Delta has rejected repeated attempts by US Airways to takeover their company. Delta cites several reasons for its determination to exit bankruptcy as a stand alone company. First, Delta seems to represent its employees who are not yet ready to give up. These employees have gone through much since the start of Delta’s financial problems. They have incurred pay cuts, lay-offs and the insecurity of a future job, not to mention retirement benefits, with the struggling airline. Delta wants to give them what they deserve, a chance to turn this company around and secure their future. Delta sees a takeover that will eliminate jobs, hubs and ultimately competition along many routes in the USA. Thus they have turned the potential takeover into a good thing by using it to unite the employees to a common goal (save Delta) from a common enemy (US Airways). Next, Delta does not see the same benefits that US Airways sees. Delta sees the merger putting it $23 billion dollars in debt and it was $21 billion dollars of debt that put them in bankruptcy in the first place. Ok so delta doesn’t want to be taken over, what can it do to prevent US Airways from buying up its shares on the open market?
To avoid a hostile takeover, a company can employ several “shark repellent” strategies such as “golden parachute”, “poison pill”, “greenmail”, and “white knight”, among many others. In the golden parachute strategy and in the event of a takeover, top executives are offered very lucrative benefits such as stock options or severance pay and can cost the acquiring company more money than they are willing to pay. A company will take a “poison pill” and offer shares to existing stockholders at a discounted price thereby diluting the shares and making it more expensive for the predator. “Green mail” takes place when a large amount of stock is held by an unfriendly company who forces the target company to repurchase the stock at a high enough premium to destroy a takeover attempt. A “white knight” is a friendly company who comes in to save the target company from a predator through a friendly merger. Though the terminology is a bit unique in mergers and acquisitions, these are strategies used by many companies in the mergers and acquisitions world, and thus they should be understood. It is for example, beneficial for a stockholder of a company about to take a poison pill to know that he is entitled to shares at a discount price. But coming back to Delta, we see that the airline giant has debated several of these strategies.
Delta has “sandbagged” US Airways and tried to stall the deal as long as they could. They would not respond directly to Parker’s offers and tried to make it through to the bankruptcy hearings, something Parker was strongly against. For Parker it was not worth it to buy Delta after they came out of bankruptcy. Further there is speculation that Delta has considered other “white knights” such as Northwest Airlines with whom Delta would have less overlap in routes and with whom a merger might be more appealing. To win support from their creditors, Delta says that it will not rule out a future acquisition and take the “poison pill” which would help directors block out a future takeover of the company. After taking these moves, a frustrated Parker is expected to drop his bid for Delta. Now it is up to Delta to show the world that they made a smart decision in turning down $10 billion dollars!
