Richard J. Ferris had planned to crisscross the country this week and next to visit Allegis Corp.'s large institutional investors and promote his dream of a full-service travel company. He was due in Boston today and Los Angeles next Tuesday.
But his plans suddenly changed. Instead, Ferris spent Tuesday in the Manhattan board room of Morgan Stanley & Co., Allegis' investment adviser, defending--to his own directors--his diversification program and the recapitalization program that went with it. And, finally, they just didn't buy it.
The emergency meeting had been called to discuss a number of proposals for restructuring Allegis, which also included one from its airline subsidiary's pilots and one from a group of private investors.
The board spent all afternoon listening. There were a few breaks so that directors could huddle in groups for discussions and attend to other business. Two board members were not there: E. Mandell de Windt, retired chairman and chief executive of Eaton Corp. in Cleveland, and Richard P. Cooley, chairman and chief executive of Seafirst Corp. in Seattle; both participated by telephone.
Also present were Eric J. Gleacher, Jr., head of Morgan Stanley's mergers and acquisitions department; representatives of First Boston Corp., another investment adviser, and lawyers from Skadden, Arps, Slate, Meagher & Flom, a top takeover law firm. By the time the session ended at about 9 p.m., Ferris had lost his fight, his corporate dream was shattered and he was out of a job.
His resignation was followed by a swift reversal of the strategy Allegis had taken under Ferris, its 50-year-old chairman and chief executive. The corporation, parent of United Airlines, had just spent $7 million to change its name from UAL Inc. On Tuesday, as an expression of the change in strategy, the company said it plans to rename itself United Airlines Inc.
"Obviously," said Timothy Pettee, airline analyst with the New York brokerage of Bear, Stearns & Co., "the board must have given Ferris a vote of no confidence. He was the principal architect of the integrated travel concept. There may be others that go with him."
The swiftness of Ferris' departure and the change in policy came as a shock to many observers. "I was surprised at how quickly they reversed course," said Edward Starkman, associate airline analyst for the New York brokerage of Paine Webber Inc. "(Earlier the board had) so strongly backed and defended the Allegis concept and Dick Ferris. But they had been backed up against the wall by all of these various plans to maximize shareholder value."
Shareholders did not like the Ferris plan to diversify from the airline on which the company was built. It had purchased Westin Hotels in 1970; then in the past two years, it added the Hertz car-rental firm and the Hilton International hotel chain.
Airlines traditionally have not done well in the hotel business, one expert noted. "If you look back to the 1960s and the 1970s," said Lawrence F. Cunningham, professor of marketing and transportation at the University of Colorado at Denver, "many airlines tried to pursue diversification into travel-related services, namely hotels. They found out that the operating synergies between airlines and hotels were dubious at best."
Cunningham noted that Pan American World Airways, Continental Airlines, Trans World Airlines and American Airlines all bought and sold hotel chains during that period.
He added that in the last two years American Airlines and United Airlines, the nation's largest carriers, had gone in opposite directions. American expanded by buying planes, while United under Ferris diversified.
"The American strategy was much more viable," he said.
As part of its change in course, Allegis now plans to sell the hotels and Hertz, and most observers predicted Wednesday that the car-rental company will be the first on the auction block.
They suggested that Frank A. Olson, the Hertz chief executive who was named to succeed Ferris at Allegis, might himself try to put together a private purchase of Hertz.
What seems to have displeased stockholders so much was that the diversification program never brought them what they considered fair market value. The company's pieces were worth more than its whole.
Allegis shares lagged behind the stock market's big runup last year, but since have climbed sharply as a result of takeover speculation.
"While the (diversification) concept might have worked demographically," too much time would have been needed to make it work," said a spokesman for a large institutional stockholder of Allegis who asked not to be identified. "The gap between breakup value and current stock value was too large."
A bid last April by United's pilots to buy the airline from Allegis proved the catalyst for this week's climactic events. Coniston Partners, an investment company, then purchased 13% of Allegis' shares and threatened a hostile takeover. That forced Ferris to offer his own restructuring plan that would have given shareholders a special payment of $60 per share.
But during the past week, neither the pilots--who disliked Ferris' diversification strategy--nor Coniston would accept the plan.
On Wednesday, a number of Allegis shareholders, 80% of whom are large Wall Street institutions, applauded Tuesday's announcement.
On the New York Stock Exchange, Allegis shares rose $2 to close at $92.75. The 3.3 million shares traded made Allegis the day's most active stock.
"We believe the actions by the Allegis board are a positive first step which will help restore the company as a successful business over the long term," Fidelity Investments of Boston said through a spokeswoman. Fidelity owns 1.7 million shares.
Coniston issued a statement saying that if the proposal is carried out, it will terminate plans to solicit shareholder support to replace the Allegis board. Coniston, which has a earned paper profit of nearly $200 million in just a few weeks from the runup in value of its 13% stake in the company, said Allegis' action "was a restatement and adoption of Coniston's previously announced program to maximize shareholder value."
Pilots' Union Pleased
Augustus K. Oliver, one of the Coniston partners, said in an interview that it has no present plans to sell shares or acquire more, but it reserved the right to do either.
In a statement, the United pilots' union said: "We are pleased by the company's decision to abandon its Allegis diversification strategy and reconsider our proposal. However, it is only a first step in the right direction. The pilots are committed to the purchase and control of the airline by all employees."
ALLEGIS A $7-MILLION NAME THAT LASTED LESS THAN 7 WEEKS On April 30, UAL Corp. stockholders approved changing the company's name to Allegis. The idea was to reflect that Allegis was more than an airline and included Hertz and the Westin and Hilton International hotel chains--as well as United Airlines.
It cost an estimated $7 million for an identity consultant to pick a name and for the massive marketing campaign that the company has launched in connection with the new name.
On Tuesday, the company announced it expects to sell its subsidiaries, focus on United and change its name back to United Airlines Inc. Based in Chicago, the airline has 61,000 employees and flies to 165 cities in 13 countries.
SUBSIDIARIES FOR SALE HERTZ HERTZ The largest car-rental firm in the world has 4,700 outlets, including licensees, in 130 countries, a fleet of 130,000 cars and 30,000 employees. In 1986, it had revenue of $1.6 billion. Based in New York, Hertz was purchased from RCA in August, 1985, for $587.5 million. Chief executive: Frank A. Olson, 54.
HILTON INTERNATIONAL Based in New York, Hilton International operates 91 hotels in 43 countries with 39,000 employees. Its 1986 revenue was $754.5 million. The company is separate from Hilton Hotels Corp. which operates or franchises Hilton hotels inside the continental United States. The two companies share a reservations network. Hilton International was purchased from Transworld on April 1 for $982 million. Chief executive: Harry Mullikin, 59.
WESTIN HOTELS WESTIN With headquarters in Seattle, Westin operates 61 hotels in 11 countries with 28,000 employees. In 1986, its revenue was $491.6 million. The company, formerly known as Western International Hotel Co., was purchased in 1970 for stock valued at approximately $82 million. Chief executive: Harry Mullikin, 59.