On Friday, poultry giant Tyson Foods was ordered by a Delaware Chancery Court judge to proceed with its US$4.7bn merger with Ibp Inc. The surprise decision set in motion once again a deal aborted on 29 March, when Tyson unilaterally terminated its US$30 a share offer for the Dakota Dunes-based meatpacking firm amid allegations that IBP had improperly induced it into the deal by providing overly optimistic profit estimates, in its so-called Rawhide proxy.

Market analysts have admitted surprise that Vice Chancellor Leo E. Strine came down on IBP’s side during the nine-day trial, as the Springdale, Ark-based Tyson was initially expected to emerge triumphant from the case. He concluded however that Tyson must have realised that the projections were estimates because IBP did not usually make long-term earnings estimates and accepted IBP’s damaging testimony that proved Tyson officials were fully aware of the financial problems at an IBP subsidiary.

Nevertheless, his demand that the original half-cash, half-equity deal, which was struck on a friendly basis on 1 January, be upheld surprised many. The ruling granted IBP its wishes while general practice would have involved the granting of millions of dollars in damages. Strine argued however that a merger would be better for both companies in the long run. Completion of the deal would mean that Tyson avoids paying out a “staggeringly large” damage award while IBP shareholders gain their anticipated stake in the country’s largest chicken producer.

Admitting however that the occasionally bitter trial may hinder working relations between the management teams at IBP and Tyson, Strine did concede that Tyson would be free to replace IBP managers with its own people.

Appealing idea?

Strine’s decision is still subject to the outcome of a possible appeal, as Tyson is expected to take the case to the Delaware Supreme Court. A settlement could be more appealing for the chicken giant however, if it wants to ensure that it avoids shelling out US$30 a share for the firm.

For every US$1 per share it can knock off the original US$30 per share deal, Tyson can save itself US$100m. IBP president Richard Bond hinted during his testimony that the company would be willing to accept as little as US$28.5 per share to avoid litigation, and Tyson may be wise to take the offer while it can.

With this deal, IBP are winners too. Judging by current stock prices, a settlement at this level could mean securing around US$1bn more for IBP shareholders than any other sale could secure. It’s highly unlikely that another bidder will match Tyson’s price, as before the Friday ruling IBP’s shares were only valued at US$18.27 each.

Tyson may however be able to win its case on appeal, but the chances are open to debate. Tyson did secure a small victory in Strine’s ruling that it did not violate the deal back on 22 February, as IBP alleged, but the chance of another court overturning the order to merge are slim. Even Strine commented during his 146-page decision that while parts of Tyson’s case were strong, they were not powerful enough to win.

Strategic sense

On hearing Strine’s ruling, IBP commented that the verdict vindicated its belief that Tyson should not have terminated the merger deal. In a statement, IBP chairman Robert Peterson commented: “We believe this is the most appropriate outcome for our company as well as our shareholders […] as we stated during the trial, it still makes strategic sense for these two great companies to team up.”

“Despite the litigation, we believe the management teams of IBP and Tyson can work together to form a new company that will be the world’s premier protein provider,” he added confidently.

The verdict was met with a terse response at Tyson headquarters however. A prepared statement was released to the effect that it is still too premature to comment until the company has had the chance to fully review the decision.

Strine is meanwhile preparing to meet with both IBP and Tyson next week, by which time both companies should have completed drafts of an order intended to implement his decision.