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Unsolicited Aggression


Lonnie "Bo" Pilgrim wears a broad-brimmed black pilgrim's hat and brings along a stuffed chicken named Henrietta when he makes public appearances. On his lighthearted Web site, "Bo's World," video clips show Pilgrim leaping out of airplanes with live chickens in jump gear. And he talks on the site about the virtues of raising chickens in little country towns.

In many ways, Pilgrim, the 78-year-old chairman and founder of chicken producer Pilgrim's Pride Corp. (PPC) in Pittsburg, Tex., would seem to be an unlikely person to launch a hostile takeover bid. Nevertheless, Pilgrim started a brutal chicken fight when a rival, Atlanta-based poultry processor Gold Kist Inc., (GKIS) refused to sell out to him in February. Instead of giving in, Pilgrim launched a four-month-long proxy battle to appeal directly to shareholders. On Dec. 4, Gold Kist's board capitulated, agreeing to sell the company to Pilgrim for $1.1 billion.

Pilgrim's Pride is now America's largest chicken producer, ahead of Tyson Foods Inc. (TSN) And the company's management team describes their relationship with Gold Kist as cordial. The hostile bid "might not have been friendly to members of the board or management," says Chief Financial Officer Richard A. Cogdill, but "our proposal was very friendly to shareholders." (Pilgrim's Pride is paying $21 per share for Gold Kist, a 62% premium over the price on the date of the initial bid.) Bo Pilgrim declined to comment.

Watch out, CEOs: Takeovers are turning hostile—again. Pilgrim's unfriendly offer is only one of a barrage of unsolicited takeover bids hitting executive suites globally. In polite Japan, two paper companies recently duked it out. In Sweden, truckmaker Scania (SCV.A) is fighting off a bid by German rival MAN. On Dec. 12, NASDAQ formally made a $5 billion hostile bid for the London Stock Exchange. Some companies are even enlisting the assistance of hedge funds and unions to pour on the pressure. Meantime, private equity groups are becoming more pushy, busting in on each others' deals, and occasionally making hostile offers themselves.

Add it all up and in 2006, corporate and private equity buyers worldwide lobbed 110 uninvited bids worth $351 billion at acquisition targets. That's the highest number since 2000, when 129 offers worth $117 billion were launched, according to Thomson Financial. And there have been big deals, like Rotterdam-based Mittal Steel Co.'s $41.5 billion hostile bid for rival Arcelor, which Arcelor's board ultimately approved after it was sweetened a couple of times.

Bankers don't expect the wave of hostility to crest any time soon. Companies and financial buyers awash in cash are anxious to put their money to work while interest rates remain low and financing is plentiful and cheap. The industrial companies in the Standard & Poor's 500-stock index alone have built up $610 billion in cash on their balance sheets, nearly twice the $329 billion they had in 2000. Private equity firms have amassed at least $2 trillion of buying power, bankers estimate.

At the same time, many companies look more vulnerable than ever after having stripped out their takeover defenses to satisfy good-governance demands. Only 118 companies adopted so-called poison pill plans in 2006, compared with 234 on average every year in the '90s, according to Thomson. As a result, directors are more responsive to outside offers. "When companies are approached, it often invites a lot of rumor and speculation, and sometimes it's difficult to put the genie back in the bottle," says Paul J. Taubman, global head of mergers and acquisitions at Morgan Stanley (MS).

BUY OR BE BOUGHT

Many executives are making unsolicited bids for companies because they believe they must buy their rivals or risk being bought out as their industries consolidate. When Warner Music Chairman and CEO Edgar Bronfman Jr. was asked at an investors' conference on Dec. 5 why the company launched a hostile bid for EMI Group over the summer after EMI made an unwelcome bid for Warner Music Group Corp. (WMG), he explained: "We decided that if there was to be a combination, we actually could create more value for our shareholders in an acquisition of EMI than going the other way." The two sides recently ended the volley, fearing the combination would not fly after European regulators began another review of a merger between Sony's (SNE) music division and BMG.

That same fear prompted AirTran Airways to launch an unsolicited $288 million bid for Midwest Airlines on Dec.13 after Midwest refused to engage in private merger talks. "You can debate the merits of consolidation, but if it happens, no one wants to be left out," says AirTran President Robert L. Fornaro.

Besides, investors are rewarding hostile moves. The stock price of Pilgrim's Pride, for example, zoomed 12% after it announced a victory over Gold Kist. "Unlike earlier merger waves, hostile deals have been well received by the market, in part because they are more strategic now," says Stefan M. Selig, vice-chairman for global investment banking at Banc of America Securities (BAC), the investment banking arm of Bank of America Corp. Another reason is the larger role hedge funds play in shareholder bases. "Hedge funds can typically become a proponent for the highest offer, rather than a proponent for keeping a company independent," says Goldman, Sachs & Co.'s (GS) Gordon E. Dyal.

Take into account all of the incentives, and it means that a deal is no longer a deal. Analysts speculate that a hostile bidder like Australian mining giant BHP Billiton (BHP) may soon swoop in to bust up a friendly $25.9 billion merger that Freeport-McMoRan Copper & Gold Inc. (FCX) unveiled with copper miner Phelps Dodge Corp. (PD) in November. And there's talk that an airline, possibly partnering with private equity groups, might try to crash US Airways Group Inc.'s (LCC) $15.8 billion hostile bid for Delta Air Lines Inc. (DALR) when the company files its formal plan of reorganization by the end of December.

Anything can happen. Just ask Dave Crane. The CEO of New Jersey energy provider NRG Energy Inc. (NRG) thought he had an understanding with Edward R. Muller, the CEO of rival Mirant Corp. (MIR) in Atlanta, that the companies would go their separate ways after they decided against a "merger of equals" in early May. But a few weeks later, Muller walked up to Crane at a Goldman Sachs energy conference and handed him a letter informing him that Mirant was launching an unsolicited $16 billion bid for NRG—the largest uninvited bid in the U.S. this year. "It was an extremely bold move for a company only out of Chapter 11 for three months to buy a company that's larger than them," Crane says.

NRG fired back a blistering letter saying that it wasn't interested. Then Mirant sued NRG for failing to consider its offer. And NRG accused Goldman Sachs, which it had used earlier for banking work, of passing along confidential information to Mirant. Goldman denied the allegations. Finally, Mirant backed down when it came under attack by activist hedge fund Pirate Capital. Pirate insisted that if Mirant didn't put itself up for sale it would try to take control of Mirant's board. Pirate declined to comment. Mirant did not return phone calls.

In some of the nastier battles, executives are hurling insults at their foes. On Dec. 6, Leif Ostling, CEO of Swedish truckmaker Scania, described a $13.6 billion hostile bid by German truckmaker MAN as a "blitzkreig" in an interview, and compared his defensive role at Scania to that of Winston Churchill defending Britain from the Nazis. Ostling later apologized for the remarks, which outraged MAN managers and German politicians, all the more so since MAN's CEO, Hakan Samuelsson, is a former Scania executive and a Swede.

In Chicago, James P. Bouchard, CEO of steel distributor Esmark Inc. accused Brazilian steelmaker Companhia Siderúrgica Nacional and the management of Wheeling (W.Va.)-based Wheeling-Pittsburgh Steel Corp. (WPSC) of attempting to buy "an American steel producer with a mask and a gun," in a letter filed with the SEC after Wheeling-Pittsburgh resisted Esmark's $473 million hostile bid. The West Virginia company had already agreed to merge its plants with the Brazilian steel maker's North American assets. The Brazilian steelmaker declined to comment on Bouchard's letter.

Bouchard didn't stop there. He solicited the support of the United Steelworkers of America and hedge fund Tontine Capital Management, owner of a big stake in Wheeling-Pittsburgh. With their support, Bouchard was elected Wheeling-Pittsburgh's CEO on Nov. 17. Its new board, led by Bouchard, will review both Esmark's offer and the merger plans in January.

Even founders are making hostile bids for the companies they created. On Nov. 17, Jerry Moyes, founder of Swift Transportation Co., launched an uninvited offer to pay $29 for Swift's shares, which had been trading around $23. The board rejected Moyes' bid 10 days later. But analysts expect him to come back and fight another round. "You'll have a lot of upset shareholders if there is no deal," says Chaz Jones, research analyst at Morgan Keegan & Co.

By Emily Thornton, with Dean Foust in Atlanta, Gail Edmondson in Frankfurt, Tom Lowry in New York, and bureau reports


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