How Trump-Style Takeovers Hurt America
Donald Trump, the self-adoring New York real estate developer, can forget his offer of $7.5 billion for AMR Corp., the owner of American Airlines.
If the world’s banks wouldn’t finance the $7.2-billion buyout of United Airlines, as they indicated on Friday, they are certainly not going to pony up that much and more for Trump.
And make no mistake, Trump is not the power in the proposed AMR takeover; overseas bankers are. Trump’s ambitious offer, like similar megabuck bids recently for United and Northwest Airlines, depended not on the force of his ego but on the lenders, most of them giant Japanese banks.
Over a week ago, Trump proposed to put up $1 billion for AMR and borrow the rest, a possible total of $8 billion, counting the assumption of AMR’s existing debt. Borrow from whom? Citicorp was said to be interested. But along with Chase Manhattan, Citicorp was the bank trying to put together the United buyout--a loan syndication of 150 banks worldwide that recalled the big credits to developing countries in the 1970s.
Maybe it recalled those disastrous loans to developing countries too much, because all last week there were reports among American bankers that the Japanese banks were getting very nervous about the United deal. The Japanese banks telephoned some of the American banks that had declined to participate in the United financing and asked them why they chose not to. In the end, they apparently decided that they had better things to do with their capital.
And that kiboshed the United deal because the real power in today’s financings is with the Japanese banks, which often provide most of the money, while U.S. banks are only agents. “Nothing can be done without the Japanese banks,” says an international loan officer for a major U.S. bank.
The most hopeful interpretation to put on the collapse of the United financing is that it may put an end to a takeover movement that makes less and less sense. The question was always clear: Why should a speculator like Trump be able to disrupt a going business like American Airlines, threaten the livelihoods of its 67,100 employees and the convenience of the traveling public? It’s not because he could do a better job than could American’s current chairman, Robert Crandall, who gets compliments from both American’s employees and its competitors. Nor is Trump an industry visionary, as was C. R. Smith, the Texan who built American.
Rather, Trump, the 43-year-old author of the autobiographical “The Art of the Deal,” is a deal maker who took advantage of the global capital market while the going was good. It was a situation that demanded rethinking in U.S. business and law, even before Friday’s events.
Indeed, the U.S. Congress was already on the verge of passing legislation to stymie Trump’s bid for AMR. It was properly worried about the consequences of excessive debt on American as well as United Airlines.
For one thing, big lenders, most of them foreign, would have power over borrower companies--dictating working capital levels and other matters through loan covenants.
Yet more important is the debilitating effect of debt on company ambitions. The major U.S. airlines, American in particular, have a dawning opportunity to give the United States international leadership in a service industry. They not only have the size but they’re also pioneers in computer techniques for operations and marketing.
But, put such airlines in the hands of a speculator like Trump and the computer system would probably have been sold to pay down debt. That’s smart business in circles more adept at liquidating a company than building one.
So what can or should Congress and the government do? Gear policies to support builders like Crandall rather than people like Trump, who only want to cash in on the efforts of others.
What about shareholder value? Well, in the nine years that Crandall has run it, American’s stock price has gone up eightfold--even before takeover speculation pushed it over 100. In Friday’s trading, AMR declined 1/8 to 98 5/8 just as it fell in the 1987 market crash, but it had risen again to new highs since then, even without Trump or takeover speculation.
In short, American Airlines doesn’t need Donald Trump, and neither do AMR shareholders. His bid was based on a theoretical breakup value, a price that reflects a going-out-of-business sale rather than a going concern. It’s time to move on from such worth-more-dead-than-alive calculations.
And maybe we have. Maybe the collapse of takeover financings in the final days of 1989 will be seen in time as an encouraging epitaph for the 1980s, a decade that honored financial trickery more than business creativity.
“It’s always thus when savings are low and capital scarce,” says Peter Rona, a worldly-wise Hungarian-born investment banker and president of IBJ-Schroder in New York.
“That’s when the handlers of financial resources, like Donald Trump, are heroes, and not the Thomas Edisons.” Perhaps the 1990s will have the good sense to ignore the Trumps and to find and praise the new Edisons.
