Well, now we'll see precisely how much contempt


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board of directors has for its own shareholders. Or, more precisely, those remaining Willamette directors not yet removed through


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multiyear rolling proxy contest.

Weyerhaeuser brought the long-running saga of its hostile bid for Willamette to its denouement Thursday morning, bumping up its bid by $5 a share to $55, calling that its best and final offer. The ultimatum to Willamette is simple: If it doesn't accept the $55-a-share bid, Weyerhaeuser will walk away. Unfortunately for long-suffering Willamette shareholders, that may be precisely what the misguided board of directors of Willamette wants.

Scorched-Earth Tactic

Recent news that Willamette

is in talks to purchase



building-products division clearly prompted Weyerhaeuser to ratchet up its bid and present its ultimatum. Willamette's long-threatened tactic is a particularly nefarious takeover-defense strategy called "scorched earth." The goal is to do a deal so grotesque that you drive away the acquirer. If Willamette buys a business -- in this case, a cyclical business that melds poorly with Willamette's distribution network -- so relatively large that it buries its own balance sheet in high-cost debt, then the resulting company will be so undesirable that no paper or forest-products company would want to buy it.

This tactic may assure Willamette's board its continued independence, but at a potentially massive cost to shareholders. If Weyerhaeuser does walk, Willamette shares would probably fall even further than they would have previously.

What is particularly galling to Willamette shareholders is that they have clearly demonstrated their desire to see the company sold to Weyerhaeuser. Because of the staggered board of directors at Willamette, Weyerhaeuser can gain control of only one-third of Willamette's board at each annual meeting. It takes, therefore, two annual meeting cycles for Weyerhaeuser to achieve majority control. Last summer, Willamette shareholders elected the dissident Weyerhaeuser nominees to the board, despite the large concentration of insider shares beholden to incumbent management.

Weyerhaeuser has been critical of the possible Willamette/Georgia-Pacific asset sale. It mentions in a letter to Willamette that it too had an offer to buy Georgia-Pacific's assets and passed on the deal, and says it would have no interest in buying Willamette if Willamette consummates it.

No Other Prospects

Willamette itself was built through deals over the years. There remains substantial vestigial ownership by several families who owned mills that swapped their businesses for Willamette stock. A descendant of one of these families, the Clarkes, recently said publicly he would take $55 a share. Willamette has publicly argued, as recently as at a round of brokerage firm conferences a week ago, that its value in a deal should be $60. Unfortunately, all it has to back that up are some rudimentary spreadsheets and simplistic analyses prepared, most likely, by a junior analyst at its investment banker's office.

The cold, hard truth is that no other bidder has surfaced for Willamette during the 18 months of this siege. Willamette's argument that no bids have surfaced because the company hasn't solicited any prospective bidders might hold water if this had been going on for three or even six months. However, it's safe to assume that after 18 months, any interested bidder would have surfaced by now.

The market's skepticism is evident. Even after news of the bump, Willamette's stock was trading Thursday afternoon at around $49. If shareholders felt the board had their interests at heart and believed that a deal with Weyerhauser would really be closing in a few weeks, the stock would be trading much closer to $55.

The fate of Willamette investors now rests with a board of directors that has virtually declared war on its own shareholders. From its

steadfast refusal to negotiate to the absurd conditions imposed on Weyerhaeuser when Willamette

finally seemed to capitulate, the board continuously frustrated shareholders who clearly expressed their desire for value maximization. So far, the damage this board has done has been temporary. The stakes will be much higher as it meets to consider Weyerhaeuser's latest improved bid.

David Brail is the president and portfolio manager of Palestra Capital, a Manhattan-based hedge fund that focuses on risk arbitrage, and has been an investor in risk arbitrage and bankruptcy securities since 1987. At the time of publication, Brail was long Willamette, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Brail appreciates your feedback and invites you to send any to

David Brail.