When Breaking Up Is Sweet

Life is not always fair. Generally this time-honored observation is made in response to something that did not work out as well as it could have, despite one’s best efforts. Life on Wall Street can also seem unfair, but for the opposite reason: Even a failed undertaking can have a multimillion dollar payoff.

Consider the big nobody-loses deal du jour: Tyson Foods’ planned takeover of IBP, the beef and pork processor. Tyson, by far the biggest poultry processor in the country, has apparently beaten out Smithfield Foods in a bidding battle over the long weekend. That contest was sparked by a buyout scheme announced back in October when IBP said it would accept a $2.4 billion leveraged buyout orchestrated by investment bank Donaldson, Lufkin, & Jenrette. While it would seem that DLJ has been definitively dissed, the uncertainties of life are probably resulting in few shed tears: The buyout deal included a $59 million breakup fee (not counting DLJ’s regular fee), which the unit of Credit Suisse now stands to collect. That sum is equal to about 18 percent of IBP’s 1999 profits. That sum is also not bad for a few months’ work on a deal that failed.

And actually it’s no surprise the deal failed since it was pretty roundly criticized from the moment it was announced. IBP shares were trading for around $18 at the time, although various analysts were reported to have estimated its takeover value at somewhere between $25 and $30 a share. The DLJ plan offered $22.25. “The only thing treated worse than [IBP’s] public shareholders have been their cattle,” one analyst complained. A small barrage of lawsuits from disgruntled shareholders followed.

So, eventually, did competing bids from Smithfield (another big pork processor) and Tyson, which has agreed to pay $30 a share in cash and stock. For Tyson, the payoff is a more diversified company, but of course it will be awhile before we know whether that payoff emerges. Smithfield, in an interesting twist, also gets a payoff: In August the firm said it had bought more than 6 million IBP shares. It claimed to have no takeover interest at the time, which meant, if true, that it was making the curious move of simply investing in its biggest rival. The difference between IBP’s share price at the time and the takeover price is roughly $14 per share, meaning Smithfield’s total gain would come to more than $90 million. Again: not bad for coming in second. IBP executives, meanwhile, are now in a better position to keep their jobs, given a merger with less direct overlap than there would have been with rival Smithfield.

Still, there’s at least some uncertainty built into almost all of that as there is with any announced merger. So the safest, and the easiest, money on the table looks to be DLJ’s consolation breakup pile. Breakup fees are routine to merger agreements, for obvious reasons–providing a financial disincentive for one side to weasel out. That sounds reasonable enough, but this is one of those cases where it’s hard not to wonder: DLJ puts together what is widely tagged a low-ball deal, and when subsequent events seem to demonstrate that this is so, then what exactly has DLJ done or endured to deserve $59 million from the very party it low-balled?

The big problem with asking that question, I guess, is that it’s just not fair.