Closing In

By Jamie Murphy

Corporate Raider Carl Icahn's usual strategy is to buy a stake in a target company and then sell out to another bidder at a huge profit. But this time the New York City financier may stick around and keep the business. Last week he gained virtual control of TWA, the sixth largest U.S. airline, by accumulating at least 45.5% of the company's stock. In the process Icahn may have defeated Frank Lorenzo, the chairman of Texas Air and a rival bidder for TWA, with a series of intricate maneuvers worthy of the Navy's Blue Angels flying aces.

Only last June TWA's board tentatively accepted a $23-a-share takeover bid from Lorenzo to escape a previous $18-a-share offer by Icahn. In fact, TWA President Carl Meyer openly courted Lorenzo, fearing that Icahn might dismantle the company and sell its pieces for quick gain. After the TWA-Lorenzo deal, Wall Street expected Icahn to cash in his 35% stake and reap an estimated $50 million profit.

But TWA's unions, led by the Air Line Pilots Association, were vehemently opposed to a Lorenzo takeover. They feared that he would once again resort to a tactic he had used after Texas Air won a battle for control of Continental Airlines. In 1983 Lorenzo took Continental into bankruptcy proceedings, which enabled the company to void union contracts and slash employee salaries. That maneuver earned Lorenzo a reputation as a union buster.

To prevent the Texas Air chairman from taking over TWA, ALPA Executive Council Chairman Harry Hoglander quietly approached Icahn with a highly unusual deal. The union said that if Icahn bought the airline, TWA's 3,500 pilots would accept a 26% pay cut in exchange for a block of the airline's stock. Icahn accepted the pilots' proposition and then concluded a similar arrangement with TWA's International Association of Machinists and Aerospace Workers. The two unions represent about 17,000 of TWA's 27,000 workers, and the total value of the wage concessions offered amounted to about $145 million annually. In return Icahn promised to give employees 20% of the airline's stock, as well as a 20% share of earnings. He also vowed not to dismantle TWA or dispose of any assets related to airline jobs. Icahn told TIME that "the unions have obviously made the company more attractive."

With the labor agreements in hand, Icahn sweetened his bid to $24 a share, or a total of more than $500 million for the two-thirds of the airline's stock that he did not already own, topping the Texas Air offer by $1 a share. Lorenzo countered at week's end with a $26-a-share bid, but' Icahn disregarded this last-ditch offer, saying that he would continue to purchase TWA stock and close in on the 51% total needed for outright control of the company. Said Icahn's ally Hoglander: "Full steam ahead and damn the torpedoes."

As the wily financier played out his hand, a third potential offer for TWA suddenly arose from a group of the airline's workers, led by white-collar, non-unionized employees. Advised by Christopher Bond, a former Governor of Missouri, this faction had reportedly raised more than $1 billion in the financial markets of Western Europe in an effort to top the Icahn and Lorenzo bids.

Wall Street analysts believed it was too late in the game for a new offer to succeed. It appeared that Icahn could own 51% of TWA's stock within days. Said one investment banker: "Icahn is within an eyelash of majority control and can buy the remaining shares anytime he wants to." At that point he could nominate his own board of directors and assume command.

Icahn could still sell out. If he turned over his stake in TWA to Lorenzo for $26 a share, Icahn would make a profit of at least $124 million. But the betting on Wall Street is that he will stick to his commitment to the unions and take over the airline. If that happens, Lorenzo will not come away empty-handed. His agreement with TWA says that if it is canceled, the airline must pay Texas Air an $18 million fee. --By Jamie Murphy. Reported by Frederick Ungeheuer/New York

With reporting by Reported by Frederick Ungeheuer/New York