August 15, 2007
Yesterday, AirTran reentered the bidding for Midwest Air Group. In a press release, AirTran announced an offer to acquire Midwest for $16.25 per share. The consideration under the new proposal would consist of $10 a share in cash and 0.6056 shares of AirTran common stock and values Midwest at $445 million in total value. As I write, AirTran's stock is trading at $10.49 valuing the offer at $16.35. The offer is slightly higher than the $16 a share offer from TPG Capital, L.P. the Midwest board announced on Monday that they were accepting.
My initial reaction is that AirTran management may want to read Bernard Black's classic Stanford law review article Bidder Overpayment in Takeovers. Professor Black ably analyzes the factors which go into the documented effect of bidder overpayment and the puzzling persistence of takeovers when studies have shown that they are at best wealth neutral for buyers. These include the classic winner's curse which is a product of information asymmetry and a bidder's consequent over-estimation of value (Think about competing with another bidder to buy a home). But it is also effected by other factors such as management optimism and uncertainty and simple agency costs (i.e., the risk of the acquisition is largely borne by AirTran's post-transaction shareholders). Some analysts have claimed that AirTran would be better positioned without Midwest, so perhaps these factors are in play here. Of course, we will only know the answer post-transaction if and when Midwest is acquired by AirTrans.
Finally, the Midwest board still has leeway to prefer the TPG offer. The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply. In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated. Moreover, Wisconsin has a constituency statute which permits a board considering a takeover to consider constituencies other than shareholders, such as employees. The Midwest board has before invoked this constituency statute to justify rejection of Airtran's bid. It may do so again. And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid. Here, the strong shareholder support for Airtran's stock component will make such a board decision harder to support. But AirTran still has a ways to go before it actually reaches an agreement to acquire Midwest.
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