Wednesday, November 14, 2007

Resistance Is Useless!

And then, one Thursday, nearly two thousand years after one man had been nailed to a tree for saying how great it would be to be nice to people for a change, one girl sitting on her own in a small café in Rickmansworth suddenly realized what it was that had been going wrong all this time, and she finally knew how the world could be made a good and happy place. This time it was right, it would work, and no one would have to get nailed to anything.

Sadly, however, before she could get to a phone to tell anyone about it, a terribly stupid catastrophe occurred, and the idea was lost forever.

This is not her story.

— Douglas Adams, The Hitchhiker's Guide to the Galaxy

Where are the Vogons when you need them?

* * *

I was thrilled to find out today that the bright bulbs at Pardus Capital have discovered how to make the world a good and happy place, and—unlike Mr. Adams' unfortunate girl in Rickmansworth—they were actually able to make it to a telephone (or an e-mail server) to communicate it before anyone obliterated the planet to make way for an interstellar bypass.

Their world-changing idea—in case you missed the public notice in the media today—is to effect a no-premium stock-for-stock merger of equals between Delta Air Lines and United Airlines. By way of this impressively clever and original mechanism, Pardus proposes to eliminate vast cartloads of duplicative costs ($585 million, to be exact) and put the merged airline on the path to prosperity in an age of rising fuel prices and looming Democratic re-regulation. Implicit in this strategic thunderbolt I can only assume there must be additional benefits, as well, such as the eventual recovery of pricing power by pathetic hub-and-spoke carriers, fresh pillows and mints for every economy class passenger, and the permanent global eradication of jock itch. Left unstated in the press release is whether anyone will need to be nailed to a tree or any other wooden structure to effect this revolutionary outcome, but I suppose we must take it on faith that our intrepid Pardusians have thought of this, as well.

"Damn!," you exclaim, "Why hasn't anyone else come up with such a brilliant and simple idea?" Good question. I guess the legions of M&A and corporate finance bankers plying their trade in the aviation sector over the past several decades just didn't have the intellectual firepower or sheer visionary drive of Pardus principals Karim Samii and Shane Larson. Either that, or they were too busy picking lint out of their collective belly buttons to notice a brilliant idea like this when it trotted up and pissed on their shoes. Who knows?

On behalf of my fellow investment bankers, I must humbly accept this rebuke for having had our collective thumbs up our asses for so long and express my sincere thanks to our hedge fund brethren for having so gently shown us the error of our ways. I confess that I, too, was ignorant of the fact that the firmament had been graced with the shooting star that is Pardus, but I am profoundly grateful that Mr. Samii was not content to rest upon the laurels of "a successful career at the investment firm W. R. Huff of Morristown, N.J." but rather chose to illuminate our pathetic fumblings with the radiance of his intellect.

Now, a cynic and a caviller might object to our heroes' proposal with a laundry list of the usual objections to airline mergers (chief among them the rather intransigent sticking point of how you merge employee seniority lists between pilots and flight attendants at two different airlines into one happy, cohesive family who are delighted—simply delighted, I tell you—to deliver improved customer service to a planeload of $49 passengers from Detroit to Orlando), but I for one will resist such negativity. After all, Messrs. Samii and Larson have correctly identified the looming threats of permanently higher fuel prices and crushing structural debt as problems desperately in need of a solution, and who are we to object to the patently obvious answer of merger and cost-cutting they lay before our dazzled eyes?

Others might say that the legacy airline business typified by carriers such as Delta and United is doomed to stumble along ad nauseum until public outcry breaks down the political and regulatory barriers to consolidation by merger or liquidation, but this is nothing more than unhelpful pessimism. Sure, both Democrats and Republicans have been diligent in preventing meaningful consolidation through cross-border mergers (no "foreign person" can own more than 25% of the voting stock of any US carrier), intra-US combinations (viz. the damp squib that was USAirways/United), or even the judicious application of Chapter 7 liquidation to the zombie air carriers who seem to revisit bankruptcy every few years or so, but we must understand that all those distinguished grey-haired pilots and curvy stewardesses wield a pretty mean lobbying stick. Furthermore, no Congressman worth his or her salt wants to preside over the (arguably necessary) destruction of (tens of) thousands of excess jobs in the name of economic rationality. After all, how can you serve the public good if you cannot get re-elected?

Besides, we know the Pardus Capital gang have already thought through all these trivial issues. After all, they spent a tidy chunk of their limited partners' capital on hiring both Gordon Bethune and SH&E to give them the answers they wanted to hear. They even went so far as to pro forma Continental's and Northwest's numbers into a two-page merger model with Delta, but their grizzled industry experts waived them away from the apparently greater cost savings of the latter and the "difficult management succession issues" of the former as non-starters. Whew. I'm glad those are out of the way.

And we know that Pardus is serious. A hundred and forty million dollars serious. They just added four million shares to their now-seven million share holding in Delta, so their interests are fully aligned with those of the rest of us widows and orphans who have a soft spot for legacy air carriers headquartered in Atlanta. Not for them to talk up the Delta shares just so they can trade out of the tar baby they just stumbled into, no sir.

So, in that spirit, I am offering my M&A advisory services to Pardus to help them effect the industry-transforming merger they have proposed. I suggest a modest success fee of $75 million if we succeed, and a "Sorry, better luck next time" pat on the back if we don't. Being successful hedge fund guys themselves, they should understand that kind of "trader's option" incentive structure perfectly well.

Not that that is what they do, mind you.

© 2007 The Epicurean Dealmaker. All rights reserved.