4 case study

Willamette(

In the fall of 2000, Weyerhaeuser Company, one of the worlds largest integrated timber companies, made an offer to purchase Willamette Industries, also a large integrated timber company, for $48 per share in cash. After three days of consideration, the board of Willamette rejected Weyerhaeuser’s offer citing that the price, valued at $5.3 billion, did not accurately reflect the value of the company or its future growth potential. The immediate rejection, which many in the industry expected, placed Weyerhaeuser in the position of deciding whether or not to initiate a hostile takeover attempt.

After two weeks of consideration, Weyerhaeuser announced that it would launch a hostile takeover of the company settling on a price of $50 per share. For months, Willamette considered the offer with several rejections along the way and an announcement that it would purchase roughly ten million shares in a ongoing share repurchase program that would continue depending on stock price.

Finally, on January 2, 2002, Weyerhaeuser raised its bid to $55 per share and stated that it was as high as it could go. Two days later, Willamette Industries announced that the price was inadequate and that it was terminating its discussions regarding Weyerhaeuser’s acquisition offers.

Was the deal over? Weyerhaeuser knew that the synergies and potential fit were superb. Was it just a question of raising the price or not? Weyerhaeuser, if they really wanted Willamette, needed to decide whether or not to go back to the negotiation table and force a takeover with a price that both could accept.

Background

Willamette Industries

Established in 1906 in Dallas, Oregon, Willamette Valley Lumber company grew into one of the largest integrated timber companies in the world with 105 manufacturing facilities in 24 states, France, Ireland, and Mexico.

Business Segments

Paper

Willamette produces a wide range of paper and paper products for internal and external customers. For white paper, the company’s four paper mills manufacture 11% of the U.S. uncoated free sheet production and 8% of the country’s bleached hardwood market pulp.

Through six cut sheet facilities, the company also manufactures 23% of the nation’s communication paper and utilizes several brands including its private Willamette name brand.

The company also manufactures several brown paper products including linerboard, bag paper, and cardboard sheets for boxes. Willamette’s four bag plants produce 14% of the country’s paper bags.

Building Materials

The Building Material business segment is divided into four primary types of products: Lumber, Structural Panels, Composite Panels, and Engineered Wood Products.

Through the company’s nine sawmills, the lumber products are marketed through independent wholesalers and distributors throughout the United States. As of December 31, 2000, the company held approximately 2% of the country’s lumber production.

Plywood panels and oriented strand board are manufactured at one plant and account for approximately 8% and 3% of the US production of structural panels. Like lumber, these products are marketed through independent wholesalers and distributors throughout the United States.

Through four particleboard plants, the company manufactures approximately 14% of the US market. A smaller plant in France manufactures approximately 1% of European production. Three other plants produce medium density fiberboard and manufacture approximately 22% of the US market. These products are also sold and marketed through independent wholesalers and distributors.

The Engineered Wood Product segment has three primary products: Laminated beams, laminated veneer lumber, and I-joist products. Through two plants, the laminated beam production accounts for 24% of US production. Three laminated veneer plants produce nearly 11% of the market production and through two I-joist facilities, the company makes approximately 9% of the total US market production. These products are sold both in the domestic and international markets.

Timber Assets

Approximately 69% of Willamette’s long-term saw log needs come from the company’s 1,729,000 acres of timberland located in Louisiana, Texas, Arkansas, Oregon, Tennessee, Missouri, and the Carolinas. The balance of the company’s timber needs come from private timber sales in the open market.

Energy Consumption

The manufacturing of timber products, by its very nature, tends to consume a tremendous amount of energy. To cope with these costs, Willamette facilities are able to generate 61% of their energy needs through the burning of waste materials and the recycling of pulping liquors.

Employees

At year-end 2000, Willamette employed approximately 14,975 persons with nearly 45% of these employees represented by labor unions and collective bargaining agreements. One agreement with approximately 1,640 employees expired in 200 and was renegotiated.

The company has experienced very little turnover in the salary level positions. Approximately 46% of these employees have been with the company for at least twelve years.

Weyerhaeuser

Incorporated in 1900, Weyerhaeuser is one of the world’s largest integrated forest products companies with offices and or operations in 17 countries and an employee base of 47,244. The focus of the company has been to grow and harvest timber for the sale and distribution of forest products, and real estate development and construction.

The company is principally divided into four business segments: Timberlands, Wood Products, Pulp, Paper, & Packaging, and Real Estate and related assets.

Timberlands

Weyerhaeuser manages 5.9 million acres of company owned land and .5 million acres of leased land in North America. The timber in these acres produces mostly high quality lumber and related products for distribution in the United States and in the International markets. The company also has several renewable and long-term licenses for 31.6 million acres throughout Canada. The inventory of timber in these areas is approximately 588 million cunits. To ensure a steady quality and quantity of timber, the company has an extensive planting of high quality trees and suppresses those species of tree that cannot be brought to market.

Wood Products

Weyerhaeuser produces and sells hardwood lumber, treated lumber, plywood and veneer, softwood lumber, engineered wood, and composite panels. These products are predominately by the company’s internal sales force.

Pulp, Paper, & Packaging

The company manufactures chemical wood pulp for distribution throughout the world, paper products that include both coated and uncoated papers, and containerboard sheets for packaging.

Real Estate and Related Assets

Through the company’s subsiary, Weyerhaeuser Real Estate Company, the company develops and constructs single family houses for sale including large planned communities.

Conclusion

Weyerhaeuser management knew the dangers of betting too much on synergies for valuation. There was just no way of knowing if the potential cost savings and efficiencies could be realized in the time necessary to ensure the transaction would add to earnings upon competition. However, it was also believed that the purchase would also make Weyerhaeuser a global timber giant and management desperately wanted to do the deal. The only question was whether or not $55 per share was really the most they could afford and if they could raise the offer based on updates to a discounted cash flow model using several discount rates from 12% to 15%.

Exhibit 1

Willamette

Income Statement

(in thousands)

					2000		1999		1998
	Net Sales				$4,651,761		$4,272,957		$3,880,249
	Expenses
	Depr\Amort & Cost of Fee Timber	$314,999		$303,719		$371,141
	Materials, Labor, & Other Operating	$3,414,686		$3,165,275		$3,006,572
	Gross Profit			$922,076		$803,963		$502,536
	Selling and Administration		$268,819		$253,694		$239,792
	Other Income\Expense		($19,737)		($11,710)		$2,029
	Operating Earnings			$633,520		$538,559		$264,773
	Interest Expense			$119,133		$125,284		$131,990
	Earnings before Tax			$514,387		$413,275		$132,783
	Income Tax			$169,500		$152,800		$43,800
	Net Earnings			$344,887		$260,475		$88,983

Exhibit 2

Willamette

Financial Snapshot

(in thousands)

				2000		1999		1998
	Capital Expenditures		$398,888		$290,246		$441,839
	Working Capital		$396,094		$457,471		$366,846
	Long Term Debt		$1,542,926		$1,628,843		$1,821,083
	Total Debt			$1,670,425		$1,645,716		$1,870,602
	Total Assets		$5,117,670		$4,797,861		$4,697,668
	Shares Outstanding		$109,417		$111,587		$110,981

Exhibit 3

Willamette

Assets

(in thousands)

				2000
	Current Assets
		Cash		$24,284
		A\R		$459,591
		Inventory		$473,788
		Prepaid Expenses	$35,154
	Total Current Assets		$992,817
	Timber & Related Facilities	$1,014,285
	Property, Plant, & Equip	$3,017,593
	Other Assets		$92,975
	Total Assets		$5,117,670

Exhibit 4

Willamette

Liabilities and Shareholder Equity

(in thousands)

				2000
	Current Liabilities
	Current Portion of LT Debt	$5,499
	Notes Payable		$122,000
	A\P			$253,292
	Accrued Payroll		$85,084
	Accrued Interest		$33,910
	Other Accrued Expenses	$77,754
	Accrued Income Tax		$19,184
	Total Current Liabilities	$596,723
	Deferred Income Tax		$568,273
	Other Liabilities		$28,705
	Long Term Debt		$1,542,926
	Stockholder's Equity		$54,709
	Capital Surplus		$229,598
	Retained Earnings		$2,096,736
	Total Stockholders Equity	$2,381,043
	Liabilities & Stockholder Equity	$5,117,670

Exhibit 5

Willamette

Quarterly Snapshot

(in thousands)

	2000		Net		Gross
			Sales		Profit
	1st Quarter	$1,167,126		$224,163
	2nd Quarter	$1,188,060		$240,358
	3rd Quarter	$1,169,585		$226,052
	4th Quarter	$1,126,990		$231,503
			$4,657,761		$922,076
	1999		Net		Gross
			Sales		Profit
	1st Quarter	$970,483		$141,942
	2nd Quarter	$1,056,319		$195,757
	3rd Quarter	$1,137,615		$239,780
	4th Quarter	$1,108,540		$226,484
			$4,272,957		$803,963
	1998		Net		Gross
			Sales		Profit
	1st Quarter	$942,384		$120,761
	2nd Quarter	$991,509		$125,578
	3rd Quarter	$1,003,242		$148,476
	4th Quarter	$943,114		$107,721
			$3,880,249		$502,536

Exhibit 6

Willamette

Property, Plant, & Equipment

(in thousands)

					2000		1999
	Land				$48,436		$41,985
	Buildings				$417,700		$380,967
	Machinery & Equipment		$4,924,423		$4,569,273
	Furniture & Fixtures			$96,597		$92,411
	Leasehold Improvements		$8,023		$6,619
	Construction in Progress		$236,950		$145,479
	Total				$5,732,129		$5,236,734
	Less Accumulated Depreciation		$2,714,536		$2,485,524
	Net Property, Plant, & Equipment		$3,017,593		$2,751,210

((copyright 2002 – John D. Sullivan No part of this case study may be reproduced, stored in a manner for future retrieval or editing, or transmitted in any form without the copyright holder’s written permission.

This case was written to stimulate class discussion and analysis and is not a critique of an effective or ineffective management situation.

� Each cunit represents 100 cubic feat of solid timber.