Sunday, July 08, 2007

A Board That Knows Two Words: No Sale

Published: July 8, 2007

IT is the kind of takeover bid that shareholders dream of, with a suitor offering a healthy premium and the potential for postmerger success. So why is the target’s board dead set against it?

The bid in question is a nearly $400 million offer that AirTran Holdings, the discount airline with headquarters in Orlando, Fla., is making for the Midwest Air Group, based near Milwaukee. While Midwest’s stockholders are jumping up and down for the deal, its directors have staunchly rejected it. As a result, some Midwest shareholders wonder whether the board is performing its duty to the company’s owners or acting instead to benefit a management with whom it has long been associated.

Timothy E. Hoeksema has been chief executive of Midwest since 1983 and is also chairman of its board.

Some shareholders say their concerns begin with the fact that the Midwest directors refused for six months even to meet with officials of AirTran to hear their proposal. The board has not appointed a special committee to look at the bid. The company also has a poison pill in place to thwart a takeover.

“I don’t think management wants to sell the company at any price to anyone and I think the board has been supporting management,” said Joe Leonard, chief executive and chairman of AirTran. “It has been extremely unusual for the board not to hear what we have to say. We have said we were willing to pay for additional value if they could show that the value is there.”

Last month, at Midwest’s annual meeting, its shareholders rose up, booting out the three Midwest directors up for re-election and replacing them with AirTran’s nominees. Only then did Midwest’s directors agree to sit down with AirTran officials. That meeting will be on July 16.

AirTran said it first approached Midwest with a merger proposal more than four years ago. Rebuffed, it returned in 2005, and again last fall. Confronted with opposition from Midwest’s board, AirTran has raised the price on its most recent bid three times. The offer now stands at $9 in cash and 0.5842 shares of AirTran stock, equal to $15.43 at Friday’s close.

Midwest’s shares closed last week at $14.93. The AirTran deal reflects a 65 percent premium to Midwest’s stock price the day before last fall’s offer was publicized; it is set to expire on Aug. 10.

Before the AirTran offer came along, Midwest’s stock languished in the single digits, reflecting a string of losses at the company. Midwest was not alone in its difficulties — most airlines have shown losses in recent years. The company turned a $5.4 million profit in 2006.

AirTran says the merger would result in increased departures for the combined airline, an expansion of Midwest’s hubs and new markets. It would also bring 1,100 new jobs to Milwaukee, Midwest’s main hub.

But Midwest says the merger is not in the best interests of the company’s shareholders or the employees because it does not reflect the value of a strategic plan recently put in place by Midwest’s management.

“The board spent a lot of time and resources evaluating the AirTran offer and consistently concluded that it underrepresents the long-term value of the company,” said Carol N. Skornicka, Midwest’s general counsel and secretary. “The offer was so substantially inadequate the board did not engage in negotiations.” Ms. Skornicka declined to make Midwest directors available for interviews.

But Mr. Leonard said he is not persuaded that the Midwest board has responded properly to the offer. “In a normal merger-and-acquisition transaction, the board would appoint a special committee of independent directors,” he said. “They referred it to the governance committee. It has nothing to do with M. & A., but it does have as chairman Dave Treitel, who has been advising the company for a number of years.”

Mr. Treitel, a Midwest director since 1984, is chief executive of Simat Helliesen & Eicher, an aviation consulting firm that has worked for Midwest in recent years.

Midwest shareholders certainly seem fed up with the nine-member board. More than two-thirds of the votes at the annual meeting were cast against the Midwest directors who were up for re-election. With the exception of a new board member in 2006, there had not been a board change at Midwest since 1997. The new directors nominated by AirTran are not affiliated with it.

More Midwest directors might have lost their seats in the recent election if not for the fact that membership on the company’s board is staggered, meaning that only a few directors stand for election each year. In general, shareholders do not like the staggered terms for directors because that makes it difficult to oust an entire board that is seen as not performing.

Midwest’s outside shareholders have also resoundingly supported a tender offer for the company’s stock that AirTran started earlier this year. Almost two-thirds of the shares held by outside investors have been tendered.

Still, regardless of the shareholders’ support for the offer, a merger cannot happen without the board’s approval, Ms. Skornicka said. “Under Wisconsin law a board can consider other stakeholders, it can consider the interests of customers as well as employees,” she said. “While those things are difficult to quantify, they can impact the decision of the board.”

By agreeing to hear the AirTran proposal later this month, Midwest’s directors are by no means expressing an interest in negotiating, she said.

Mr. Hoeksema is undoubtedly less than eager to sell the company because he might lose his job as chief executive, a post that earned him $1.25 million in 2006. Mr. Hoeksema would also not receive an enormous windfall if Midwest changed hands — possibly giving him more of an incentive to hang on to his job so he can keep drawing a paycheck.

Documents show that if a change in control had occurred last December, Mr. Hoeksema would have received $2.6 million from a key executive employment agreement. Based on current prices, he would also get roughly $3.6 million when options and restricted stock vested as a result of a deal done around $15 a share. Not bad, but it is a far cry from the tens of millions and more that many other chief executives have received when their companies were sold.

Ms. Skornicka said Mr. Hoeksema’s relatively small payout in a merger reflected the modest compensation paid by the company in line with its industry and size. She said the payout played no role in the board’s response to the deal.

It will be interesting to see how Midwest’s newly configured board responds to AirTran’s offer.

“The shareholders who tendered their shares are saying, ‘I want you, the Midwest board, to remove the obstacles so I can get my money,’ ” Mr. Leonard said. “The shareholders didn’t vote out of ignorance. They’ve seen our plan, they’ve seen the Midwest plan and they knew what they were voting for when they tendered their shares.”

Certainly Midwest’s shareholders have spoken, and plainly. Now it becomes a matter of whether the Midwest board is listening.