Hostiletakeovers: Delta Airlines and US Airways
Inbusiness law tender offers refer to a takeover bid. In most cases,tender offers are publicly announced inviting interested parties fromthe public to participate in tender bids. During the tender offers,the bidders may contact the shareholders directly, or the directorsof the company may endorse the offer to a particular stakeholder orcompany. In normal tender offers, the shareholders of a targetcompany are induced to sell by the acquirers’ offering themparticular price that relates to the current price of the companyshares in the market (Kohers, Kohers & Kohers 78). For instanceif the shares of a targeted company are trading at $12 per share inthe stock market, the acquirer might propose $ 13 per share to theshareholders for the bid. In some cases, some securities may beoffered such as cash although such exchanges are limited toparticular tender offers. In the United States, tender offers arecontrolled through the Williams Act that governs all the tenderoffers agreements. This regulation covers among other things whetherall the stakeholders receive preferential treatment over each other,procedures of tender offers and the minimum time the tender offerhave to remain open (Commercial Law: An Overview). However, sometenders are exceptional and involve hostile takeovers or tenderoffers that run into numerous transactional negotiations.
Inthe United States, most corporations have been involved in hostilebids owing to prevailing believe that such tactics are necessary whenaccompany wish to accomplish their strategic acquisitions. Recentexamples of such hostile takeover bids include the US Airways andDelta Airways, Mirant and the NRG Energy, Pride and Gold kit, Oracleand the People Soft among others. In other parts of the world,hostile takeovers include the Alcoa and Alcan, Mittal Steel andArcelor, The Tsunami Brothers and Seibu Railway among others.Recently, due to what can be referred to as low confidence especiallyin the aftermath of Enron Scandal, the desire to have thorough duediligence from bidders U.S hostile bids have been less common. Infact, since 2002 only nine hostile bids have been witnessed with fivebids in 2003 to 2004 while the rest bids were between 2005 and 2007.
Althoughhostile takeovers have remained relatively low recently, hostile takeovers are considered vital especially when the target company failsto talk things over. This was the case in Alcoa and Alcan case,Nasdaq and the London Stock Exchange. Another scenario that providesa good platform for hostile takeovers is when a bidder feels that thecompetitors are merging. For instance Express Script hostile takeoverfor Caremark, Royal Bank of Scotland against ABN Amro, SumitomoMitsui Group against UFJ Holdings among others were driven by fearthat the targeted companies were regrouping. Another reason hostiletakeovers are done is to elicit a summative deal in the event thatthe targeted company is likely to say no (Kohers, Kohers & Kohers78). In a broader sense, hostile takeovers take place in the eventthat the targeted company is unwilling to agree for a merger orcomplete takeover. It is considered ‘hostile’ when a company’sboard of directors rejects the offer given by the bidding company andthe bidding company relentlessly continues to pursue its target.
Oneway in which hostile takeovers are pursued is through engaging thetarget company in proxy wars that involves persuading sizable numberof stakeholders in the company to allow for new management. Inanother way, the bidding company buys enough shares in the targetedcompany in an attempt to influence new management that will agree tonew takeover. It is said that the consequences of hostile takeoversare that they are practical rather than legal (Chapman 7). Ideally,in normal circumstances the takeover law demands that the biddingcompany conducts a due diligence on all affairs of the targetedcompany such as financial information. However in hostile takeoversthis is not possible as unwilling companies tend to hide suchimportant information, and this may be risky for the bidding company(Betton, Sandra, Espen Eckbo &Thorburn 316).
DeltaAirlines is a major United States airlines with it headquarters inAtlanta Georgia. The present day company is as a result of mergerswith other airline companies. The U.S Airways is another airlinesoperated by the American Airlines Group. In 2006, the US Airwaysengaged Delta Airlines in hostile takeover bid which failed. It isrecorded that in 2006, the US Airlines offered $ 8billion in a bid toacquire Delta Airlines directly from its creditors. The factors atplay during this takeover bid were that a takeover bid was filledbefore the Bankruptcy Abuse prevention and consumer Act of 2005(BAPCPA). Delta Airlines had entered Chapter 11 due to its nearbankruptcy arising from high expenses the firm was incurring. It isduring this time that hostiles bid attempts were filled by the USAirlines (Berkovitch & Khanna 152).
However,the long nineteenth-month bid takeover ended after Delta Airlinesunsecured creditors gave the Airline a standalone approval for thereorganization plan. In this sense, the vultures’ funds from the USAirlines would have played a significant role in garnering creditorssupport for the takeover bid against the management wish. US Airlinescould have been influenced by the belief that a well-financed hostilebid against the struggling management of Delta Airlines would havebolstered the vultures’ returns. Under chapter 11 of BankruptcyAbuse prevention and consumer Act of 2005 (BAPCPA) Delta Airlineswould have lost its creditors and court support and fall for hostiletakeover by the US Airlines. However, despite these predicamentsDelta Airlines defeated US Airlines intended takeover through itsrevamped reorganization plan that motivated its creditors insupporting the plan to leave bankruptcy (Commercial Law: AnOverview).
Intakeovers bids, there are numerous factors that the bidding companylooks at when assessing a possible takeover to another country. Thefirst consideration is the law of incorporation. In this case thebidding company considers the number of shares needed to influence atakeover bid. The Delaware Corporation Law restricts mergers withlarge shareholders unless a substantial percentage threshold isagreed on (Chapman11). Another consideration done by the bidding company is theshareholders right plan (poison pill) in which targeted companydirectors are encouraged to negotiate with the acquiring company. Theaim is to influence the targeted company agree to the price offeredper share on their stock.
Antitrustare other aspects considered during takeovers (Kohers,Kohers & Kohers 75).The requirement to have antitrust clearances in the bid processdelays normal bidding processes which give competing firms time tomake hostile bids(Berkovitch & Khanna 150).For instance, the Canadian Nickel Company had to wait for Europeanand U.S clearance, and this forced its takeover bid againstFalconbridge to extend beyond scheduled time. Consequently, thisoffered Cia. Vale DO Rio Doce to pursue bids against Inco andFalconbridge.
Regulatoryissues are other important considerations before takeover bids areconsidered. In this case, such aspects as the nature of company’sincorporation is considered whether locally or foreign controlled.The targeted company shareholders profile gives much information fortake over interests. In this case, the bidding company assesses themanagement of the targeted firm in regard to the amount owned byother institutions and retail shareholders. Furthermore, shareholderslevel of content with the management and stock performance gives muchinformation if a hostile takeover would be successful or not (Betton,Sandra, Espen Eckbo &Thorburn 316).
Socialissues are also considered by the bidding company in relation to thetargeted company. In this case, the biding company assesses themanagement boards experience in defending the company against hostiletakeovers(Hoskisson, Hitt &Ireland, 25).In addition, under hostile take overs the firm also considers thewealth and employment nature of the top management. In some aspects,the effect of financing and change control aspects after takeoversforms an important consideration for the bidding company. Aspiringbidders assesses the effects of new takeovers on the credit rating ofthe firm, license agreement and government permits among other things(Berkovitch& Khanna 156).
Thepotentiality of other acquirers is also a significant considerationto most bidders. An aspiring bidder engages in prior assessment ofother bidder’s capacity and amount to be offered. This helps ininforming the bidder on the method of acquisition i.e. hostilebidding. Finally, conducting a due diligence is an importantconsideration that all firms are expected to pursue before thinkingof any form of takeover(Chapman 5).Conducting effective due diligence before firm take overs helps clearair on such aspects as litigation, environmental concerns, contracts,pensions and retiree medical plans (Berkovitch& Khanna 163).The mode of approach is finally assessed based on theseconsiderations(Betton, Sandra, and Espen Eckbo &Thorburn 316).
Theattempted hostile takeover between US Airlines and the Delta Airlinescould have followed these considerations. After considerations, thetargeted firm (Delta Airlines) may have opted for a standalonealternative despite its prevailing financial position. However, there-organization plan to exit from bankruptcy was a convincingstrategy that won the support of building shareholders, the court andthe creditors. Delta Airlines divested some of its components throughreducing costs expenses, recapitalization and rebranded its business.Take over bids, as well as the conceptual, practical and legalprocesses of bidding, are complex. In some cases, the informationcosts of evaluating the targeted company strategic fitness to thepotential acquirer in takeover bids are important. However, takeoversare important for business that wish to enlarge their economies ofscale and conducting due diligence on the targeted company is vitalfor successful takeover.
Betton,Sandra, B. Espen Eckbo, Karin S. Thorburn, “Corporate takeovers,”Handbookof
CorporateFinance: Empirical Corporate Finance, Volume 2,North Holland: Amsterdam, 2008. pg.316.
Chapman,C.E. “ConductingDue Diligence.”PracticingLaw Institute,New York, NY. 2006.
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BerkovitchElazar & Naveen Khanna. ‘A Theory of Acquisition Markets:Mergers versus Tender Offers, and Golden Parachutes.’The Review of Financial StudiesVol. 4, No. 1 (1991), pp. 149-174. OxfordUniversity Press
Hoskisson,Robert E. Hitt, Michael A. Ireland, R. Duane. “Competingfor Advantage.”Mason, OH: South-Western/Thomson Learning. 2004. p. 25. Print.
Kohers,N., G. Kohers & T. Kohers, “Glamour, Value, and the Form ofTakeover,” Journalof Economics and Business 2007.59,74-87.