The War That’s Going On That Few Of Us Know About. Welcome To The World Of Hostile Take-overs

There is a war being fought every day that most of us know nothing about. It’s tough, ruthless, bloody, vindictive and merciless. It takes no prisoners and thrives on tactics and adrenalin. Vast industrial estates can be built up and torn down just as quickly. Allow me, to introduce you, to the world of corporate takeovers.

In polite company they’re called hostile takeovers. But make no mistake, this is war and only the strongest, or the smartest, or both, will survive. Think of backroom deals worth billions, Orcs in business suits without a conscience, engaged in scandalous conduct, firing loyal employees and making Wall Street villain Gordon Gekko, look like Mother Teresa.

By way of explanation, hostile takeovers are when a company, or investor, seeks to take over a business that doesn’t want to be taken over. If a company is listed on the stock market, it can be vulnerable to a hostile takeover. It’s especially vulnerable, if the company is undervalued or seen to be struggling.

Hostile takeovers happen in a number of ways. The first, is through tender offers where the bidder, offers shareholders a premium on the stock price. Even if the company bosses and the Board of Directors oppose the offer, it can still be accepted if the majority of shareholders agree. The company board of directors is required by law to act in the best interests of shareholders so if an offer is good enough then they are supposed to agree to the sale.

The other way is through a proxy fight, where the bidding company tries to convince shareholders, to replace the takeover target’s, board of directors, with their supporters who will approve a buyout. Under Corporate rules in Australia, a bidding company can cause a spill of the board of directors, if it acquires five percent of the voting stock or convinces 100 shareholders to call for a spill. If a bidder manages to buy 20 percent of company stock then a full takeover bid is triggered.

Hostile takeovers, aren’t necessarily a bad thing. It can often result in a great improvement in company profit, and size, with the introduction of better management. But the opposite can also happen, where company assets are stripped and sold and employees lose their jobs.

There have been plenty of examples of this type of hostile takeover.

In the United States, in the 1980s, a group of investors, that were more like corporate raiders, made a bid for airline company, TWA. The corporate raider tag came from their past reputation for stripping and selling off the company assets for massive profits. One of the most prominent of these corporate raiders, was Carl Icahn, who is said to be the financier who provided inspiration for the character, Gordon Gekko. Just like in the movie Wall Street, Icahn continues to launch attacks on companies he sees as vulnerable. His latest move was against online giant eBay. But it was his involvement with the now defunct, TWA, that was the most controversial.

At one time, TWA was mentioned in the same breath as American Airlines, United and Pan Am. TWA always had a checkered financial past and by 1985, its parent company decided to cut its losses when Carl Icahn came knocking. According to a profile written about Icahn in St Louis Magazine, he wasn’t the only corporate raider to make an offer. Another came from union buster Frank Lorenzo, who gave TWA employees even more reason to be fearful. In some ways he made Carl Icahn looked like an angel in comparison. According to St Louis Magazine, once Icahn got his hands on TWA, he made it clear, when he said he wanted TWA to be profitable, he was talking about profits for himself. The magazine quoted a former TWA pilot, who said: “It became more and more apparent that Carl was not interested in growing the airline but in using TWA as a financial vehicle to acquire wealth for himself.”

Three years after the buyout, Icahn turned TWA into a private company, banking $US469 million in the process. In return, TWA was burdened with $US540 million of debt. This debt eventually became an albatross for TWA. In order for the airline to remain competitive it needed new planes. Icahn ordered 12 new planes for the fleet when employees were expecting more than 100. As far as TWA was concerned worse was to follow. In 1991, Icahn sold TWA’s London routes to American Airlines for $US445 million, which immediately ended a lucrative revenue source for the airline.

But Icahn didn’t just sell off TWA’s assets to make a quick buck. He also needed to pay back the money he borrowed to make his raid on the airline in the first place. That’s the other point you need to remember about hostile takeovers. It is almost always using borrowed money, which of course has to be paid back once the deal is done.

By 1992, TWA was bankrupt, owing hundreds of millions of dollars to creditors. In what must surely be a sad irony, these creditors included Icahn, who was owed $US190 million. TWA management negotiated a repayment deal with Icahn that ended up costing the airline $US100 million a year. It crippled TWA, which was eventually sold to American Airlines. Nothing remains of the company apart from this story.

And this will give you some idea of how ruthless this kind of corporate trench warfare can get. In 2009, US based food conglomerate, Kraft, launched a hostile takeover bid for Cadbury, the iconic British confectionary manufacturer. Cadbury had been on the Kraft radar for a number of years. But a takeover was not possible until Cadbury sold its drinks business, Schweppes, in 2008.

Following that sale, Kraft made one bid for Cadbury and then another a week later. Both bids were firmly rejected by Cadbury’s bosses. Cadbury’s chairman Roger Carr said it was an “unappealing prospect” to be absorbed into Kraft’s “low growth conglomerate business.” The Cadbury CEO called the offer “derisory.” Cadbury was also upset that Kraft’s second offer of about $US 25 billion, was actually lower, than the figure they offered in their first takeover bid. Kraft amended its takeover offer after billionaire, Warren Buffett, who held a 9.4 percent stake in Kraft, warned the company not to pay over the odds for Cadbury. The British confectionary operation, had its collective backs against the wall and was being threatened by a foreign multinational. So Cadbury decided to try and buy some time. It asked the UK Government’s Takeover Panel to force Kraft to submit a formal offer for Cadbury. This would give Cadbury time to formulate a defensive strategy, as well as gather more information about Kraft’s intentions. It looked like Cadbury might survive the threat when the company posted an encouraging third quarter financial report while Kraft recorded a disappointing result. Cadbury’s share price rose above the takeover offer. But interested parties, who know the smell of money almost as much as blood in the water, knew Cadbury was still very vulnerable. A group of Cadbury’s biggest shareholders, comprising US weighted hedge funds and short-term investors, decided to force the majority of Cadbury shareholders into accepting the Kraft offer. Of course the people who really do have the most to lose, like Cadbury’s employees and the family descendants of Cadbury’s founders,were devastated when the company was sold to overseas interests for what they perceived to be a bargain basement price. The fact that these overseas interests were clearly driven solely by the need to make greater profit, was a bitter pill.

The takeover deal had a catastrophic result for the 400 people working at one of the Cadbury factories in the UK,  that Kraft had dutifully promised to keep open, should it win the takeover battle. A month after the takeover deal was signed, Kraft reneged on its pledge and said the factory would close. No room for sentiment when there is money to be made and costs to be cut. Company loyalty counts for nothing. I have always wondered how people, who have no respect or regard for their fellow human beings, are able to sleep at night. But even if I was to ask them, they would stare at me blankly and be puzzled that I even asked the question. So be it. But for me money, quite frankly, is over rated unless it can be used to do some collective good.

Airlines Find New Ways To Torture Passengers With Economy Minus Seating

Everything is shrinking. Have you noticed? We can go from one side of the world to the other in an instant. Skype or email, you can reach anyone, anywhere with the click of a mouse or the tap of a keyboard. And it’s not limited to the virtual world. You can stick a pin in a map of any country and be there within hours. That is unprecedented in human history. But if you think this is a plug for the world’s major, or even minor, airlines think again.

It ain’t.

Airline travel has never been more affordable, more frequent, more readily available and more undesirable. Everything the world’s airlines do these days has, what I call, a perverse inversibility. The more they offer in travel destinations, the less you receive in customer service and creature comfort. Whoever said there’s no such thing as a free ride wasn’t kidding. Here are some examples. You think you’ve locked in the final price for your airfare, only to be told it’s going to cost extra should you want to choose your seat. From baggage fees to credit card surcharges, it’s just one more extra fee, airlines are slugging customers, to bring in an extra dollar.

Choosing your seat on a Qantas domestic flight is free, but you’ll get stung big time on their international routes. Selecting a general seat will cost you $25. And for extra legroom make that $60. Qantas does  allow you to avoid paying the fee by offering free seat selection within 24 hours of flying, that is, of course, if you don’t mind taking pot luck on where you’ll end up sitting. How generous? A Qantas spokesperson had the temerity to suggest that seat selection fees were designed to avoid passenger disappointment.

Yeah right.

But Qantas isn’t the only Australian carrier loading on the fees. Jetstar automatically charges for seat selection unless you choose not to pay. Its booking system starts off by adding $5 to your fare for allowing you to choose your seat. And if you want a seat closer to the front it will cost you $11 and then it jumps to $24 for an exit row seat.

Virgin’s fee structure offers extra legroom seating from $20 to $70 for domestic and short haul international flights and a whopping $150 for long haul international flights. And it’s happening all over the world. In the United States, Delta, American Airlines, and low-cost carriers US Airways, Frontier, Spirit and Allegiant have introduced charges for “preferred seating”. In Europe, British Airways charges a seat selection fee and budget carrier Ryanair offers specific seats for an extra cost, as does its low-cost rival EasyJet.

So you can imagine my shock, horror and dismay, did I mention shock? When I read that airlines are planning to introduce a whole new level of flight hell called ‘economy minus.’ If you thought there couldn’t be anything worse than cattle class think again. Plans are afoot to sky test a new, even more cramped section in economy class, according to leaks published on an aviation website.

The “enhanced economy” section would have a seat pitch, which is the distance between your seat and the seat in front of you, of approximately 35 to 38 inches (88.9 — 96.5 centimetres). Regular economy would have a pitch of 76 to 78.7cm and the new “economy minus” at under 76cm — but the exact size, meaning how small, is yet to be confirmed.

But many airlines have already reconfigured their economy sections into similar models, they’re just not letting the travelling public know about it. Numerous airline seats already fall under the 76cm mark. And, you might be surprised to know, that all these teensy seats go against recommendations from plane manufacturer Boeing, which released its “magic formula” for leg room in economy class in 2001. The formula, was hailed at the time as the ultimate guide for leg room. It was based on calculations of how many cubic centimetres of leg, rear, end and shoulder space it takes to create a “tolerable” experience for passengers. Boeing calculated it at 81 cm.

Essentially, what we’ve come to know as the premium offering of “economy plus,”which isn’t quite business class, but less of a squeeze, is really just the equivalent of the economy class section from years ago and we thought that was bad enough at the time. The airlines refuse to advertise the fact that seats are continuing to shrink, and the standard economy section we used to know will soon be just a memory. In fact, these days airlines are stealing space from economy passengers to make their premium flyers more comfortable. For example, last year, one airline reduced economy passenger space by an inch (2.5cm) per row in order to give their “economy plus” flyers extra room.

The airlines are being very quiet about it all, but passengers are noticing the difference. One airline passenger in the United States wrote about what she described as the space-stealing problem in a review of her United Airlines experience. This airline has already garnered a reputation for having an unofficial “economy minus” section with leg room of just 78cm on some of its planes — 16cm less than its premium passengers.

“We just ended a miserable flight, “ she wrote. “United’s ‘economy plus’ option, means that for a family not able to afford to upgrade, you are now put in the ‘economy minus’ seats — meaning the least leg room on any flight in living memory. It seems United gives the plus legroom to the economy plus, but then subtracts the legroom from the poor folks back in cattle class.”

Prepare yourself for the brave new world in airline travel.

Major airlines like Air New Zealand, Emirates, KLM and Air France managed to squeeze in a fourth seat in the middle of their Boeing 777 planes. And to add insult to injury they charge the same price as regular economy for a seat that’s narrower than most other airlines.

This is not good news in a world where people are getting bigger not smaller. Airline travel is fast becoming something to be endured rather than enjoyed.