Southwest Airlines Adopts ‘Poison Pill’ To Fend Off Activist Elliott Management

Southwest Airlines has a new shareholder rights plan, known widely as a “poison pill,” enacted in response to activist investor Elliott Management’s complaint about changes in the company’s leadership. According to the plan, which the airline announced on Wednesday, no one investor, including Elliott, can be permitted to gain too much control over the company.

The poison pill would be triggered if an investor bought 12.5% of Southwest’s shares. If triggered, it would allow existing shareholders to purchase newly diluted firm shares at a 50% discount, thus diluting an activist investor’s stake. This follows the revelation earlier last month that Elliott had an 11% stake in Southwest, valued at around $1.9 billion.

The company has also been criticized by Elliott Management for not performing up to the levels of other airlines it perceives as competitors, specifically stating that the company does not have a premium seating offering. Elliott has asked Chief Executive Bob Jordan and Chairman Gary Kelly to be removed as leaders. The board has firmly supported the company’s current leadership.

These have recently included an overcompensated-for domestic market and delays with the introduction of new aircraft from Boeing. Yet, despite such challenges, Southwest in the past has still topped the list of profitable airlines throughout the turbulent airline industry’s five-decade history.

Because of this mounting pressure, Southwest finally let it be known that it is amenable to serious modifications to its long-standing business model. Among such changes are the possibilities of pre-assigned seats and the availability of premium seats – both of which go against the grain of this carrier’s conventional wisdom.

For example, hedge fund Elliott Management has left its mark on corporations as large as AT&T and Salesforce in its umpteenth campaign in the corporate scene. Indeed, with over $65 billion under management, the firm is classed among the top in the world, and it has a documented history of calling for strategic changes in its investment targets.

Southwest’s leadership says it hasn’t closed its doors on meaningful interaction with Elliott since the two last Sat down just a fortnight ago. The airline has hired Bank of America and Morgan Stanley to work as financial advisors in the matter, and Vinson & Elkins and Kirkland & Ellis as legal advisors for the litigation.

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As this corporate drama plays out, industry observers and investors are going to pay very close attention to how Southwest fends off these hostile actions and if it will make drastic changes to its business model amid ever-growing calls from activists to do just that.

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