 andhigher business valuations at the time that were reflective of thatliquidity and acquisition activity.
Ultimately, the board decided to ask its financial advisors toidentify  and  contact  potential  strategic  and  financial  buyers  tosolicit their interest in purchasing the company. According to the2001  going-private  memorandum,  the  company’s  investmentbankers identified and contacted 61 potential acquirers to deter-mine their interest in a possible transaction. Of those contacted,32  parties  were  sufficiently  interested  to  sign  a  confidentialityagreement and review a memorandum of offering regarding the
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company  and  its  operations,  which  was  prepared  by  companymanagement  in  conjunction  with  its  investment  bankers.  Theresult  of  that  activity  was  that  Michael  Foods  received  prelimi-nary expression of interest from six potential acquirers. Each ofthe expressions of interest included a preliminary evaluation forthe company expressed as a range of price per share. The low endof the collective range was $28 per share and the high end was $35per share.
After reviewing the preliminary expressions of interest withits advisors and management team, the board invited five of thepotential  acquirers  to  conduct  further  due  diligence  and  refinetheir offers. The sixth potential acquirer, who was the low bidder,was offered an opportunity to increase the level of valuation, indi-cating  that  a  minimum  of  $30  per  share  would  be  required  tomove forward. This acquirer declined to do so, and each of thefive remaining potential acquirers conducted extensive due dili-gence and investigation of the company that included presenta-tions  by  management  and  a  thorough  review  of  the  financialperformance and operating history of the company.
In November 1999, each of the acquirers declined to make aspecific and final offer for the outstanding common stock of theMichael  Foods  Company,  much  to  the  surprise  of  management.Although not specific in their reasoning, the consensus among thepotential acquirers was that the company would be fully valued ator  near  its  then  market  price  of  approximately  $26  per  share.After receiving no definitive offers from the five potential acquir-ers,  the  board,  through  its  investment  bankers,  contacted  thesixth party that had submitted a preliminary expression of inter-est to the company. That potential acquirer, a publicly held diver-sified  food  products  company,  was  invited  to  conduct  duediligence on Michael Foods and its operations in order to refineits valuation for the company.
Over the next several weeks, the potential strategic acquirerconducted an extensive due diligence review of Michael Foods.During the same time, legal counsel and the investment bankersfor the two companies began a discussion of the terms of a poten-tial stock for stock transaction. A number of proposals and coun-terproposals were exchanged regarding an appropriate valuationratio  for  Michael  Foods  and  the  potential  acquirers’  common
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stock. It is believed that this potential acquirer was MorningstarFoods, discussed earlier in this chapter in the Suiza Foods casestudy.
In January 2000, the potential acquirer made a final offer forthe  acquisition  of  the  company  to  the  Michael  Foods  board  ofdirectors. The acquirer proposed a fixed exchange ratio, and themarket  price  for  the  potential  acquirer’s  common  stock  at  thetime  implied  a  valuation  for  Michael  Foods  common  stock  ofslightly less than $28 per share. After extensive discussions withits financial advisors regarding the valuation and stock price datafor the potential acquirer and the relative valuation data for bothcompanies,  Michael  Foods’  board  of  directors  determined  thatthe proposal transaction was not likely to provide shareholderswith adequate value for their equity interest in the company. Atthat point, the board of directors terminated its discussion withthe potential acquirer.
In  January  2000,  Michael  Foods  publicly  announced  that  itsboard  of  directors  had  concluded  a  formal  strategic  reviewprocess without entering into any transactions. The stock priceslowly  sank  to  the  $20-per-share  price  range.  But  the  companyindicated that the board might, without further public announce-ment, resume its formal strategic review process and would fromtime to time respond to follow-on opportunities created by thoseactivities. Reading between the lines, the company made a publicannouncement to the marketplace indicating that it was availablefor sale and was looking for opportunities to have further discus-sions on that matter.
In  June  2000,  Greg  Ostrander,  chief  executive  officer  ofMichael Foods, along with a team of other members of manage-ment, began to seriously consider the possibility of a management-led buyout of the company. On June 6, 2000, Mr. Ostrander metwith Jeffery Michael, a director of the company whose family andrelated  parties  beneficially  owned  approximately  17  percent  ofthe company’s common stock. Mr. Ostrander discussed with Mr.Michael and his family the possibility of the management-led buy-out with the idea that the Michael family would possibly remain insome form as an investor in the company if it became privatelyheld. Mr. Michael expressed a preliminary level of interest in con-tinuing some form of investment in the company, depending onthe circumstances. On July 17, 2000, Mr. Ostrander and Mr. Michael
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met with representatives of various banks to discuss the possibil-ity  of  a  management-led  buyout  of  the  company.  During  thosemeetings, bankers from Rabobank offered to introduce manage-ment  to  a  number  of  financial  sponsors  who  regularly  partici-pated  in  management-led  buyout  transactions.  On  July  19,  Mr.Ostrander and other members of management retained a law firmto provide legal advice to him and members of the managementgroup. On July 25, 2000, Mr. Michael, Mr. Ostrander, and the othermembers  of  the  management  team  met  with  representatives of  Banc  of  America  Securities  to  discuss  the  feasibility  of  the management-led  buyout  and  financing  alternatives.  By  August,Mr. Ostrander thought he had enough potential financing interestin place to have a discussion with the board of directors indicat-ing that he was involved in a preliminary exploration of the feasi-bility of a management-led buyout of the company. The consensusof the board was that Mr. Ostrander was authorized to proceedwith an offer.
Throughout August and September 2000, Mr. Ostrander metwith  and  had  discussions  with  various  private  equity  and  capi-tal  firms  to  ascertain  their  level  of  interest  in  participating  in  amanagement-led  buyout  transaction.  By  the  end  of  September,Mr. Ostrander decided to proceed with Vestar Capital and Gold-ner, Hawn, Johnson, and Morrison as coinvestors with the man-agement team in the proposed transaction. During September andOctober  2000,  the  Vestar/Goldner  group  and  its  advisors  con-ducted  a  due  diligence  review  of  the  company  and  its  businessoperations and held numerous meetings with financing sources,members of the management, and Mr. Michael in order to struc-ture a preliminary proposal for the acquisition of the company.
During the week of October 30, 2000, Mr. Ostrander informedthe  Michael  Foods  board  of  directors  and  their  lawyers  that  heexpected to be in a position to make a proposal for the purchaseof the company along with Vestar and Goldner at the board’s reg-ularly  scheduled  meeting  on  November  8  and  9,  2000.  At  therequest of the board, Mr. Ostrander also informed representativesof U.S. Bancorp, Piper Jaffray, and Merrill Lynch of the transac-tion  and  requested  that  they  be  prepared  to  discuss  the  matterwith the board during its meeting.
With the investment bankers now teed up, the company wasin play. On November 3, 2000, Merrill Lynch was contacted by a
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senior executive from a privately held diversified agriculture andfood  company  regarding  that  company’s  preliminary  interest  indiscussing  an  acquisition  of  Michael  Foods.  Merrill  Lynch  hadcontacted  this  potential  acquirer  in  1999  as  part  of  the  board’sformal review of alternatives to enhance shareholder value. Afterreviewing  the  confidential  memorandum  prepared  by  MichaelFoods at the time, the potential acquirer had chosen not to pur-sue  a  transaction.  Given  its  current  interest,  however,  MerrillLynch advised the executive to contact the law firm for MichaelFoods, who, they understood, continued to represent the boardof directors.
The executive contacted the attorneys and engaged in a dis-cussion pointing to his company’s preliminary interest in explor-ing an acquisition of Michael Foods. During the conversation, hereported  that  his  company  was  considering  joining  with  one  ofthe  private  equity  sponsors  that  had  been  introduced  to  Mr.Ostrander  in  making  an  offer  for  Michael  Foods.  The  attorneyinformed the executive that the Michael Foods board of directorswas not soliciting offers but would give careful consideration toany bona fide written proposal for a transaction that the potentialstrategic  acquirer  addressed  to  the  board.  The  attorney  alsoinformed the executive that the Michael Foods board was sched-uled to meet on November 8 and 9, and suggested that the poten-tial strategic acquirer provide a written expression of interest inas definitive a form as possible to the board for consideration atthat meeting.
The Michael Foods board of directors held a regularly sched-uled meeting commencing during the evening of November 8 andcontinuing  on  November  9,  2000.  Attorneys  representing  theboard  as  well  as  investment  banking  representatives  from  U.S.Bancorp and Merrill Lynch attended the November 9 portion ofthe meeting, during which representatives of Merrill Lynch andthe  law  firm  and  Mr.  Ostrander  reported  their  conversationswith  the  potential  strategic  acquirer  and  its  joint-venture  part-ner  and  indicated  that  they  anticipated  that  the  board  wouldreceive an expression of interest from those entities during theboard meeting.
Mr. Ostrander and representatives of Vestar and Goldner pre-sented a written proposal to the board to acquire Michael Foods fora purchase price of $28.50 per share of Michael Foods common
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stock. During the presentation, the Vestar/Goldner investor grouprepresentative stated that substantially all of their due diligencewas completed with the exception of certain environmental andregulatory  matters.  The investor  group’s  written  proposalincluded  commitment  letters  from  its  lenders  and  a  proposedform of the merger agreement. After the Vestar/Goldner investorgroup presentation, Jeffery Michael confirmed that he and vari-ous  family  members  were  equity  participants  in  the  transactionbut  that  substantive  terms  of  their  involvement  remained  to  bedetermined  and  no  agreement  as  such  to  participate  had  beenreached  at  the  time.  The  board  then  met  in  executive  sessionwithout Mr. Ostrander, Mr. Michael, or management executives ofthe company.
Legal counsel reviewed for the board the process that wouldbe  involved  in  evaluating  and  negotiating  the  proposal  and  theboard’s fiduciary duties and statutory obligations under the law,including  the  necessity  of  forming  a  committee  of  all  disinter-ested  directors  to  consider  the  proposal  in  order  to  meet  therequirements of a public company. The board established the dis-interested  directors  committee  consisting  of  all  directors  whowere  neither  participants  in  the  proposal  nor  executives  oremployees of the company. After the committee of independentdirectors met, they concluded unanimously to continue to retaincurrent  counsel  and  current  investment  bankers  as  advisors  tothe independent committee of the board.
The  investment  bankers  then  reviewed  for  the  board  theprocess  that  the  board  had  previously  undertaken  to  evaluatestrategic alternatives and updated certain valuation data regard-ing  the  company.  The  investment  bankers  informed  the  boardthat in their view the proposed offer price of $28.50 per share ofMichael  Foods  common  stock  was  inadequate.  Although  theboard did not establish a valuation at which it would be preparedto sell the company, the consensus of the board was that it wouldnot give serious consideration to any offer that valued the com-pany  below  $30.00  per  share.  The  board  noted  that  the  Vestar/Goldner investor group intended to obtain a portion of the debtfinancing necessary to acquire the company through the issuanceand  placement  of  a  $200  million  senior  subordinated  note,  forwhich  it  had  provided  the  board  a  highly  confident  letter  fromBanc of America Securities. The board and its financial advisors
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considered the volatility in the high-yield debt market as a signifi-cant risk to the completion of the proposed transaction.
During the meeting, the board received by facsimile a writtenindication of interest from the potential strategic purchaser andits  financial  partner  to  acquire  all  the  shares  of  Michael  Foodscommon stock at $30 per share. The indication of interest statedthat  the  valuation  implied  by  the  per-share  price  was  based  onpublicly available information and might be increased if a due dili-gence review of the company’s nonpublic records indicated that agreater value was warranted.
The  board  discussed  a  number  of  aspects  of  the  potentialtransaction,  including  the  possibility  that  it  might  be  subject  totime-consuming antitrust review, because the potential strategicpurchaser and the company competed with each other in one ofthe company’s core market segments. It was the consensus of theboard that the potential strategic purchaser and its financial part-ner should be given a limited time to conduct due diligence anddetermine whether they were interested in making a more defini-tive proposal to acquire the company.
The  board  also  decided  that  the  Vestar/Goldner  investorgroup  should  be  informed  that  the  board  had  received  anotheroffer of interest to acquire the company and that the board con-sidered  it  sufficiently  interesting  to  require  investigation.  Theboard  viewed  the  Vestar/Goldner  group  proposal  as  financiallyinadequate  and  subject  to  unacceptable  risk  of  consummationdue to the lack of a firm financing commitment for $200 million insenior subordinated notes.
The board then discussed management’s intention to providethe  potential  strategic  acquirer  and  its  financial  partner  with  atwo-week  period  of  time  to  conduct  due  diligence  on  the  com-pany and refine its proposal and that board was requesting eachgroup to provide it with their best final proposal by the end of theday on November 27, 2000.
Late in November, the Michael Foods special committee wasinformed  that  the  potential  strategic  acquirer  and  its  financialpartner had been unable to reach agreement on several aspects oftheir proposed joint-venture arrangement and that the potentialstrategic acquirer was considering whether it wished to make arevised proposal by itself.
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On  November  27,  the  special  committee  received  a  revisedproposal from the Vestar/Goldner group that valued the companyat $30 per share. The proposal continued to include a highly con-fident letter that firm commitment for $200 million in financingsenior subordinated debt necessary to consummate the transac-tion was in place. The financing commitments included with therevised Vestar proposal expired in accordance with their terms ifnot accepted on or before December 7, 2000.
On  November  28,  2000,  the  potential  strategic  acquirer  in-formed  the  special  committee  that  it  would  decide  whether  it was prepared to pursue independently an acquisition of MichaelFoods by the next day. Later that day, the board, with Mr. Ostran-der and Mr. Michael recused, met and was informed of the revisedVestar/Goldner investor group proposal and the status of discus-sions with the potential strategic acquirer. On November 30, 2000,the  potential  strategic  acquirer  informed  the  special  committeethat the senior management of the strategic acquirer had a con-tinuing interest in pursuing the acquisitions but that an additionaltwo-week  period  would  be  required  for  the  potential  strategicacquirer to complete its due diligence and determine whether itwas prepared to make a binding offer to acquire Michael Foods.
As part of its discussion with the independent committee, thestrategic  acquirer  advised  Michael  Foods  that  its  in-house  legalcounsel  had  indicated  they  did  not  expect  any  serious  antitrustchallenges related to the completed transaction, notwithstandingthe  two  companies’  competing  core  businesses.  The  committeerequested that the potential strategic acquirer provide the boardwith a revised written expression of interest that included an indi-cation  of  the  upper  end  of  its  valuation  range  for  the  companybased on its current due diligence to date.
Later in the day on November 29, 2000, the special committeereceived a letter from the potential strategic acquirer indicatingthat it continued to be interested in acquiring Michael Foods com-mon stock at $30 per share and that its valuation for the companycould increase to up to $32 per share depending on the results ofa further due diligence investigation. The letter included a requestfor an additional two-week period to complete the process.
On  November  30,  2000,  the  special  committee  met  with  itsfinancial  and  legal  advisors  to  discuss  the  two  expressions  of
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interest and formulate a recommendation to the Michael Foodsboard  of  directors.  The  special  committee’s  financial  advisorsreviewed  various  matters  for  the  committee  including  the  verypoor conditions in the high-yield financing market. The financialadvisors also informed the special committee that in their view,based on their understanding of the investment parameters of pri-vate  equity  firms  and  experience  in  comparable  transactions,  itwould  be  unlikely  that  the  Vestar/Goldner  group  would  be  pre-pared to increase its offer above $30 per share.
The special committee also discussed the strengths and weak-nesses  of  each  of  the  two  expressions  of  interest,  includingfinancing  risk,  antitrust  risk,  due  diligence  risk,  and  proposedpricing. After discussing a number of alternatives, including thepossibility  of  rejecting  both  proposals,  the  special  committeedecided  to  recommend  to  the  board  that  it  consider  either  pro-viding the potential strategic purchaser with a two-week period toconduct further due diligence in order to develop a more defini-tive proposal or providing the Vestar/Goldner investor group witha more limited period of time to revise its offer to include a higherprice per share and fully committed financing.
Later on November 30, 2000, the board of directors, with Mr.Ostrander  and  Mr.  Michael  recused,  met  with  its  financial  advi-sors  and  legal  counsel.  The  special  committee  reviewed  for  theboard the revisions to the Vestar/Goldner investor group proposaland the revised preliminary expression of interest from the poten-tial strategic acquirer. The board discussed the matter, includingthe current market conditions for high-yield senior credit financ-ing  with  the  view  that  the  Vestar/Goldner  investor  group  wasunlikely  to  be  prepared  to  increase  its  proposal  above  $30  pershare.  After  a  thorough  discussion  of  various  alternatives,  theboard of directors unanimously decided to provide the potentialstrategic acquirer with a two-week period to conduct further duediligence in order to develop a more definitive proposal and, atthe  recommendation  of  their  law  firm,  to  engage  special  legalcounsel to assist the special committee and the board in evaluat-ing  the  antitrust  risks  associated  with  a  transaction  with  thepotential strategic acquirer.
The  special  committee  recommended,  and  the  board  ap-proved,  that  the  potential  strategic  acquirer  should  not  be  per-mitted to access confidential information regarding the company’s
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business in product segments in which the two companies com-pete until special antitrust counsel had an opportunity to assessand advise the special committee on the antitrust risk associatedwith the proposed transaction.
After  the  board  of  directors’  meeting  on  November  30,  thespecial committee informed the Vestar/Goldner investor group ofthe  board’s  decision  to  continue  to  explore  the  proposal  of  thepotential  strategic  acquirer  over  the  next  two  weeks.  The  com-mittee informed the Vestar/Goldner group that its proposed $30-per-share  valuation  and  the  lack  of  fully  committed  financingwere  significant  factors  in  the  board’s  decision  not  to  proceedwith  exclusive  negotiations  with  Vestar.  The  committee  wasinformed that Vestar would not commit to extend its offer beyondDecember 7. Later that day, the special committee received a let-ter  from  the  Vestar/Goldner  investor  group  confirming  that  itsoffer would terminate at 5:00 P.M. on December 7, 2000.
The special committee retained a Washington, D.C., law firmto provide it with advice with respect to an antitrust analysis ofthe possible acquisition of Michael Foods by the potential strate-gic acquirer. Antitrust counsel in that office had previously pro-vided advice to the company on related matters. From December 1through December 7, 2000, Michael Foods’ antitrust counsel andoutside counsel to the potential strategic acquirer collected andexchanged  relevant  data  about  the  two  companies  pursuant  tothe  terms  of  a  confidentiality  agreement  between  the  law  firmsthat barred disclosure of the data to the firms’ respective clients.During  the  same  period,  the  potential  strategic  acquirer  con-ducted its due diligence of the company. On December 4, MichaelFoods’  board  of  directors,  with  Mr.  Ostrander  and  Mr.  Michaelrecused, met by phone and was updated on the special commit-tee  and  its  legal  counsel  on  the  due  diligence  process  of  bothcompanies.
On December 8, 2000, the special committee met with its legalcounsel to hear and evaluate its antitrust counsel’s analysis of theantitrust  issues  associated  with  the  sale  of  the  company  to  thepotential  strategic  acquirer.  After  an  extensive  presentation  byantitrust  counsel,  the  special  committee  determined  that  theboard of directors should have an opportunity to review the fullpresentation and conclusions of antitrust counsel. Later that day,the board of directors met, with Mr. Ostrander and Mr. Michael
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recused. After a brief summary of the antitrust counsel’s presen-tation, at the special committee’s recommendation, they decidedto meet during the afternoon of December 11 for a full presenta-tion and discussion of the antitrust analysis of the proposed trans-action. On December 10, 2000, a representative of Vestar informedthe  special  committee  that  Vestar  anticipated  making  a  revisedproposal  to  the  special  committee  on  or  about  December  11,2000. The Vestar/Goldner investor group delivered a revised pro-posal to the special committee to acquire the company for $30 pershare, which included a commitment letter from Banc of AmericaSecurities and Banc of America Bridge Capital LLC with respectto  both  the  senior  secured  credit  facilities  and  the  unsecuredsenior subordinated bridge notes. In the commitment letter, Bancof America Bridge Capital LLC committed, subject to the termsand conditions contained in the commitment letter, to purchase$200  million  in  unsecured  senior  subordinated  bridge  notesrequired to complete the financing of the proposed acquisition inthe  event  that  Michael  Foods  could  not  complete  the  privateplacement of the unsecured senior subordinated notes.
During  the  afternoon  of  December  11,  2000,  the  board  ofdirectors, with Mr. Ostrander and Mr. Michael recused, met in theoffices of their legal counsel with their financial advisors. Antitrustcounsel made an extensive presentation of the antitrust aspectsof  the  possible  acquisition  of  Michael  Foods  by  the  potentialstrategic  acquirer.  They  discussed  with  the  board  the  generalreview  process  of  the  Federal  Trade  Commission  in  a  mergertransaction and the various aspects of the transactions that oftenlead to a higher level of scrutiny by the FTC and various solutionsto concerns that could be raised by the FTC. After significant dis-cussions, the consensus of the board and its antitrust counsel wasthat  there  was  a  high  probability  that  the  proposed  transactionwould  be  carefully  reviewed  by  the  FTC  and  that  the  reviewprocess would extend over a number of months and would resultin substantial expense to the company and greater uncertainty inthe  relationships  of  the  company  with  its  customers,  suppliers,and employees and shareholders.
If  the  proposed  transaction  were  challenged  by  the  FTC,  itwould  significantly  increase  the  risk  of  completing  the  mergerand related transactions. The board determined that the possibil-ity of a transaction with the potential strategic acquirer, even at
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up to $32 per share, would be subject to an unacceptable risk thatthe transaction could not be consummated in a reasonable periodof  time  at  the  negotiated  price  without  substantial  additionalexpense.
The board of directors then reviewed and discussed the Vestar/Goldner investor group’s revised proposal with its financial andlegal advisors. Legal counsel reviewed the terms of the proposedmerger  agreement  and  the  financing  commitments  as  well  asother legal issues relating to the proposed transaction. Represen-tatives of U.S. Bancorp Piper Jaffray advised the board that sub-ject  to  internal  procedures  and  a  review  of  a  definitive  mergeragreement,  it  would  be  prepared  to  deliver  an  opinion  that  the$30-per-share  price  for  Michael  Foods  common  stock  to  bereceived in the proposed transaction was fair to such sharehold-ers  from  a  financial  point  of  view.  Representatives  of  both  U.S.Bancorp and Merrill Lynch indicated that they did not believe thatthe Vestar/Goldner investor group would be prepared to increaseits  purchase  price  for  the  company  and  advised  the  board  thatabsent significant disruption in the financial and credit markets,there was a high degree of likelihood that the proposed transac-tion would be consummated. The special committee representedto the board of directors that the special committee and its legalcounsel proceed to negotiate the terms of an agreement with theVestar/Goldner investor group subject to final review by the spe-cial committee, disinterested directors, and the board. The boardunanimously concurred with the recommendation of the specialcommittee.
On December 13, 2000, representatives of the Michael Foodslaw firm provided the Vestar/Goldner investor group and its legalcounsel with detailed comments on the proposed form of mergeragreement. Representatives of the two law firms, with the activeparticipation  of  the  special  committee,  proceeded  to  negotiatethe terms of