Southwest Airlines Co. (NYSE:LUV) has implemented a “poison pill” strategy to prevent Elliott Investment Management from increasing its stake in the airline after the activist investor pushed for leadership changes following disappointing financial results.
Response to Activist Investor Pressure
The announcement follows Southwest CEO Bob Jordan’s recent statement that he would not step down despite pressure from Elliott, which disclosed a stake worth nearly $2 billion in the airline last month. “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,” Southwest Executive Chair Gary Kelly stated on Wednesday.
Kelly mentioned that the board adopted the poison pill because Elliott could “significantly increase” its current 11% stake in the company.
Details of the Poison Pill Strategy
The “poison pill” strategy, commonly used by corporate boards to fend off hostile takeover attempts, involves issuing one right for each share of common stock. These rights will initially trade with Southwest’s common stock and become exercisable if any person or group acquires 12.5% or more of the company’s shares. This mechanism allows shareholders to purchase additional shares at a substantial discount, diluting the ownership interest of the acquiring party.
Financial Performance and Investor Criticism
Elliott’s call for replacing CEO Jordan with an external hire comes after Southwest posted lackluster results in recent quarters, partly due to delays in plane supply from Boeing (NYSE:BA). In late June, the company also reported ongoing struggles with pricing accuracy in its second quarter, attributing the issues to challenges in predicting travel demand, which drew further criticism from Elliott.
Elliott Investment Management did not immediately respond to requests for comment on Wednesday.
Market Reaction and Stock Performance
Shares of Southwest Airlines were up less than 1% in early trading following the announcement. The stock has lost nearly 22% of its value over the past 12 months.
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