Southwest Airlines has adopted a shareholder rights plan, commonly known as a "poison pill," in response to activist hedge fund Elliott Management's investment and its push to remove CEO Bob Jordan and Chairman Gary Kelly. The move underscores Southwest's determination to fend off the aggressive maneuvers of one of the world's most successful activist investors.
The poison pill, activated if any investor acquires at least 12.5% of the company, allows all other shareholders to purchase additional shares at a 50% discount. This tactic is designed to dilute the influence of any shareholder attempting to amass a significant stake and exert control over the company.
Elliott Management, led by Paul Singer, disclosed in June that it had acquired an 11% stake in Southwest, valued at approximately $1.9 billion. The firm criticized Southwest's performance relative to larger rivals, pointing out the airline's lack of premium offerings as a key factor in its underperformance. Southwest's announcement on Wednesday saw its shares rise slightly in morning trading.
The adoption of the poison pill comes as Elliott made filings with antitrust authorities that could enable it to increase its stake further. There is a 30-day waiting period following such filings, suggesting Elliott began this process around the time it disclosed its initial stake.
"Southwest Airlines has made a good faith effort to engage constructively with Elliott Investment Management since its initial investment and remains open to any ideas for lasting value creation," Gary Kelly said in a statement. According to sources familiar with the matter, representatives from Elliott and Southwest met in person just two weeks ago.
Elliott's push for changes at Southwest includes the removal of CEO Bob Jordan and Chairman Gary Kelly, signaling a clear intention to overhaul the airline's leadership. Despite Elliott's aggressive stance, Jordan has stated he has no plans to resign. The Dallas-based airline has been grappling with an oversupplied domestic market and delays in receiving new planes from Boeing, which have compounded its operational challenges.
Southwest's board has shown unwavering support for its current leadership team following Elliott's stake disclosure. The airline has been under pressure to enhance revenue streams and is considering significant changes to its business model, including the potential introduction of seating assignments and premium seating options. These changes represent a departure from Southwest's traditional approach but are seen as necessary to stay competitive.
Elliott Management has a history of successful activist campaigns at major companies, including AT&T, Salesforce, and Texas Instruments. The firm, which relocated its headquarters from New York to West Palm Beach, Florida, in 2020, manages over $65 billion in assets and has only experienced two losing years in its five-decade history.
Southwest Airlines has enlisted the support of Bank of America and Morgan Stanley as its financial advisers. Legal counsel is being provided by Vinson & Elkins and Kirkland & Ellis, both of which have strong reputations in activism defense.
The implementation of the poison pill is seen as a strategic move by Southwest to protect its current management and corporate structure from Elliott's activist pressure. However, it is likely to escalate tensions between the airline and the hedge fund, leading to further strategic maneuvers from both sides.
Southwest's bylaws allow shareholders or groups holding at least 10% of the company's stock to call a special meeting, which means Elliott could potentially leverage its current stake to push for significant changes before the next annual shareholders' meeting in May 2025.
