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Robert Grue

on 16 November 2012

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Transcript of Southwest/AirTran

Merges With Southwest Airlines AirTran Airways History Behind the Merger: - 1967: Texas investors incorporate Southwest Airlines Co., which only had routes in Texas - 1975: Southwest goes public; changes name to Southwest Airlines - 1979: Southwest expands with its first out-of-state flight to New Orleans - 1993: ValuJet Airlines is founded in Atlanta to fill a void in the airline market after the collapse of Eastern Airlines - 1996: After steady growth and strong financial performance, ValuJet Flight 592 crashes in the Florida Everglades, killing all 110 on board the flight. - 1997: After a year of financial woes following the '96 plane crash, ValuJet merges with AirTran via a reverse merger. The new AirTran grows steadily and becomes a key player in the industry. The Merging Process: - Sept. 27, 2010: Southwest announces that it will buy AirTran and enter the Atlanta market by taking over AirTran's hub there - March 23, 2011: AirTran's shareholders approve the merger - April 26, 2011: The Department of Justice approves the merger, allowing the parties to close the deal - May 22, 2011: Southwest and AirTran close the deal Structuring the Deal: - Deal Value: $3.42 billion - Payment Terms: - $3.75/share of AirTran common stock - Stock exchange ratio: approximately 1 share of Southwest for every 3 shares of AirTran's common stock The "Exchange Ratio" shall be determined as follows:

(i) in the event that the Southwest Average Share Price is less than $10.90, the Exchange Ratio shall be equal to (A) $3.50 divided by (B) the Southwest Average Share Price, rounded to the nearest thousandth;

(ii) in the event that the Southwest Average Share Price is equal to or greater than $10.90 but less than or equal to $12.46, the Exchange Ratio shall be 0.321.

(iii) in the event that the Southwest Average Share Price is greater than $12.46, the Exchange Ratio shall be equal to (A) $4.00 divided by (B) the Southwest Average Share Price, rounded to the nearest thousandth. Merger Agreement: Material Adverse Effect The Exchange Ratio: "AirTran Material Adverse Effect” means any Effect that is, or would reasonably be expected to be, materially adverse to the assets, business, financial condition, or results of operations of AirTran and the AirTran Subsidiaries, taken as a whole; provided, however..." Merger Agreement: Material Adverse Effect - Structure: Reverse Triangular Merger Followed by a "Sideways Merger" Reverse Triangular Merger: So, in this deal it looks like: Which is then followed by... Merger Agreement: Material Adverse Effect The Reasoning Behind Two Mergers?? - It made the deal TAX-FREE Market Comparison: Carve Outs General Economic Conditions
Changes in GAAP, applicable law, or interpretation
Factors generally affecting the industry General Economic Conditions Merger Agreement: Material Adverse Effect Bargaining Power Excludes "prospects" (pro-seller)
No long-term effects limitation (pro-buyer)
"Taken as a whole" limitation (pro-seller)
9 carve outs (pro-seller)
3 with a "materially disproportionate effect" qualifier (pro-buyer/seller)
3 with other qualifiers (pro-buyer) Why Merge with AirTran? Merger Agreement: Material Adverse Effect 1. Immediate Growth: Acquiring AirTran allowed Southwest to change its focus from alternate airports to bigger business destinations where Southwest formerly had little or no presence 2. Going International: AirTran currently serves several Caribbean destinations, so this acquisition makes international expansion much easier for Southwest, a goal Southwest has talked about for a long time Factors Generally Affecting the Industry - Ex: Atlanta-Hartsfield, LaGuardia, and Ronald Reagan (D.C.) Business Issues: AirTran Employees $1.159 - $2.856 million
Lifetime air travel benefits 3. Reducing Competition: Southwest competed with AirTran for many years in some major metropolitan cities such as Milwaukee and Baltimore, so this merger reduces Southwest's competition Severance Benefits: Retention Plans: None
Bonus incentives: $110,000 - $170,000/3 months Business Issues: Integration 4. Increasing Market Share: Acquiring AirTran increases Southwest's domestic market share from 15% to 19%, which is comparable to the 21% market share of both Delta/Northwest and Continental/United AirTran's Boeing 717s 5. Strategically Complementary: Southwest and AirTran both emphasize high-quality service and low-cost operations, while having only modest route overlap. Also, increased flexibility with AirTran's Boeing 717s. Synergies - Route Expansion: Synergies - Market Share Expansion Investors Agreed Southwest made a good move: Southwest's stock jumped over 19% following the announcement of the agreement on September 27th Merger Agreement: Other Provisions Survival period for the representations and warranties: none survive after the effective date of the agreement (pro-seller)
Governing law: Texas (pro-buyer)
Conditions: the same (neutral) Charlie Arnold & Robert Grue Bargaining Power Litigation Merger Agreement: Unique Provisions Representation: AirTran aircraft are properly registered on the FAA aircraft registry and have validly issued and current standard certificates of airworthiness
Representation: AirTran's disclosure letter sets forth all takeoff and landing slots and operating authorizations from the FAA at any domestic or international airport The Integration Process Thus Far: Southwest has Assumed AirTran's Operations in: - Des Moines - Seattle - Key West Southwest Has Terminated Flights to 15 Cities that AirTran Previously Serviced: Allentown, Pa.;
Asheville, N.C.;
Atlantic City, N.J.
Bloomington/Normal, Ill.;
Charleston, W. Va.;
Dallas/Fort Worth;
Harrisburg, Pa.;
Huntsville, Ala.;
Knoxville, Tenn;
Lexington, Ky.;
Moline/Quad Cities, Ill.;
Miami, Fla.;
Newport News, Va.;
Sarasota, Fla.;
White Plains, N.Y. Future Integration Plans: - On April 14, 2013, Southwest will assume AirTran's operations in: -Charlotte, NC
-Flint, MI
-Portland, ME
-Rochester, NY - Complete Integration??? Fairly Easy Questions? The End
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