TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/101689/10168900.028

Text File | 1990-09-19 | 6.9 KB | 123 lines

BUSINESS, Page 52

Here Comes Donald, Duck!

Can American Airlines fight off Trump's $7.5 billion raid?


    Nearly everyone saw an attacker on the horizon. The question
was who it would be. For weeks the rumors swirled that someone
might launch a takeover raid on American Airlines, the largest and
most respected U.S. carrier. In August the board of American's
parent company, AMR, bolstered its so-called poison-pill defenses
by allowing management greater flexibility to issue new stock in
order to make a takeover more expensive. The Fort Worth company
also signed up the high-powered Wall Street firms Goldman Sachs and
Salomon Brothers to develop a full-defense strategy. AMR even asked
the New York Stock Exchange to investigate recent large trades in
its stock, which caused volatile swings in its share price.

    Despite all the girding for an assault, the airline industry
was rocked last week when a raider finally surfaced. It was New
York City tycoon Donald Trump, who announced that he was offering
$120 a share, or $7.5 billion, to take over the giant carrier.

    What had American done to deserve this? After all, AMR is
widely regarded as the best run of the big U.S. airline companies.
Under the aggressive leadership of chairman Robert Crandall,
corporate revenues have more than doubled in the past six years,
to $8.8 billion. Most impressive, the airliner built its modern
fleet of 683 aircraft with relatively little borrowing. Against
$2.6 billion in assets at the end of last year, AMR held a modest
$1.2 billion in long-term debt.

    The size of Trump's bid drew gasps as well, since it was the
most ever offered for an airline and was almost 50% higher than the
price of AMR shares just before the bid. But the airline industry
is in the grip of takeover fever. After fending off bids from Los
Angeles oilman Marvin Davis, the management and employees of No.
2-ranked United in Chicago are attempting to take their company
private for an estimated $6.7 billion. And last June an investor
group led by Los Angeles financier Alfred Checchi paid $3.6 billion
for No. 4-ranked Northwest Airlines. Of the four largest U.S.
carriers, only No. 3, Delta, has yet to take a direct hit in the
takeover wars. And its turn may come.

    While Trump's grandstanding is becoming a self-parody, his
financial clout is undeniable. The King of the Deal already owns
the prestigious Plaza Hotel in Manhattan and two hotel-casinos in
Atlantic City. Last May he paid floundering Eastern Airlines $365
million for its East Coast shuttle service, renamed it the Trump
Shuttle, and now controls at least 40% of the market, in contrast
to 26% when he took over. Trump has made huge killings by buying
stakes in companies and leading other investors to believe he had
an interest in a buyout, only to sell out after the stock price
rose. Among his targets have been Golden Nugget, Pillsbury and
Federated Department Stores. But because he has made an outright
offer this time, analysts tend to think this is no bluff. "If the
bid weren't serious, it wouldn't be $120 a share," says Helane
Becker of Shearson Lehman Hutton.

    Even so, American's Crandall is as tough as barbed wire and
likely to unleash a counterattack to protect his company. Crandall
has a proprietary attitude, having crafted the airline's go-go
expansion since he became company president in 1980. He invented
the frequent-flyer program and instituted the first supersaver
fares. To cut labor costs, Crandall introduced a two-tier wage
system under which younger hires were paid less than veteran
workers. "Crandall won't give up easily," says an industry hand.
"He sees American as his company. Trump's bid is a slap in his
face."

    American's best defense seems likely to be an attack on the
amount of debt needed to finance a takeover attempt. Trump, whose
personal fortune is estimated at between $1 billion and $3 billion,
has offered to put $1 billion of his own money into the deal. The
rest would come from bank loans. Trump may get the money, but
politicians and air-safety experts have alleged that highly
leveraged carriers might be tempted to skimp on safety measures to
maintain profits. AMR released a statement last week saying it
"continues to believe that excess levels of debt in the airline
industry are not in the public interest."

    Some industry watchers think American could turn to hometown
partners for help. Rumor had it that certain members of the
billionaire Bass family of Fort Worth might take a large friendly
stake in the company, as they did to protect the Walt Disney Co.
from a raid several years ago. Or Crandall might borrow money to
create an Employee Stock Ownership Plan to achieve the same goal.

    American may also find an ally in Washington. Shaken by the
upheavals at Northwest and United, which involved extensive foreign
financing, the Senate Committee on Commerce, Science and
Transportation approved a bill last week that would prevent any
buyer from acquiring more than 25% of an airline without the
explicit approval of the Commerce Secretary. When Senator Lloyd
Bentsen learned of the attempt to buy American, the Texas Democrat
prevailed on the Commerce committee to make the bill retroactive
so that it would apply to the Trump bid. "The Congress must send
a strong message that highly leveraged buyouts are not tolerable,"
said Kentucky Democrat Wendell Ford, who sponsored the bill along
with Arizona Republican John McCain. "I don't want to wake up when
all U.S. carriers have been leveraged and bought out," added Ford,
"to decide that something should be done to regulate the buying and
selling of major parts of our transportation network."

    Despite the firepower lined up on AMR's side, Trump has several
factors in his favor. For one, an estimated 80% of AMR is owned by
institutional investors, who generally show less loyalty to
management than do individual shareholders. For another, AMR has
not paid dividends to its shareholders since 1980, contending that
the money would be better spent to build the company. In addition,
AMR's board of directors can be removed by a simple majority vote
of shareholders. Because Trump gave the company only until Oct. 20
to respond to his offer, he "has got them on a very short leash,"
says Owen Dowd, a senior vice president at the Wall Street firm of
Oppenheimer & Co. "If he can succeed in removing the board, then
he's won the game."

    On Wall Street the takeover speculators seem to think that the
Trump-Crandall fight is too close to call. AMR closed at 103 3/4
on Friday, up 17 1/4 points for the week but 16 1/4 points below
Trump's bid. Some speculators were not persuaded that Trump is
serious about the bid. Despite his high profile, Trump as a
businessman remains an enigma. Last week Playboy magazine disclosed
that a clothed Trump may grace its cover early next year. Perhaps
American Airlines is just another plaything for the man who has
everything.