In most children's games, there is no such thing as' repentance '. When a company signs a firm contract to acquire another company, similar principles seem to apply.
Later this Tuesday, Omni Logistics, a freight forwarding company headquartered in Dallas, stated that it had filed a lawsuit against Forward Air, a trucking company, demanding that the Delaware Court of Justice enforce the merger agreement signed between the two companies in August this year. Prior to this, Forward issued a statement last week stating that it may terminate the controversial acquisition, citing Omni's failure to fulfill its merger obligations. And Omni happens to be one of its trusted suppliers.
The ongoing soap opera includes a series of battles through public statements, reminiscent of Elon Musk's attempt to withdraw after signing a $44 billion deal to acquire social media giant Twitter (now renamed X) last year. Although Musk argued that Twitter did not crack down on spam accounts as promised, his motivation for backtracking may be to realize that the bid was too high. One year after the acquisition, the company estimated its value to be $19 billion.
The reason behind Forward CEO Thomas Schmitt's change of mind is clearly due to the unprecedented uproar among shareholders caused by his disclosure of the transaction, leading to a 40% drop in the company's stock price.
Investors are greatly dissatisfied with Forward's $3.2 billion bid to acquire Omni, as the valuation of Omni is equivalent to 18 times the company's 2022 earnings before interest, tax, depreciation, and amortization (EBITDA), and 2022 coincides with a period of exceptional activity in the logistics industry due to various obstacles following the pandemic. Investors also strongly oppose the huge debt that Forward will bear.
Even worse, Forward investors feel that they have been deceived by the structure of this acquisition deal, which is clearly designed to avoid triggering legal rules that require shareholders to vote: Omni's private equity owners will only convert a small portion of their equity into Forward's ordinary shares, while the rest will be converted into a large number of non voting preferred shares. The dividends on these preferred stocks will be particularly high, to the extent that Forward shareholders will eventually be forced to convert their holdings, thereby significantly diluting their voting rights.
Some of the shareholders were so angry that they applied for temporary restraining orders to block the merger transaction, citing infringement of their rights. However, a Tennessee court last week rejected the Forward shareholders' request.
The consequences of all these cases submitted in different courts are currently uncertain, but what can be determined is that all parties have invested significant legal fees. Activist investor Ancora welcomed the 180 degree turnaround in Forward's attitude, and in a statement, Ancora stated that Forward's board of directors "is correct in its efforts to hold Omni accountable for any and all non-compliance with the terms of the agreement. Ancora had previously called on Forward to abandon the transaction and is currently researching ways to dismiss Forward's current directors.
However, despite some initial rebound, Forward's stock price has begun to decline.
Omni wrote in an open letter to Forward shareholders on Tuesday: "The threat of Forward Air terminating this transaction is unenforceable
In fact, it will be difficult for Forward to prove that Omni is suspected of violating agreements and contracts related to information acquisition, confidentiality, and financing issues prior to the completion of the transaction, especially since these issues only surfaced after the outbreak of anger against Schmitt. In an interview with The Wall Street Journal, Schmitt seemed to regret his communication with shareholders and overestimated their desire for a high-risk, high-yield investment.
Schmitt's reneging on acquiring Omni still has another destructive side effect. Although Schmitt may still need to complete this merger, he can no longer publicly appreciate the industrial logic behind the merger as before. This is also the situation Musk faced after Twitter filed a lawsuit against him: he was forced to acquire a company he had defamed.
Since regardless of the outcome, Forward's executives are unlikely to fully retreat, if they stick to their stance, the situation may be better, rather than leading to a deterioration in their relationship with Omni from the beginning.
The moral of this story is that when it comes to corporate acquisitions, obtaining consent is often a better approach than asking for forgiveness.