In most children’s games, there are no takesies-backsies. A similar principle seems to apply when a company signs a pretty ironclad contract to buy another.
Late on Tuesday, Dallas-based freight forwarder Omni Logistics said that it had filed a lawsuit against trucking company Forward Air asking for the Delaware Court of Chancery to enforce the merger agreement that both companies signed back in August. This follows a statement last week in which Forward said it might terminate the controversial acquisition, arguing that Omni—which happens to be one of its trusted suppliers—had failed to comply with merger obligations.
This ongoing soap opera, which is being chronicled by a crossfire of public statements, is reminiscent of when Elon Musk stamped his signature on a $44 billion deal to buy social-media giant Twitter (currently rebranded as X) last year, and then attempted to get out of it. Though Musk contended that the company hadn’t cracked down on spambot accounts as much as it had promised, he was probably motivated by the realization that the price was too high. (A year after closing, the company estimates it is worth $19 billion).
What is apparently behind the change of heart of Forward Chief Executive Thomas Schmitt is the unprecedented shareholder uproar after he disclosed the deal, which led the company’s stock to drop 40%.
Investors are up in arms about the $3.2 billion price tag placed on Omni—a valuation of 18 times the earnings before interest, tax, depreciation and amortization it made in 2022, when the logistics industry was on a sugar high of postpandemic disruptions. They also balked at the massive amount of debt they would be taking on.
Worse, though, is that they felt tricked by the way the deal was structured, which was clearly designed to avoid the legal requirement of triggering a shareholder vote: Omni’s private-equity owners would be given only a small part of their stake in Forward in common shares, with the rest in the form of a huge amount of nonvoting preferred shares. These would pay such high dividends that shareholders would eventually be forced to convert them, massively diluting themselves.
Some of them were angry enough to file for a temporary restraining order to stop the merger, arguing that their rights were violated, but a Tennessee court denied their request last week.
It is uncertain where all of these multiple legal venues will lead, beyond all parties spending heavily on legal fees. Activist investor Ancora, which had called for Forward to renege on the deal and was exploring ways to oust the current directors, has celebrated the U-turn and said in a statement that the board “is right to be diligent in holding Omni accountable for any and all noncompliance with the agreement’s terms.”
Yet, despite an initial rebound, Forward’s stock has headed back down.
“Forward Air’s threat to terminate the transaction is unenforceable,” Omni wrote Tuesday in an open letter to Forward’s shareholders.
Indeed, Forward will struggle to prove Omni’s alleged breach of agreements and covenants pertaining to issues such as pre-closing access to information, confidentiality and financing of the deal—not the least because these have only come to the fore after anger erupted toward Schmitt. In an interview with The Wall Street Journal, he appeared somewhat repentant over how he had communicated with shareholders, overestimating their desire for a high-risk, high-gain investment.
Schmitt turning on Omni is having another damaging side effect. He can no longer openly praise the industrial logic of the merger as much, even though he might still have to go through with it. This is what happened to Musk after Twitter filed a lawsuit against him: He was forced to buy a company he denigrated.
Since Forward’s executives can’t emerge from this unscathed no matter the outcome, they might have been better off sticking to their guns, rather than souring the relationship with Omni right from the start.
The moral of the story: When it comes to corporate acquisitions, it is often better to ask for permission than to ask for forgiveness.
Write to Jon Sindreu at jon.sindreu@wsj.com
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