Midwest Air Group (NYSE: MEH) agreed last week to be acquired by TPG Capital, and CEO Tim Hoeksema relieved investors concerned about its independence by proclaiming, "The cookies stay." The move closed the door on AirTran's (NYSE: AAI) two-year hostile takeover attempt, but reports have now emerged that could allow Northwest (NYSE: NWA), the "passive investor" in the acquisition, to actually own Midwest outright one day.

TPG partner Richard Schifter is quoted by The Associated Press saying "The equity firm may want to cash out of the deal some day, and Minneapolis-based Northwest could become the sole owner." Schifter told the Kansas City Business Journal that a potential acquisition of Midwest by Northwest would be "several years out and isn't anything we expect in the near future."

The potential for Northwest to acquire Midwest one day has definitely ruffled some feathers in the region. The Milwaukee Journal Sentinel said in an editorial that TPG's recent conference call with reporters was "not encouraging" and that questions remain, including if Midwest could survive in the business. The Journal also questioned how "passive" Northwest's relationship with Midwest will be in the future, especially with its "spotty service record."

TPG Capital has a history of working with airlines. Since the main purpose for private-equity companies is to make a profit on their investments, it is only logical to think that Northwest could one day own Midwest outright. It's also possible that TPG could sell the company to AirTran years down the tarmac. Either way, the cookies are safe, for now.

Those were the words from Midwest Airlines (AMEX: MEH) CEO Tim Hoeksema after he announced late last night that Midwest has made a decision, according to the Milwaukee Journal Sentinel. After four hostile attempts from AirTran Holdings (NYSE: AAI) and nearly two years of rejection, Midwest Airlines has finally agreed to be acquired -- by TPG Capital for $450 million.

Hoeksema is expected to remain at the CEO of Midwest. Under AirTran's ownership, he would have been forced to resign.

Midwest Airlines will get to keep its name, identity and independent status with the sale to TPG Capital, as well as the cookies.

To everyone's little surprise following Asian and European markets declines, stock futures are negative, indicating a lower start for U.S. markets despite their strong finish yesterday. No doubt, many will sigh in relief when today is over heading into the weekend.

8:30 update: Stock futures are now up following the Federal Reserve cutting its discount rate to 5.75% from 6.25%. So far the Fed had tried to address liquidity concerns by injecting money into the market, but when another $17 billion injected into the banking system yesterday did little, it seemed the Fed had decided on this rate cut, which would narrow the spreads between the rates and could help market liquidity improve.
Stock futures are shooting up at the moment, indicating quite a positive start.

Yesterday U.S. stocks seemed to be free falling at some point, with the Dow industrials losing about 340 points in the early afternoon. But once again, a late session volatility stormed the markets, this time taking stocks upward, and averting the dreaded 10% decline signaling a market correction. The Dow industrials and the Nasdaq still declined somewhat for the day, but the S&P 500 finished in positive territory.

Despite that positive momentum, the Tokyo benchmark Nikkei 225 index nose-dived 5.4% today as investors fear the dollar's decline could worsen earnings for Japanese companies. Other Asian markets also finished lower while European stocks started higher but managed to erase gains and now trade in negative territory.

Economic data due today is thin with the preliminary University of Michigan consumer sentiment survey for August due out at 10:00 a.m. and is expected to tick down.

Corporate news:

Dell Inc. (NASDAQ: DELL) said late last night it will restate four years of financial results. The mistakes cause by executives adjusting reports to achieve performance goals could end up costing as much as $150 million.

Hewlett-Packard Co. (NYSE: HPQ) reported quarterly financial results after the close yesterday. HP boosted financial forecast. Net profit for the quarter ended July 31 was $1.78 billion, or 66 cents per share, a 29% jump from the year-ago period. Excluding one-time charges, the company earned 71 cents per share, beating estimates by 5 cents. Sales for the period were $25.38 billion, a 16% increase from the a year ago and $1 billion higher than analysts prediction.

Borse Dubai offered 27.7 billion kronor ($3.96 billion) for Sweden's OMX AB, topping a bid from Nasdaq Stock Market Inc.

Midwest Air Group Inc (NYSE: MEH) said today it accepted a bid of about $450 million or $17 per share from private equity firm TPG Capital and Northwest Airlines Corp (NYSE: NWA), the latter as a passive investor.

Finally, yesterday, a judge said he will not block the $565 million merger of Whole Foods Market Inc. (NASDAQ: WFMI) and Wild Oats Markets Inc. (NASDAQ: OATS), but the Federal Trade Commission could still appeal the ruling. Shares of Wild Oats are gaining in premarket action.

AirTran Holdings (NYSE: AAI) made another bid for Midwest Air Group (NYSE: MEH) today, pushing to total up to $445 million. The new cash-and-stock offer of $16.25 bid surpasses the $16-a-share cash offer made TPG Capital and Northwest Airlines (NYSE: NWA) on Sunday and is 50 cents higher than their previous last-ditch effort on Sunday, hours before the Midwest Board said it would pursue a rival bid.

This is the fourth time AirTran has raised its bid for Midwest since December. Despite AirTran receiving support from nearly 63% of Midwest shareholders, management refused to relinquish control to the Orlando-based discount airline. Midwest's Board said it would "take AirTran's revised offer under consideration."

While the Board deliberates, let's take a look at exactly what would happen to Midwest if they were to be acquired by either AirTran or TPG/Northwest:

• AirTran wants to rebrand the airline under its own name and integrate Midwest's operations into its broader network.

• Under the TPG offer, Midwest would maintain its brand name and its current management. Northwest, a company that has had nothing but problem after problem since it emerged from bankruptcy earlier this year, would not participate in the management or have any direct control over Midwest. Instead, Northwest hopes to explore cost reduction strategies like joint fuel purchasing.

AirTran President Bob Fornaro said the Midwest Board is required to not only consider the price of a takeover offer but also the effect on employees and the community, according to USA Today. But what about the shareholders? A total of 63% of Midwest shareholders were willing to side with AirTran after a $15.75 offer, and now the offer has been improved to $16.25. It seems pretty clear who the shareholders want to be with.

In another lap tray to the belly, customers of Milwaukee-based Midwest Air Group (NYSE: MEH), repeatedly named as one of the nation's best airlines for customer service and comfort, learned today that the airline will be purchased by a group led by TPG Capital. The investor group includes Midwest's competitor Northwest Airlines (NYSE: NWA), which is reviled by passengers for its cattle-car seating, lack of timeliness and failure to understand the concept of customer service

The acquisition offers little in the way of synergy to the two airlines. They duplicate many routes, and Midwest flies the Boing 717, while Northwest uses 747s and 757s. What the deal does accomplish is to block the expansion of a potential competitor in Northwest's upper midwest routes. While the deal secures the present management of Midwest, I suspect it's just a matter of time before the malaise reaches Milwaukee.

Midwest has been fighting off suitor Airtran Holdings' (NYSE: AAI) hostile takeover attempt, which reached $15.75 and $389 million before it folded its cards late last week. TPG, which grew out of the Continental Airlines (NYSE: CAL) takeover in 1993, is offering $16 per share, or over $400 million, to take the company private. The Midwest board voted Sunday to go forward with the TPG offer, and an agreement is expected by midweek.

The cost of flying will continue to rise. Airline mergers are coming fast and furious as the year draws to a close. I think it's too late to avoid the deal risks of a merger-resistant Democratic Congress before January. Nevertheless there's a major airline merger trend underway: Continental Airlines, Inc. (NYSE: CAL) wants to combine with UAL Corp.'s (NASDAQ:UAUA) United Airlines, US Airways Group, Inc. (NYSE: LCC) is trying to buy Delta Airlines Inc. (OTC: DALRQ), Airtran Holdings (NYSE: AAI) is going after Midwest Express Group (AMEX: MEH), and private equity firms are trying to acquire Qantas Airways Ltd.

This merger wave will be bad for consumers. The fewer the number of airlines left standing, the less the competition. And the less competition, the higher the price the airlines can charge you and I. Antitrust laws are designed to encourage competition and to prevent such consumer-damaging consolidation. But it's likely that the incoming Congress will scrutinize this matter more closely than the current one.

Why the flurry of mergers? There are two major operating costs in the airline business -- jet fuel and labor. While airlines can use hedging to limit increases in jet fuel prices, there's not a huge amount that can be done to reduce them. By contrast, some companies, such as US Air, have been extremely effective at lowering labor costs by filing for bankruptcy and ripping up contracts with pilots, attendants and other workers, and resetting pay at much lower levels.

The proposed mergers will lower labor and other costs further and with fewer choices available for consumers, the airlines will earn nice profits on the spread between the lower costs and the higher prices they can charge. While airline shareholders may benefit, consumers will suffer.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Airtran, Continental, Delta, Midwest Express Qantas, or US Air.

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