareholders in Willamette should be appalled by such a destruction of value.” The $55 offer is exactly the amount at which the Clark family, a descendant of Willamette’s founders and holder of a 2 percent to 3 percent stake, said they would tender. Other family members would likely follow suit, analysts say. There’s a 70 percent chance the families will direct Willamette chairman Swindells, who owns about 4 percent of the outstanding shares, to take the money, posits Mark Connelly of Credit Suisse First Boston. He says Willamette “deserves kudos for this late, but very good move” with Georgia-Pacific, though there is a 29 percent chance the board will drag out a decision on the offer until June, looking for a graceful exit. “Weyerhaeuser will still be there in June at $55,” he said. The last 1 percent is for the “highly doubtful” possibility of a combination with Georgia-Pacific. Willamette management said they would not sign a deal that was dilutive, said Peter Ruschmeier, an analyst with Lehman Brothers Inc. “I take them at face value,” he said. Negotiations with Georgia-Pacific are still in the early stages. Nevertheless paper and forest products industry observers say a deal to unite the Pacific Northwest rivals appears inevitable. Questions remain about whether Willamette’s management can walk away with its pride intact and if Weyerhaeuser can transform from a well-heeled stalker to a well-intentioned owner of an $18 billion company. Copyright (c)2002 TDD, LLC. All rights reserved.

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