Summary Southwest Airlines and Elliott Investment Management are embroiled in a heated boardroom battle over control and direction. Elliott wants to replace a majority of Southwest's board to drive shareholder value, putting airline leadership at risk. Southwest is open to discussions with Elliott but criticizes the public approach, anticipating a showdown in upcoming months.
While bitter boardroom battles are usually played out in the media, they are often decided within the confines of the same boardroom. Southwest Airlines and Elliott Investment Management are still in the early stages of a public slanging match, with the airline releasing a response on Wednesday to the latest set of demands from its unwanted suitor. Trouble is brewing However, in a direct attack on the airline's leadership team, Elliott Investment Management (Elliott) went so far as to name the 10 people it wants to install on the Southwest Board to replace a majority of the current Southwest Board of Directors.
Yesterday, Southwest Airlines returned serve by releasing a statement in response to the demand, criticizing Elliott for its public comments. Southwest Airlines (Southwest) said the Board had consistently sought to sit down with Elliott to engage constructively in the best interests of all shareholders, but Elliott had "dismissed those efforts at every turn." A meeting was agreed for September to find a resolution but the airline is unhappy that its suitor unilaterally announced its intention to replace a majority of directors.
Despite that, Southwest said: "The Southwest Airlines Board and Executive Leadership Team remain open to conversations with Elliott to discuss ideas to drive shareholder value, and the Board will evaluate Elliott's proposed nominees as part of its ongoing Board refreshment process. No immediate action is required of Shareholders." Lacking a majority shareholding, Elliott needs to gather support from institutions and other shareholders so it can either vote in its own nominees or pressure Southwest to find an acceptable compromise, which likely means the top management will lose their jobs.
If it were to come to fruition, Elliot Investment Management would become the largest institutional shareholder in Southwest Airlines. Both sides are looking for support Elliott has a 7% beneficial ownership stake, and when derivatives are included, its stake climbs to around 11%, so it is starting from a reasonably strong position but relies on these public statements to garner more support. Southwest's leadership appears to have accepted performance has not been acceptable in recent times and seemingly wants to do a deal, but that may not be as easy as it sounds.
As an example of change, the Board pointed to the range of initiatives it implemented to elevate the customer's experience, including eliminating its legendary free-for-all boarding process, which it said would improve financial performance and drive shareholder value. Playing for time, the Board also said it will provide a comprehensive plan to transform the business during its Investor Day in late September. Southwest Airlines has joined other airlines in the United States by planning to offer assigned seating, as well as more premium seats in its cabins.
Southwest also pointed out it is not averse to boardroom change, but as is the case in these situations, Elliott wants to install its own team, starting with the airline's most senior positions. Southwest said it had appointed eight new independent and highly qualified Directors over the last three years, including the recent addition of experienced airline executive and entrepreneur Rakesh Gangwai . While the debate is heating up, it is still relatively tame compared to most hostile takeover bids, but with each side clearly laying their cards on the table, that might change quickly.
The Southwest Directors say they are happy to engage with Elliott but that seems impossible while Elliott is focused on getting its new team elected to the Board and running the airline. It will be intriguing to see how Elliott responds, so watch out for the next installment when it is reported by Simple Flying..
