Why Weyerhaeuser Pines for Willamette


You have to feel for Weyerhaeuser CEO Steve Rogel. He has engineered a textbook turnaround at the world's third-largest forest-products company since taking the helm three years ago. He has acquired competitors, squeezed costs, boosted margins, and reawakened the sleepy timber giant. Fourth-quarter earnings at the Federal Way (Wash.) company exceeded expectations for the 11th time since he took the top job. Even declining paper prices and rising energy costs, which are typically red flags for the timber business, shouldn't steamroll the company's steady success. Weyerhaeuser Co., a Northwest icon for a century, is back.

But the most coveted prize of all eludes Rogel. In November, Weyerhaeuser (WY) bid $5.4 billion for Willamette Industries Inc. (WLL), the Portland (Ore.) company where Rogel cut his teeth for 25 years before taking the helm there. He learned everything he knows about the timber, pulp, and paper business at Willamette. But the company refuses to be sold. Through antitakeover tactics and a community call-to-arms, this scrappy, very profitable competitor is maneuvering to remain independent.

Willamette CEO Duane McDougall says Weyerhaeuser's offer of $48 a share undervalues his company and is an "opportunistic attempt" to grab it at a time when timber-company stocks are down. "To think this will be one big happy family is disingenuous," McDougall says.

PAPER AND PINS. With these one-time associates pitted against each other, the fight has gotten personal. Shortly after Weyerhaeuser's bid, Willamette executives taped a picture of Rogel to a voodoo doll, placed it on a desk in a hallway that ran through the executive suites, and occasionally jabbed pins into their former colleague's face. The voodoo doll is gone now, but the hard feelings linger. Says McDougall: "It was a pretty good indication of how people were feeling."

The mood is just as intense at Weyerhaeuser. So far, the company has shown no intention of dropping its bid. It has even extended its tender offer beyond an earlier Feb. 1 deadline, encouraged by 51% of Willamette's shareholders pledging to tender shares to Weyerhaeuser. Though Rogel says he's pleased with the result, McDougall says the vote is merely a referendum. If Weyerhaeuser accepted the tendered shares, Willamette would trigger its poison pill to dilute them.

So Weyerhaeuser is working on Plan B. It will carry the fight to Willamette's annual shareholders meeting, scheduled for June 7, with a planned proxy battle. The company will offer a slate of candidates for the four board seats up for election. With a staggered election for its 10 board positions, Willamette could fend off the takeover for at least another year. But Weyerhaeuser is digging in. "We're a bit perplexed here," Rogel says. "It's beyond me as to what's going on when you have an offer so compelling that they should ignore it."

Though Willamette's defiance may play well on the home front, few on Wall Street are very happy. Investors want to know how Willamette will keep the stock propped at $48 a share if Weyerhaeuser withdraws its bid -- especially in a weak economy. They haven't heard Willamette execs offer any convincing plan to prevent the stock from dropping back to $33 a share, which was the price before the merger bid. Willamette closed at $47.16 on Mar. 8. "They want to run an independent company, but the question is whether they're fulfilling their shareholder responsibility," says D.A. Davidson analyst Steve Chercover.

CONSOLIDATION. For the fragmented timber and paper industry, shareholder responsibility means undergoing a much-needed consolidation to eliminate inefficient businesses and unneeded capacity. Last year, rivals International Paper acquired Champion Intl. and Georgia Pacific grabbed Fort James. Weyerhaeuser has snatched two smaller companies -- MacMillan Bloedel and TJ Intl. Large customers such as Office Depot or Home Depot want fewer suppliers to fill all of their paper and lumber needs. They're putting pressure on pricing, forcing the forest-products companies to shave costs by growing bigger through mergers.

For Rogel, Willamette is the crown jewel of his grand strategy to become one of the industry's dominant global players. He has investors on his side: They're pledging the majority of shares to Weyerhaeuser. "Clearly nobody understands better than Steve Rogel the strength Weyerhaeuser can bring to Willamette or the benefit Willamette can bring to Weyerhaeuser," says Mark Connelly, analyst for Credit Suisse First Boston.

The two companies may be a good fit, but a merger means Willamette would lose what makes it so attractive

Even Willamette executives acknowledge the two companies appear to be a good fit in terms of products. Weyerhaeuser is big in timber and plywood. Willamette runs a strong white-paper business. The Portland company is more nimble and runs very efficient, low-cost mills. With $16 billion in sales, Weyerhaeuser is bigger and has more resources. That's why Rogel likes what he sees. Such a combination could generate $300 million in annual savings, he calculates. And future growth possibilities appear as big as the tallest Douglas firs. "I'm hopeful we can create one globally world-class company by putting these two companies together," Rogel says.

But the acrimony will make that tough. Analysts estimate Willamette employees and family members own about 30% of the shares. Of the remaining shares, 55% are institutional and 15% are sold by retail brokerages. But Willamette leaders have drummed up plenty of opposition, rallying employees, area residents, and even the city of Portland against the takeover bid.

The Willamette board refuses to negotiate. Since the hostile bid surfaced in November, the board has plumped up executives' golden parachutes and withheld shareholder mailing lists from Weyerhaeuser to block the bid. And it threatens to trigger a poison pill that would massively dilute shares and has warned shareholders that its defense might cost $60 million. McDougall says Willamette is prepared to fight to the bitter end, a process he concedes "would be pretty painful for everybody."

Willamette's best defense may prove to be its attractive balance sheet. Since 1990, the company has churned out consistently strong double-digit profit margins climbing as high as 29%. No other major competitor -- not even Weyerhaeuser -- can best Willamette where it counts the most. During the same time period, Willamette also has produced a higher return on assets than its competitors. Last year, the company boosted earnings by nearly 40%, to $345 million on sales of $4.7 billion.

SMALL AND NIMBLE. Willamette is one of the few forest-product companies that didn't warn investors that earnings would drop below fourth-quarter estimates. Falling prices, higher energy costs, and unfavorable foreign exchange rates have crimped recent earnings for many timber and paper companies. But the secret to Willamette's success stems from being a smaller, more nimble company that focuses on being the low-cost supplier of paper and lumber. "Willamette is far and away the most successful company in the industry," CSFB's Connelly says.

The combination of strong earnings and a pugnacious streak might be enough to keep Willamette independent. Senior executives say they're prepared to watch the stock plummet should Weyerhaeuser withdraw. They're also prepared to snap up some smaller rivals if that would shut up Wall Street. Even investors supportive of the merger are beginning to have second thoughts. "The longer this thing goes on and the uglier it gets, the advantage of complementary cultures becomes smaller and smaller," says Deutsche Bank analyst Mark Wilde. "I'm less and less optimistic about a deal."

In the era of consolidation, Weyerhaeuser may be right to seek Willamette, but it may be a paradise lost. Willamette's glow comes from being an independent company. That would disappear in a merger. With bitter feelings bound to linger after what seems destined to be a drawn-out battle, this could end up being the worst fight Rogel ever picked. By Stanley Holmes in Seattle


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