A regulatory filing last week from Federated Department Stores revealed for the first time the behind-the-scenes discussions of its merger with May Department Stores, which included a last-ditch effort to revive merger negotiations that had almost died.
The filing with the Securities and Exchange Commission on May 10 listed each proposal Federated’s chief executive officer Terry Lundgren delivered to John Dunham, acting chief executive officer of May, and the board’s responses, as well as all conversations preceding the initial proposal.
After spending the weekend finalizing details, Federated and May announced the merger agreement on the morning of Feb. 28, with Federated paying $35.50 in cash and stock for each May share and assuming a debt of $6 billion. The transaction, consisting of 50 percent cash and 50 percent stock, results in Federated paying May investors $17.75 per share in cash and 0.3115 shares of Federated stock. The total price tag is about $17 billion.
Talks between the two companies seemed to always be hanging on by a thread. On Feb. 10, for example, merger talks collapsed because Federated refused to meet May’s price of $36 a share.
According to the SEC filing, officials from both companies have met and discussed the possibility of May acquiring Federated several times over the past two decades, once in 1988, in 1999, and in 2002. None of the talks discussed structural or financial details.
Federated’s management reopened talks last December by informing Federated’s board of its plans to perform analyses of a possible merger with May. After reviewing the results, the board authorized the management to approach May a month later, on Jan. 11. Federated’s Lundgren called Eugene S. Kahn, then chairman and ceo of May, who agreed to meet to discuss the proposition.
Kahn’s resignation three days later could have derailed discussions, but May’s board authorized Dunham to proceed with the meeting. Lundgren called Dunham to propose that he and Ronald Tysoe, vice chairman of Federated, travel to St. Louis on Jan. 25 or Jan. 26 for a meeting. Dunham felt the marketplace rumors over a potential transaction between the two companies distracted May’s search for a new ceo as well as disrupted business, and suggested on Jan. 20 that Morgan Stanley and Goldman Sachs meet beforehand.
Related Galleries
After the financial advisors met, Lundgren, Tysoe, and Thomas Cody, vice chair, met with Dunham and William McNamara, vice chairman of May, in St. Louis on Jan. 26. Departing from previous discussions when the companies planned a merger-of-equals, Federated considered this an acquisition of May. Lundgren planned to retain May’s associates and maintain a divisional headquarters in St. Louis and a regional presence. Price was not mentioned at this meeting, but the executives discussed due diligence and general structure.
Federated launched its initial bid on Jan. 31, with a formal letter to the May board offering $33.25 per share for all outstanding common stock in a transaction consisting of 40 percent cash and 60 percent stock. The offered price was at a 20 percent premium of the Jan. 13 share price. The company offered to include two existing directors from the May board on to the Federated board. The May board rejected the offer on Feb. 3 as being too low, but it signed a confidentiality agreement the next day.
Federated offered $34.25 a share on Feb. 7 and modified the transaction to 50 percent cash and 50 percent stock, which May again rejected as being too low. The May board concluded on Feb. 9 that the acquisition would not result in an increased shareholder value than currently expected and continued the search for a new chief executive.
After the Feb. 10 rejection by May, Federated regrouped and met on Feb. 16 to negotiate a higher price. The company sent May a letter the next day offering $35.25, two dollars higher than its initial offer, but noted that the proposal would expire at noon the following day. Dunham called Lundgren to negotiate an extension and to begin drafting a merger agreement. Dunham also convinced Lundgren to not make an announcement on Feb. 22 with the year-end financials.
On Sunday morning, Feb. 27, Federated agreed to raise its offer 25 cents to $35.50. The parties executed and delivered the merger agreement later that evening.