Was Midwest Airlines’ decision to reject a hostile takeover bid from AirTran Holdings Inc. and instead agree to be acquired by a private equity group and Northwest Airlines the wise move for the company?
Only time will tell. AirTran is giving the new Midwest all it can handle in the Milwaukee market, with basement bargain fares and increased nonstop routes. AirTran also is better-equipped to handle the skyrocketing fuel costs because its fleet of aircraft is the youngest and most efficient in the country.
However, the decision last August to reject AirTran’s combination offer of stock and cash and instead take an all-cash offer of $17 per share was indisputably the prudent move for investors who owned Midwest stock.
If those investors have not yet sent a "thank you" card to Midwest Airlines chief executive officer Tim Hoeksema, they should consider it.
The decision to shun Airtran for an all-cash offer saved Midwest shareholders about $121 million, according to a new report by an independent securities analyst.
"Since AirTran’s final offer to acquire Midwest on Aug. 14, 2007, its share price has fallen from $10.32 to a recent price of $3 – a 71-percent decline," said William McGinnis, CFA, owner of W. McGinnis Advisors in Milwaukee. "The shares offered to Midwest shareholders in the hostile takeover attempt were worth a total of $171 million at that time, but today are worth only $50 million, due to AirTran’s share price decline. If Midwest’s board had accepted AirTran’s offer and shareholders had not sold the shares, there would have been a total $121 million decline in value … There is always a risk in accepting the shares of another company in an acquisition, and these risks are often exacerbated in a hostile takeover offer. That’s why cash is king – it removes the share price risk."
The new report is a follow-up to McGinnis Advisors’ original report, which focused on the often unrecognized factors that boards of directors consider when faced with a hostile takeover bid.
That report, titled "Hostile Acquisition Offers – The Responsibilities of the Target Board," can be found at www.wmcginnisadvisors.com/midwest-original.htm.
In the original report, McGinnis noted seven reasons why Midwest’s board might reject the offers of AirTran and instead agree to the terms of an all-cash deal with Fort Worth, Texas-based TPG Capital and Northwest Airlines.
"None of the seven issues noted in the original report are unique to AirTran," McGinnis said. "They apply to all companies offering their shares in a hostile takeover attempt. A very recent example of this situation would be Microsoft’s hostile offer to acquire Yahoo."
Although the future of Midwest Airlines remains uncertain in a very flighty and insecure industry, the sale to TPG Capital created a great windfall for thousands of Wisconsin investors who owned stock in the company.
Keep in mind that many of those investors bought Midwest stock at its low points of $2 to $3 per share and ultimately sold them for $17 per share. Nice. Very nice.
"Midwest shareholders should be exceptionally pleased with the $17 per share cash offer the board accepted from TPG Capital," McGinnis said. "If shareholders simply put the money they received under their mattress, they would be 44-percent better off than if the AirTran offer had been accepted and the shares held."
More details of the follow-up analysis can be found in the full report at www.wmcginnisadvisors.com/midwest-follow-up.htm.
