EDITORIAL: Lessons to draw from Republic-Frontier deal

July 2, 2011

Hoosier executives aren’t immune to getting swept up in the moment and pulling the trigger on acquisitions that swiftly go south.

Think Conseco Inc., whose $6 billion purchase of mobile-home lender Green Tree Financial Corp. in 1998 helped send it into bankruptcy four years later.

Or Eli Lilly and Co., which in 1994 bought Arizona-based pharmacy-benefit manager PCS Health Systems for $4 billion—a deal fueled by concern that such firms were going to become crucial gatekeepers in getting drugs to patients. Lilly ended up writing off almost the whole purchase price.

It is tempting to toss Republic Airways Holdings’ purchase of Frontier Airlines and Midwest Airlines into the same heap. Two years after using the deals to enter the realm of branded flying, Republic shares are down more than half, to $5.50.

“We believe [Republic investors] price in a negative value of $4 to $5” for the purchased airlines, Evercore Partners said in a report.

The final chapter on the Frontier saga has yet to be written. But we know one thing: The moral of the story should not be that Hoosier executives need to proceed with greater caution.

To be sure, the M&A game is fraught with risk, and managers and their boards must assess what could be the worst-case outcome whenever they do a deal.

But often, there’s a cost of not doing deals. Hoosiers tend to be a conservative lot—and over the years that’s sometimes translated into missed opportunities.

Take Indiana’s banking landscape, long dominated by out-of-state players. The General Assembly did the industry no favors by being slow to change antiquated laws. Yet that doesn’t fully explain why Hoosier institutions were on the selling end while banks in neighboring states built themselves into powerhouses.

Hoosier conservatism also may help explain why Indiana has just five Fortune 500 firms, while Ohio has 27.

But it doesn’t have to be that way. Take the company now known as WellPoint Inc. For decades, it was nothing more than a Blue Cross Blue Shield health insurer doing business only in Indiana. If it had stuck with that strategy—rather than engineering the string of mergers that built it into an industry giant—the company today would be merely a minor subsidiary of a firm based elsewhere.

Or take shopping mall owner Simon Property Group Inc., whose founders, Mel and Herb Simon, became billionaires. Examples abound where the spoils go to the bold.

Which brings us back to Republic. Buying Frontier and Midwest was indeed risky, taking Republic beyond the fixed-fee, contract-flying business in which it had thrived.

But the lesson for other executives is not to shrink back and hunker down. When Bedford took the helm of Republic in 1999, it was a sleepy, money-losing commuter carrier with just 26 prop planes and a single jet.

It might still be a small fry today—rather than the industry heavyweight with $2.7 billion in revenue and nearly 10,000 employees it has become—if Bedford hadn’t embraced a go-for-it mind-set.•


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