Valassis Communications Sues to Stop $1.3 Billion Takeover

Accuses Direct Mailer Advo of Fraud

By Published on .

CINCINNATI (AdAge.com) -- Valassis Communications today sued to end its proposed $1.3 billion takeover of Advo, accusing the nation's largest direct-mail media company of fraud.
Valassis Communications, which does more than $1 billion in annual sales, is a leading producer of newspaper advertising inserts distributed in more than 550 Sunday papers.
Valassis Communications, which does more than $1 billion in annual sales, is a leading producer of newspaper advertising inserts distributed in more than 550 Sunday papers.

Valassis said in a statement that its complaint, filed today in Delaware Chancery Court, accuses Advo of intentionally providing "materially false financial information" and withholding information at a time when its operating income was "materially off forecast."

Advo response
Advo in a statement dismissed the lawsuit as "baseless and without merit" and said it "can only surmise that Valassis' action is merely a smokescreen to hide the fact that Valassis is suffering from an extreme case of buyer's remorse."

Valassis announced the lawsuit after markets closed today, but its stock plunged nearly 16% when the merger was announced July 6 and has recovered only about a third of that loss since.

The complaint was filed under seal, a Valassis spokesman said, but the company's statement said it also alleges that Advo executives knew of, but did not disclose, "significant internal control deficiencies associated with Advo's enterprise-wide order-to-cash system."

'Left us no choice'
"Advo left us with no choice," Valassis Chairman-CEO Alan F. Schultz said in the statement. "The pertinent information we received was erroneous, projections were grossly inaccurate and we believe we were the victims of fraud."

"Advo remains committed to the transaction contemplated by the binding merger agreement and will take action to enforce that agreement and vigorously defend itself against Valassis' claims," an Advo spokeswoman said.

In announcing the deal last month, Valassis termed it "highly complementary" because it pairs the nation's largest direct-mail media company with one of the largest newspaper-coupon distributors in the U.S.

In a conference call around the same time, Mr. Schultz said the deal would help Valassis diversify away from a declining newspaper industry while giving Advo better access to package-goods marketers it has had trouble reaching.

Second suit this year
Now, Valassis is launching its second major lawsuit of the year, after earlier suing rival News Corp.'s NewsAmerica Marketing, alleging antitrust violations.

Like antitrust lawsuits, litigation seeking to stop mergers based on fraud allegations can be hard to win. Tyson Foods unsuccessfully sued in Delaware Chancery Court to end its proposed takeover of beef processor IBP in 2001. The court ordered Tyson to complete the merger, which it did.
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