Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
Carl Icahn, an activist investor, had gained control of TWA in 1985 and immediately started calling Colodny to push for joining TWA and USAir, “He used to get on the phone and we’d go on for 30 or 40 minutes at a time. He would say we pay employees too much…and if we merged with TWA he could force us to take the same wage cuts TWA had put on their employees. I told him that, in that case, he would have a lot of very unhappy employees providing very bad service.” (Ed Colodny quoted in Reed, T and Reed, D. (2014) Creating American Airways: The Converging Histories of American Airlines and US Airways. McFarland & Co. p. 11)
Icahn tried to stop the Piedmont merger, finally sending a letter to Colodny on the day the USAir and Piedmont boards were due to meet (March 4, 1987) to approve the start of the deal process. In it he offered to buy USAir for $1.64bn ($52 cash for each of USAir’s 31.56m common shares). TWA was already USAir’s largest shareholder and Icahn indicated that if his “friendly” deal could not be agreed he was prepared to go hostile.
Very quickly Colodny obtained a court order preventing TWA acquiring more USAir stock. Also, the deal with Piedmont was sealed. TWA withdrew its offer, and before the end of the month had sold its USAir holding for $180m, having previously paid $178m.
One raider had been stopped but more were waiting in the wings. Michael Steinhardt’s $1.3bn fund, with a reputation for aggressive trading, bought a 5.89% stake in July 1989 and seemed poised to mount a hostile takeover bid. Steinhardt’s public statements such as “we might consider seeking control of the rapidly growing airline” didn’t help the mood at USAir HQ.
The directors felt the need for defences. One “poison pill” they approved was to grant the right to existing shareholders to buy USAir shares at below market price if a potential raider acquired 20% or more of the group (such poison pills are not allowed in the UK). They also authorised a repurchase of up to 5m shares.
In response Steinhardt simply bought more stock. Clearly the action by USAir’s board were not enough, they needed a “800lb gorilla” to see off Steinhardt.
Buffett, the white squire (or gorilla)
A friend suggested that Colodny go and talk to Warren Buffett; he just might be willing to protect the company/managers from a hostile raid. So he made the journey to Omaha, along with Chief Financial Officer, William Lotus, joining Buffett for lunch at his favourite steakhouse, Gorat’s. “We spent a couple of hours talking about the airline, a very friendly casual conversation, and I had a great T-bone steak”, recalls Colodny 9reed and Reed 2014).
Then they got down to business. Buffett was interested in putting Berkshire’s money into USAir, but not in the form of common stock – he was fully aware of the growing competitiveness of airlines and considered………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
