Southwest Airlines 2011 Annual Report Download - page 90

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In addition, as a result of the manner in which the acquisition and related transactions were structured,
AirTran’s public debt is now a direct obligation of the Company, which eliminates the subsequent need for
reporting of stand-alone AirTran financial results. For the year ended December 31, 2011, total operating
revenues of $2.0 billion and a net loss of $23 million, respectively, are attributable to AirTran and are included in
the Company’s Consolidated Statement of Income.
Equity transaction
Each share of AirTran Holdings common stock was exchanged for $3.75 in cash and 0.321 shares of
common stock of the Company. The common stock consideration was based on the average of the Company’s
closing common stock price for the 20 trading days ending April 27, 2011, which was $11.90. The transaction
valued AirTran Holdings common stock at approximately $7.57 per share, or $1.0 billion in the aggregate.
Stockholders of AirTran Holdings, including those holding restricted stock awards, received approximately
44 million shares of common stock of the Company, which represented approximately 5.6 percent of the
Company’s common shares outstanding. Additionally, holders of AirTran Holdings equity received cash of $518
million, including $7 million in cash for the fair value of AirTran Holdings stock options and performance share
units. Including AirTran debt outstanding at the acquisition date (including convertible notes outstanding at the
acquisition date) and capitalized aircraft operating leases, the total transaction value was approximately $3.2
billion. Subsequent to the acquisition date, a portion of the convertible notes previously held by AirTran
Holdings note holders were either converted or called by the Company for an aggregate of approximately seven
million shares of the Company’s common stock and $81 million in cash. The equity transaction did not contain
any contingent consideration arrangements.
Expenses related to the AirTran acquisition
The Company is expected to continue to incur substantial integration and transition expenses in connection
with the AirTran acquisition, including the necessary costs associated with integrating the operations of the two
companies. While the Company has assumed that a certain level of expenses will be incurred, there are many
factors that could affect the total amount or the timing of these expenses, and many of the expenses that will be
incurred are, by their nature, difficult to estimate. These expenses could, particularly in the near term, exceed the
financial benefits that the Company expects to achieve from the AirTran acquisition and could continue to result
in the Company taking significant charges against earnings. For the year ended December 31, 2011, the
Company incurred consolidated acquisition-related costs of $134 million, primarily consisting of financial
advisory fees and consulting, severance, and technology integration costs, and facility integration expenses. In
the Company’s Consolidated Statement of Income, these costs are classified as Acquisition and integration
expenses.
Tax matters
AirTran experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of
1986, as amended, as a result of the acquisition. Section 382 of the Code imposes an annual limitation on the
amount of taxable income generated subsequent to the ownership change that may be offset with Federal net
operating loss carryforwards (“NOLs”) of the corporation incurred before the ownership change. Any unused
annual limitation may, subject to certain limits, be carried over to later years, and the limitation may, under
certain circumstances, be increased by built-in gains or reduced by built-in losses in the assets held by such
corporation at the time of the ownership change. The combined company’s use of NOLs arising after the date of
an ownership change would not be limited unless the combined company were to experience a subsequent
ownership change. As of the acquisition date, AirTran had NOLs of $542 million, which expire between 2017
and 2029, available to offset future taxable income, resulting in a deferred tax asset of $190 million, which
represents the expected tax benefit of the NOLs. No valuation allowance was necessary. The Company currently
expects that the ownership change resulting from the AirTran acquisition will not significantly limit its ability to
use AirTran’s NOLs and alternative minimum tax credit carryforwards in the carryforward period.
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