Deal pros are closely watching developments in an unusual battle in the Delaware Chancery Court that marks the first legal square-off between an increasingly used restructuring format and a straightforward acquisition. In the opening rounds, the contest is being waged largely on contract grounds. But the outcome, including a possible settlement, could have significant impact on whether a restructuring technique or an orthodox acquisition is the best way to create value for shareholders of public companies. The case also marks a rare instance in which a hedge fund has jumped a deal and wound up as a successful acquirer. The contestants are diversified NACCO Industries; small appliances producer Applica; and hedge fund Harbinger Capital Partners, which had owned about 40% of Applica and wound up acquiring the company for an outlay of about $88 million to buy out public stockholders. The battle reached the court after NACCO filed suit in mid-November asking that Applica be required to go through with a reverse Morris Trust deal, which was junked after Applica accepted a $6-a-share offer from Harbinger. The Morris Trust arrangement called for NACCO to spin off its Hamilton Beach/Proctor-Silex small appliances operation, which would then be merged with Applica, whose shareholders would own 25% of the combined company. Harbinger countered with a straight acquisition offer, with a 31% premium over Applica’s stock price, claiming that the 25% stake shortchanged shareholders and attacking plans to pay NACCO an upstream dividend of $110 million. NACCO’s complaint charges a breach of the merger agreement that created the Morris Trust deal, and that Applica and Harbinger had discussions in contravention of the pact. Additionally, Harbinger is charged with tortious interference for jumping the deal and is accused of providing misleading information in its 13-D filings, which initially said the Applica stake was only for investment purposes and was amended late in the game to add the possibility of an acquisition. “It’s going to be interesting, if the case is not settled in some fashion, to see just how these issues are treated,” says Robert Myers of Dewey & Ballantine. “Hedge fund activism is a hot topic.” It’s too early to tell whether shareholder issues will play any role in the results – principally whether one format trumps another in creating value. For example, the value pegged to a straight cash deal is easy to calculate, but whether a more-complex, stock-based reverse Morris Trust generates more or less value and whether the time frames make any difference in that determination have yet to be tackled. A straight cash-out is quick and maximizes value in the short run. The reverse Morris Trust format is tax-free but is hard to put together, needs more time to execute, and usually needs shareholder approvals. And there is long-run potential for maximizing value because the shareholders maintain a continuing interest in the combined company. Strategically, the reverse Morris Trust is a tax-free channel to create scale in an industry that requires larger players. NACCO, whose key businesses are lift trucks, housewares, and mining, sought to exit traffic appliances, a thin-margin business, under intense competitive pressures from low-cost imports and demands of big-box retail customers. Takeover defenses Tidewater, Solectron Scuttle Pills Two more poison pills were snuffed out at publicly held companies during November. Offshore oil services firm Tidewater let its shareholder rights plan expire while electronics manufacturer Solectron dropped its pill about five years before it was scheduled to end. In both cases, the companies kept the possibility of reinstating their pills in their arsenals. Newly adopted policies allow them to restore the pills if directors believe it’s necessary, subject to approval by shareholders within 12 months. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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