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How Allegis Chief 's Grand Plan Fizzled

June 11, 1987|ROBERTE. DALLOS | Times Staff Writer

NEW YORK — Richard J. Ferris had planned to crisscross the country this week and next to visit Allegis Corp.'s large institutional investors and promote his dream of a full-service travel company. He was due in Boston today and Los Angeles next Tuesday.

But his plans suddenly changed. Instead, Ferris spent Tuesday in the Manhattan board room of Morgan Stanley & Co., Allegis' investment adviser, defending--to his own directors--his diversification program and the recapitalization program that went with it. And, finally, they just didn't buy it.

The emergency meeting had been called to discuss a number of proposals for restructuring Allegis, which also included one from its airline subsidiary's pilots and one from a group of private investors.

The board spent all afternoon listening. There were a few breaks so that directors could huddle in groups for discussions and attend to other business. Two board members were not there: E. Mandell de Windt, retired chairman and chief executive of Eaton Corp. in Cleveland, and Richard P. Cooley, chairman and chief executive of Seafirst Corp. in Seattle; both participated by telephone.

Dream Shattered

Also present were Eric J. Gleacher, Jr., head of Morgan Stanley's mergers and acquisitions department; representatives of First Boston Corp., another investment adviser, and lawyers from Skadden, Arps, Slate, Meagher & Flom, a top takeover law firm. By the time the session ended at about 9 p.m., Ferris had lost his fight, his corporate dream was shattered and he was out of a job.

His resignation was followed by a swift reversal of the strategy Allegis had taken under Ferris, its 50-year-old chairman and chief executive. The corporation, parent of United Airlines, had just spent $7 million to change its name from UAL Inc. On Tuesday, as an expression of the change in strategy, the company said it plans to rename itself United Airlines Inc.

"Obviously," said Timothy Pettee, airline analyst with the New York brokerage of Bear, Stearns & Co., "the board must have given Ferris a vote of no confidence. He was the principal architect of the integrated travel concept. There may be others that go with him."

The swiftness of Ferris' departure and the change in policy came as a shock to many observers. "I was surprised at how quickly they reversed course," said Edward Starkman, associate airline analyst for the New York brokerage of Paine Webber Inc. "(Earlier the board had) so strongly backed and defended the Allegis concept and Dick Ferris. But they had been backed up against the wall by all of these various plans to maximize shareholder value."

Unhappy Shareholders

Shareholders did not like the Ferris plan to diversify from the airline on which the company was built. It had purchased Westin Hotels in 1970; then in the past two years, it added the Hertz car-rental firm and the Hilton International hotel chain.

Airlines traditionally have not done well in the hotel business, one expert noted. "If you look back to the 1960s and the 1970s," said Lawrence F. Cunningham, professor of marketing and transportation at the University of Colorado at Denver, "many airlines tried to pursue diversification into travel-related services, namely hotels. They found out that the operating synergies between airlines and hotels were dubious at best."

Cunningham noted that Pan American World Airways, Continental Airlines, Trans World Airlines and American Airlines all bought and sold hotel chains during that period.

He added that in the last two years American Airlines and United Airlines, the nation's largest carriers, had gone in opposite directions. American expanded by buying planes, while United under Ferris diversified.

"The American strategy was much more viable," he said.

As part of its change in course, Allegis now plans to sell the hotels and Hertz, and most observers predicted Wednesday that the car-rental company will be the first on the auction block.

They suggested that Frank A. Olson, the Hertz chief executive who was named to succeed Ferris at Allegis, might himself try to put together a private purchase of Hertz.

Shares Lagged

What seems to have displeased stockholders so much was that the diversification program never brought them what they considered fair market value. The company's pieces were worth more than its whole.

Allegis shares lagged behind the stock market's big runup last year, but since have climbed sharply as a result of takeover speculation.

"While the (diversification) concept might have worked demographically," too much time would have been needed to make it work," said a spokesman for a large institutional stockholder of Allegis who asked not to be identified. "The gap between breakup value and current stock value was too large."

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