Wachovia war hits the courts but short truce declared; International Rectifier rebuffs Vishay

By Paul Deckelman

New York, Oct. 6 - The already convoluted war of words between Citigroup Inc. and Wells Fargo & Co. over which big bank should be allowed to walk off with troubled rival Wachovia Corp. exploded into a multi-front legal battle royale over the weekend and on Monday, with legal briefs ricocheting around various courts in several jurisdictions like shrapnel until late in the day the three companies announced a temporary cease-fire.

Meantime, federal regulators were looking to broker some kind of an orderly division of Wachovia's assets between Citi and Wells Fargo in an attempt to calm an already jittery financial market.

Wachovia investors, who had voted with their wallets on Friday and had taken the Charlotte, N.C., banking company's shares sharply higher on news of Wells Fargo's deal to buy the company, pulled back Monday, but only moderately.

Another merger-and-acquisition melee meanwhile going on between International Rectifier Corp. and would-be acquirer Vishay Intertechnology Inc. heated up, in preparation for International Rectifier's annual shareholders meeting on Friday. Vishay - trying to wrest control of Rectifier's board from its management via a proxy fight - said it might be willing to raise its $23 per share offer, under the right circumstances. But International Rectifier warned shareholders that it was just an opportunistic trick.

Alpharma Inc. and King Pharmaceuticals Inc. have on the other hand turned down the intensity level of their clash over King's $37 per share offer for Alpharma; the two companies signed a confidentiality agreement under which Alpharma will hand over key data so King can do diligence and perhaps raise its offer, even as another potential bidder lurks in the background.

And elsewhere in the pharmaceutical/biotechnology sphere, things seemed downright harmonious at ImClone Systems Inc., which accepted Ely Lilly & Co.'s $70 per share takeover bid, an offer that easily trumped Bristol-Myers Squibb Co.'s final price of $62. Bristol-Myers said it would not get into a bidding war with larger, better-financed rival Lilly, contenting itself with the profit it will make on the nearly 17% of ImClone that it already owns. But the harmony may not last long, as Bristol-Myers and ImClone - partners in the successful Erbitux cancer drug - disagreed on whether Bristol-Myers had a piece of some other drugs in the ImClone pipeline.

While these things were taking place, Wall Street was getting its collective clock cleaned, Friday's approval of the $700 billion government bank bailout apparently having little impact on the fears of panicky investors worldwide. The bellwether Dow Jones Industrial Average - which swooned some 800 points intraday - rallied late in the session but still ended down by 369.88 points, or 3.58%, at 9,955.50 - its lowest close since October 2004.

Broader market indexes were also beaten down, with the Standard & Poor's 500 index down 42.34 points, or 3.85%, to 1,056.89, the Nasdaq composite index off by 84.43 points, or 4.34%, to 1,862.96, and the Russell 2000 index down 23.49 points, or 3.79%, to 595.91.

Legal ceasefire declared in Wachovia war

The complicated Wachovia-Wells Fargo-Citigroup love triangle kept judges busy over the weekend and initially on Monday with dueling rulings from courts in New York and Wachovia's home base of North Carolina on the state, state appellate and federal court levels. After Citicorp's initial victory in a New York state court, which issued an order extending Citigroup's exclusivity rights for negotiating a deal to this Friday - they were to have lapsed on Monday - Wachovia and Wells Fargo, seeking to protect their $15 billion merger deal, went to a state appellate court and got the lower court order overturned, citing irregularities in the process, including the fact that no representatives from either Wachovia or Wells Fargo were initially present when Citigroup lawyers sought the order - a Wachovia lawyer was eventually allowed to join the proceedings by phone - as well as the fact that the New York judge who issued the initial order did so at his summer home - in neighboring Connecticut.

Wachovia filed suit in a federal court in New York, seeking to have the language in Citigroup's exclusivity agreement declared null and void. Citi meantime went back to the New York state courts Monday, filing a $60 billion damage suit against both Wachovia and Wells Fargo. And in far-off North Carolina, two Wachovia shareholders filed suit in a local court in Mecklenburg County - where Wachovia is headquartered - winning a temporary restraining order to prevent Citigroup from enforcing its agreement with Wachovia.

In the interests of bringing some sanity to the crazy quilt of legal proceedings, the three banking giants late Monday announced a temporary truce in the complex legal battle, with all formal litigation activity to be put on hold effective immediately. That truce will hold through noon on Wednesday, subject to possible extension.

The Federal Reserve, seeking to stem the chaos that yet another big bank failure might cause, was meantime urgently seeking to broker an agreement between the three banks, which The Wall Street Journal reported could take the shape of Citi and Wells Fargo carving up Wachovia's assets along geographic lines; the paper suggested that New York-based Citigroup would get Wachovia's branches in the Northeast and mid-Atlantic regions while San Francisco-based Wells Fargo would take over those in the Southeast and California. It said that under the plans being discussed, Wells Fargo would also take over Wachovia's asset-management and brokerage units, which were not part of Citi's original $2.16 billion deal to buy Wachovia's 3,346-branch bank network.

An alternative outcome was outlined Monday by noted hedge-fund manager William Ackman, who was speaking at the Value Investing Conference in New York. Ackman - whose Pershing Square Capital Management owns 7.8% of Wachovia and is known as an activist investor - suggested that Wachovia might be split in two and sold to two or more different buyers.

He said that Citi might buy the whole banking business, as it originally planned, while a partner company - perhaps even current legal adversary Wells Fargo - would get the remaining brokerage, asset-management and insurance operations.

Under another scenario broached by Ackman, J.P. Morgan Chase & Co., Goldman Sachs Group Inc. or Morgan might be in the mix as a possible buyer of Wachovia's St. Louis-based A.G. Edwards brokerage operation.

Wachovia (NYSE: WB) was down 43 cents, or 6.92%, to $5.78, on volume of 110 million shares, a little under the usual volume. Citigroup (NYSE: C) was off 94 cents, or 5.12%, on volume of 159.2 million, one-third above its usual volume. Wells Fargo (NYSE: WFC) dropped 92 cents, or 2.66%, to $33.64. Volume was 59 million shares, a bit less than the norm.

International Rectifier, Vishay continue clash

While the banks in the Wachovia imbroglio were able to call a truce, at least temporarily, there was no such respite in the takeover battle between International Rectifier and would-be acquirer Vishay Intertechnology, who continued their war of words ahead of Friday's scheduled International Rectifier shareholder meeting, each side soliciting proxies and touting opinions from proxy advisory firms either opposing or supporting Vishay's $23 per share bid.

Vishay noted that Risk Metrics Group endorsed its efforts to put three independent directors on International Rectifier's board, warning that "if IRF shareholders vote against the dissident nominees... the lengthy waiting period before shareholders would be allowed to decide the issue [whether there should be a change in control at the board level] could cause Vishay to drop its bid altogether. If it were to do so, some commentators believe that the IRF share price would drop dramatically, an outlook which is also supported by our valuation analysis. Thus, the downside risk of not supporting the dissident nominees could be significant."

International Rectifier meantime touted endorsements from three proxy advisory firms, among them Glass & Lewis & Co., which said that "...Vishay has failed to convince us that IRF directors have not acted in the best interests of shareholders, nor has the dissident established that its nominees would contribute necessary expertise to the IRF board. In our opinion, the IRF board has worked to proactively address the company's accounting investigation and restatement and, as noted, has worked to revamp the executive leadership of the company over the last year..."

Vishay said that it was skeptical of International Rectifier's recently announced plans to improve its operations while remaining an independent company and reiterated that its $23 per share bid was superior to what the El Segundo, Calif.-based power semiconductor manufacturer could achieve on its own.

Still it said that "if International Rectifier can, through good faith negotiations, demonstrate to Vishay that a further price increase is justified, Vishay would be willing to improve its offer. In this regard, Vishay would seek to obtain substantiation of International Rectifier's new business plan, particularly the $60 million reduction in cost of goods sold within two years and the projected substantial increase in revenues and gross margin."

International Rectifier lost no time in trashing the Malvern, Pa.-based high-tech manufacturer's offer for talks, declaring that "our shareholders should not believe Vishay's latest ploy. With neither cash on hand nor committed financing, we do not believe that Vishay is in a position to provide 'immediate value' as it has suggested. A hypothetical increase to an already hypothetical, highly conditional offer should be viewed as yet another attempt to distract shareholders from the serious risks of accepting Vishay's nominees and bylaw proposals."

International Rectifier (NYSE: IRF) was up 29 cents, or 1.67%, to $17.66 on volume of 1.6 million shares, a little less than double the average turnover. Vishay (NYSE: VSH) lost 17 cents, or 2.82%, to $5.85. Volume was 2 million shares, a little more than usual.

Alpharma, King in a meeting of the minds

What up till now has been a similarly acrimonious situation between two other companies took a turn for the better on Monday, with the disclosures in regulatory filings by Alpharma and King Pharmaceuticals that the two manufacturers of pain-killing drugs had signed a confidentiality agreement, which would allow King to conduct due diligence. Bridgewater, N.J.-based Alpharma hopes that the outcome of the process would be King raising its current $37 per share buyout offer, which Alpharma had previously rejected as inadequate.

Bristol, Tenn.-based King recently began a hostile tender offer for Alpharma shares at $37, hoping to convince the company's shareholders to ignore their management; that offer, which is slated to expire at 5 P.M. ET on Friday, remains in effect.

But King choosing to try to work with Alpharma towards a possible consensual transaction is really not much of a surprise, according to analyst Ken Trbovich of RBC Capital Markets, who said that "we thought that they would eventually have to enter into a confidentiality agreement in order to partake in the auction process in a formal way, but we are surprised that it took them this long to do it. This is something we thought would have happened early last week. If you look at the filing, it took them a few days to negotiate the confidentiality agreement."

King's hand was likely forced by Alpharma's revelation last week that it has already received an expression of interest from another company - "Company X," as the analyst has labeled it - which according to Alpharma has already made an offer in a range the lower end of which is still above King's $37 sally.

However, Trbovich told Prospect News that "in the current environment, nobody knows" whether King will now up its offer to around the $40 area to match or exceed the mystery bidder. "Clearly, we think there's a reason King would have to [raise its offer to at least $40] if the other bidder is still in the picture - but based on the filings, we don't know whether 'Company X' is or isn't still involved."

He cautioned that while "given everything that led up to this, apart from the current market conditions, we would say yes" to the notion that King will make another offer to Alpharma at that higher level," the reality is that "given the current market conditions, I would say that's uncertain."

With King now studying Alpharma's books and the sensitive non-public data which the New Jersey company has been keeping under wraps, in order to determine whether a higher bid is feasible and warranted, there is no set timetable for determining when - or even if - a higher final offer would be tendered. Alpharma warned in its filing that such an offer was by no means a certainty.

However, Trbovich cautioned that given everything going on in the capital markets right now, "in our view, there's reason to believe that if they want a quick closing, that involves less risk in terms of news events, then they need to have that wrapped up in the next couple of weeks."

Alpharma (NYSE: ALO) fell $1.76, or 5.05%, to $33.10, on volume of 2.8 million shares, not quite double the usual volume, while King (NYSE: KG) lost 56 cents, or 6.26%, to $8.38, on volume of 3.9 million shares, about one-third more than usual.

Lilly wins ImClone

Another takeover situation came to what appears to be a happy ending for all parties concerned on Monday, when ImClone and Eli Lilly announced that the latter would acquire the former for $70 per share, or $6.5 billion total. That easily beat Bristol-Myers Squibb's final offer of $62 per share, and that company indicated that it would not get into a bidding war with Lilly.

Bristol-Myers owns 16.6% of ImClone and is its partner marketing the successful cancer drug Erbitux - 2007 sales of the drug were $1.3 billion. But ever since Bristol-Myers first offered to buy the 83.4% of ImClone that it did not already own for $60 per share, later raised to $62, things between the former allies turned ugly. ImClone chairman Carl Icahn rejected the Bristol bid out of hand, calling it "absurd," while Bristol threatened to depose Icahn and his board in a proxy fight.

But the New York-based drug giant knew when it was beaten and walked away from its efforts to acquire its crosstown neighbor.

"BMY wisely did not try to outbid the financially stronger Lilly (which can easily afford this purchase) and instead will pocket $1 billion in cash for its share of IMCL and continue its marketing relationship with Erbitux with Lilly as its partner," noted analyst Carol Levinson of the Gimme Credit investment research service in a note Monday.

Analyst David Peterson of Bank of America Securities opined in a research note that having been beaten out in the ImClone sweepsatakes by Indianapolis-based Lilly, Bristol-Myers would like take the pile of money it will receive from its shares - he estimated it would have some $8 billion in cash and marketable securities - and "look for other high potential drugs and biotechs to add to its portfolio."

Bristol-Meyers, he said "needs to find new products and pipelines."

Gimme Credit's Levinson, meantime, speculated that while Bristol-Myers was ending its pursuit of ImClone, it will not go quietly into the night. "We note that BMY took the opportunity today to reaffirm its claims to marketing rights to IMC-11F8 and "other compounds" under development at IMCL, which IMCL's CEO claims are not part of the company's marketing agreement with BMY. Thus, this controversy is likely to continue."

ImClone (Nasdaq: IMCL) rose $1.93, or 2.97%, to $66.89, on volume of 11.5 million shares, or five times the norm. Bristol-Myers (NYSE: BMY) fell $1.11, or 5.43%, to $19.32, on volume of 24.2 million, a little less than twice the usual daily handle. Lilly (NYSE: LLY) was off by $2.89, or 7%, to $38.42, on volume of 18.9 million, three times more than usual.

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