HOW TYSON ATE HUDSON IN A LITTLE PATCH OF ARKANSAS...
By MELANIE WARNER

(FORTUNE Magazine) – To understand the history behind Tyson Foods' acquisition of Hudson Foods in early September, you have to know a little bit about an over-the-fence. As in "I had an over-the-fence with Hank yesterday, and he told me..." In the northwestern Arkansas farm country that's home to both of these family-controlled poultry powerhouses, over-the-fences are the chummy way people make agreements with one another and keep tabs on what's going on. And with an improbable coterie of millionaire and billionaire families living in the area, there's lots to keep tabs on. In the Arkansas towns of Springdale, Rogers, Bentonville, and Lowell, you'll find more millionaires driving pickup trucks than anywhere outside Texas. In addition to the Tysons and the Hudsons there are the Hunts--founders of the huge trucking company, JB Hunt--and, of course, the mega-billionaire Waltons of Wal-Mart, who mostly keep to themselves.

Good fences, as they say, make good neighbors, and Tyson and Hudson, the country's largest and fifth-largest chicken producers, have been glaring over each other's fences for more than two decades. Their corporate headquarters lie 15 miles apart along a four-laner, and several top executives of both companies have houses in Pinnacle Country Club, a gated golf course community of million-dollar mansions. They golf together and occasionally dine at each other's houses.

But it doesn't mean that they're great friends. Says Hudson Foods' founder and chairman, James "Red" Hudson: "I think Leland [Tyson CEO Leland Tollett] and his wife, Betty, are wonderful people, and June and I have known them for a long time, but our associations have basically been saying hello." The chicken business is, after all, extremely competitive. Witness the time Tyson unraveled Red Hudson's deal to acquire Mississippi chicken processor McCarty Farms in 1995 by offering a 20% bigger bid. Or this past summer, when Red Hudson met with Costco's CEO Jim Senegal in an attempt to undo a Tyson deal with the warehouse retailer. "I don't care what the printed mission statement is--the real mission of Hudson Foods is to take Tyson's business, period. We're Apple, they're Microsoft," says one Hudson executive.

For more than a decade executives at Tyson, whose chicken business is more than twice the size of anyone else's, have been itching to buy Hudson. But every time Tollett or Tyson Chairman Don Tyson approached Red Hudson with the idea of selling the company he created in 1972 (after buying Ralston Purina's chicken operations), the 73-year-old chairman said no thanks. Tollett's most recent entreaty took place in mid-July at an over-the-fence in Red's kitchen across the street. Discussions broke off several days later because Red, who didn't really want to sell, was asking what he calls "a pretty good price" for his 90% of the company's voting shares.

But Tyson wasn't after Hudson just because Tollett was reminded of his rival every time his Ford pickup passed Red's Mercedes at Pinnacle's gates. The real reason is that Tyson needs to meet analysts' projections of 15% annual growth, and in recent years Hudson Foods has been stealing some of Tyson's thunder. Hudson has eroded Tyson's position as the dominant supplier of chicken products to Wal-Mart, the Arkansas neighbor that Merrill Lynch estimates will own 9% of the country's food sales by 2005. Hudson, a company with annual sales of $1.7 billion, now does slightly more business with Wal-Mart than the $6.5 billion Tyson. Shane Glenn, analyst for the Little Rock investment bank Stephens Inc., attributes this to Hudson's greater willingness to negotiate on price and to its new chicken plant in Henderson, Ky., which primarily supplies Wal-Mart. (The fact that Red's grandson, Mike Hudson Jr., is married to the daughter of a Wal-Mart executive can't hurt either.) Other Hudson assets attractive to Tyson include a thriving turkey operation, chicken processing facilities in three states where Tyson has none, and other product lines that are complementary to Tyson's.

Despite Tyson's numerous attempts to acquire Hudson, it wasn't until the company was thrust into national headlines for issuing the largest recall of meat in U.S. history that Tyson finally got its lucky break. Abandoned by a major customer and served up as an example by a government agency, Hudson was brought to its knees in September and driven into the arms of Tyson--something Red Hudson never would have imagined when he first received word at the end of July about E. coli-contaminated meat that was traced to Hudson's beef facility in Nebraska.

As far as outbreaks go, this one seemed mild. Unlike Jack-In-The-Box's scare in 1993, which sickened 500 and killed four, only 16 people in Colorado became ill from eating Hudson hamburger patties. No one died. And it was determined that Hudson's plant probably wasn't responsible for contaminating the beef--it was brought in from an outside supplier. Hudson recalled 20,000 pounds of beef on Aug. 12. Then, for reasons still unclear, the USDA forced Hudson to increase the amount to 1.2 million and then again to 25 million pounds. Thomas Billy, head of the USDA's inspection service, says that his department found record-keeping inadequacies and practices of recycling meat from one day to the next at the Hudson plant, which made it impossible to locate a break in the chain of tainted meat, but says he won't elaborate because a USDA investigation is still under way.

The result of the recall was that Hudson Foods, a company most of the country had never heard of, might as well have been renamed Black Death Inc. All beef products branded with Hudson's name were yanked out of the freezers of Safeways, Sam's Clubs, and Wal-Mart Supercenters across the country, regardless of whether they were part of the infected lots of meat.

One cause of the negative coverage was Burger King. The buyer of about half the Nebraska plant's output, Burger King initially insisted that none of its Hudson meat was tainted with E. coli. But after the recall was expanded, drastically reducing Burger King's supply of hamburger, sales slipped just as the launch of the new Big King burger was drawing near. So the company ran newspaper ads proclaiming that they would never buy beef from Hudson again--a harsh pronouncement considering that Burger King was the reason Hudson was in the beef business in the first place. (The Nebraska plant was built at Burger King's request.)

Also hitting Hudson hard was the USDA's decision to announce new food-safety legislation barely a week after the expanded recall. "We wanted to strike while the iron was hot," says USDA Secretary Dan Glickman.

Being taken to task by a major restaurant chain and the USDA was the last thing Hudson Foods needed. Earnings for 1997 were already suffering from high feed-grain costs and a $33 million write-off from a Russian distributor who proved to be less than creditworthy. Merrill Lynch analyst Leonard Teitelbaum estimated in late August that the recall would result in a loss of as much as 15 cents per share for Hudson's fourth-quarter earnings. The concern was not really the beef business (which accounted for less than 7% of revenues and was sold to beef processor IBP after the recalls) but rather that negative public perception of the company could spill over to Hudson's mainstay chicken operations, which bring in 57% of revenues. "Everything that had Hudson's name on it was damaged, regardless of what the product was," Hudson told FORTUNE with a mixture of remorse and anger in his voice. Hudson Foods was facing both a financial mess that would have an impact on the company's stock, already down 20% from January, and the awful idea that Hudson Foods would be famous as the evil company that sold contaminated meat. So Red Hudson told his CFO, Charles Jurgensmeyer, to call Tyson.

The deal that was struck was a considerable compromise for Red relative to the price he had asked for back in July. "Of course we're not happy with it," says Red. "But under the circumstances, I think it's the best opportunity for the majority of people in our company." Tyson will buy Hudson for the equivalent of about $680 million, in a combination of cash and stock; the Hudson family gets a total of $515 million. How does it feel to give in to an archrival? "I'm going to have a lot of seller's remorse," says Red. "I always had visions that if I did sell out, it would be for a lot more."

--Melanie Warner