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The takeover of Northwest Airlines that Al Checchi spearheaded in 1989 holds a modest place in history. It was the last of the big leveraged buyouts of the 1980s, a capstone for the free enterprise facade that hid the decade's construct of unbridled greed.
As takeovers went, the Northwest buyout was a kinder, gentler affair than many others. Checchi points out, correctly, that no junk bonds were used to finance the deal, and it did not trigger the massive layoffs or corporate cannibalization that befell other targets of highly leveraged purchases.
But it was not the "friendly takeover" Checchi now likes to recall.
Before Checchi and his associates arrived on the scene, Northwest was a profitable company holding true to its conservative Minnesota roots. Founded in 1926, the airline made money each year, expanded slowly, paid for its airplanes with cash, and took on debt grudgingly. "At the time, Northwest was doing just fine," says a former company executive who lost his job after the takeover. "They had lots of money in the bank."
The airline had some problems. It was struggling to overcome a reputation for poor service, and had a history of fractious labor disputes that prompted numerous strikes, including one that grounded Northwest's planes for 103 days.
Still, during the three years before Checchi arrived to save it, Northwest's revenues grew from $3.5 billion to $5.6 billion and it posted record profits -- $77 million in 1986, $103 million in 1987, and $135 million in 1988. Clearly, the airline was not in financial trouble.
In fact, it was the fat, slow-moving sort of prey that was bound to entice corporate predators. Although no two takeover targets are exactly the same, they share some general characteristics, and Northwest was a leverage artist's dream. By the very nature of its conservative management, the airline had little debt and plentiful assets.
In 1989, no one was in a better position to know just how prime Northwest was for the taking than Gary Wilson, Checchi's business mentor and longtime friend.
The two had met in the 1960s when Checchi was still a student and Wilson was working for a Washington, D.C., consulting firm run by Checchi's uncle. The two men became friends. By the time Checchi earned an M.B.A. from Harvard Business School, Wilson had moved on to the Marriott Corp., where he was making a name for himself as a wily financial operative.
Wilson is credited with masterminding Marriott's use of debt to rapidly expand its hotel business. Wilson's strategy was to turn the company's assets into cash. Marriott sold hotels it already owned, then leased them back and made money by continuing to manage them. New hotel construction was financed by selling limited partnerships to investors. Wilson hired Checchi on at Marriott to help with the plan. (Not long after the two men departed, Marriott's debt load caught up with it, and the company's fortunes declined precipitously.)
Their careers and fortunes have been intertwined ever since. Checchi left Marriott to work for the Bass brothers of Texas, secretive multimillionaires with business and real estate holdings across the country. After Checchi helped the Basses score a 25 percent stake in the Walt Disney Co., Wilson ended up as Disney's chief financial officer. Checchi and Wilson each banked about $50 million in stock profits from the Disney deal, according to published reports from the time.
Checchi left the Basses and moved to a mansion in Beverly Hills once owned by Sidney Poitier. He set up his own company and began casting about for the next op-portunity. In 1989, Wilson brought it to his doorstep.
"[Wilson] had been on the board of Northwest Airlines, and his feeling was that the board had lost confidence in the management's ability to deal with the forces of change in the industry, and that they would be responsive to a friendly approach to acquire the company," Checchi says.
Put another way, Wilson knew Northwest's finances, assets, and management, and he recognized that the airline's stock was worth more than it was trading for on the market. Checchi says Wilson told him, for instance, that Northwest was holding some valuable real estate in Tokyo, a handy source of potential cash that was going untapped. The company's stock price also did not reflect the potentially lucrative options it held for new airplanes. New planes were in great demand at the time, and options to buy one could be sold or traded for a profit.
According to a former Northwest executive who was fired after the takeover, the intimate knowledge of Northwest's finances Wilson gained while on the board helped Checchi and Wilson see a chance to turn a quick profit by making a play for the company. At best, they would succeed and own an airline. At worst, they would buy a bunch of stock, run up the price with their takeover bid, then sell and take the profits.
Wilson and Checchi began secretly buying up Northwest stock, joined by another well-connected business friend -- Fred Malek. (Malek ran President George Bush's re-election campaign in 1992.) The partners bought up 4.9 percent of Northwest's shares using a company they created for that purpose called Wings Holdings. As required by securities laws, Wings ultimately disclosed that it was acquiring a hefty chunk of Northwest.