Watching the poor souls who are members of United Airlines's labor unions try to buy the company is like watching a dog chase a mechanical rabbit around a track. You know that if form holds, you will always end up with a frustrated dog and an untouched rabbit. The only question is how close the dog will get before the rabbit pulls away again.
Form, so far, has been holding pretty well. The unions' $300-a-share offer for UAL Corp., which owns the airline, came very close to going through, but collapsed last October when some banks pulled back their financing commitments.
The unions then bid $201 a share in April, but that offer never got off the ground, because the unions wouldn't put any cash of their own into the deal and lenders wouldn't finance it.
Now there's a new offer, at a lower price, running around. That offer doesn't seem likely to go through, either. Unless, of course, the unions change their pattern -- tamper with the mechanical rabbit, as it were -- by putting up cash as a down payment. Or unless they find a sucker, such as European planemaker Airbus Industrie, that is so desperate for United's business that it will put big bucks into a UAL leveraged buyout. I wouldn't bet too much on it.
Why am I so down on the union's latest offer -- an offer that I haven't even seen? Because dogs almost always act like dogs, and mechanical rabbits like mechanical rabbits.
At the risk of being obvious, I'd like to repeat what I and others have said before: the 1980s are over. No-cash-down takeovers are dead, dead, dead. In today's environment, no bank in its right mind will finance a multibillion-dollar buyout by any buyer who isn't putting money of his own into the venture. That was true in April when a number of us predicted that the union's $201 offer wouldn't fly, and it's even more true now.
Reason No. 1 is that banking regulators are giving so-called "highly leveraged transactions" the hairy eyeball, and are leaning on banks not to make many of them.
Reason No. 2 is that with dead and dying LBOs littering the landscape, lenders have remembered that it's just plain stupid to lend money to someone who has none of his own money at risk. Because, if the deal goes bad, the borrower can walk away at no loss to himself, and stick the bank with a disaster.
I feel bad for the UAL unions, which have been jerked around for years by takeover artists and would-be takeover artists, and which got into this messy business to preserve their jobs.
But I get tired of hearing every five minutes that a deal is just around the corner, stories that are obviously inspired by the unions and by the other half of the UAL Odd Couple, Coniston Partners. The unions want to save jobs and have workplace democracy. The Conistons, who own 11.8 percent of UAL's stock and have a $150 million paper loss on it, would sell to Attila the Hun, Saddam Hussein or even Frank Lorenzo to get out of this disaster alive.
But the more important reason to write about the UAL unions' latest travail is that the unions' series of lower offers shows what has happened to market psychology in the past 12 months. Think of it. A year ago, the unions almost pulled off a $300-a-share deal for UAL. Now they will probably offer about half that price, and will have to be very lucky to get it done.
Part of the reason for the decline is that the airline business is taking its lumps. The Iraqi invasion of Kuwait has doubled the price of oil, which has driven airplane fuel prices through the roof. The U.S. economy seems headed for a recession (or something worse), which tends to reduce the number of business people who take airline trips.
But most of the reason is that the junk bond market has turned to ... well, junk. The stories that you may have read about the decline in the junk market are too kind. Any junkmeister willing to talk truth -- which means talking off the record -- will tell you that for most junk issues, there is virtually no market.
Banks' junk takeover loans, of course, were made in response to the junk-financed takeovers mounted by Drexel Burnham Lambert and its clients. In Drexel's glory days, all it took to become a corporate raider was Drexel's phone number. Drexel could raise endless amounts of junk bond money to let anybody take over anything. Issuing a press release was enough to put a company in play. The commercial banks got into the junk takeover loan business to seize back the business that Drexel had gotten by issuing junk takeover bonds.
But for the Drexel game to work, you need a real market for junk bonds -- a market in which you can buy or sell securities without changing their price much. In today's junk market, buying bonds is easy -- you just can't sell them. Unlike the New York Stock Exchange, in which brokers match buyers up with sellers, bond markets consist of dealers buying bonds, holding them and re-selling them. With junk bond prices plummeting, no one wants to hold them.
Think of the junk market as 100 sellers all looking for the exit -- only there isn't any door. Which is why the junk market has pretty much croaked. And which is why unless the unions put up real money or find an investor who will, the UAL buyout will always be a dog.