Down to earth: for Piedmont Airlines, its 1989 "merger of equals" with USAir was more like a funeral than a wedding.

• Position: BOOK EXCERPT

In Piedmont: Flight of the Pacemaker, Frank Elliott tells the story of Piedmont Airlines, the Winston-Salem company that in its 40-year existence became an icon of Tar Heel business. In this excerpt, the Twin City journalist chronicles the merger that, in effect, was its demise.

Deregulation caused a seismic shift in the airline industry. Controls over fares, routes and service--the foundation on which the airlines had been built--were gone. And while some airlines were pulled under as their economic underpinning collapsed, others, among them Piedmont, rode the changes to new heights.

For the old hands with the company, the 1980s had been one head-turning development after another. Piedmont was no longer a puddle jumper. By 1986 it was the nation's eighth-largest airline. It was flying across the country, it had its own hubs, it had bought up one small airline and operated another as a subsidiary, it was allied with four commuter airlines, it was operating a shuttle service in Florida, and it was awaiting delivery of the world's newest airliner.

Deregulation had also brought about another change: It was now much easier for airlines to merge with each other. Piedmont's merger with Empire was but one example of this. Air West merged with Republic. Delta acquired Western. TWA bought Ozark. People Express bought Frontier Air and was in turn bought by Texas Air, which then acquired Eastern.

Behind all these mergers was another fact of life under deregulation: In the new environment, size mattered. With no protected routes, the airlines that could carry a passenger from start to finish made more money than those that had to hand off the passenger to another airline midway. Airlines with fuller route systems were in a better position to fend off new competitors. And larger airlines had the financial resources to match the startups dollar for dollar in a fare war. When it came to size, Piedmont, despite its tremendous growth in the 1980s, was still well behind Delta, American and United.

Piedmont had already had a brush with being on the other end of a merger--in 1979 when Air Florida began buying up stock in a short-lived effort to acquire it. Founder and then-President Tom Davis had made it clear that he had no interest in a merger or acquisition. Air Florida, a smaller airline, initially challenged defensive moves by Piedmont's board of directors, but it dropped its pursuit as Piedmont's rapid expansion under deregulation made it too big to swallow. But that defense would not work against a larger, more determined suitor. Piedmont's board realized that the company was not immune and amended the charter in May 1986 "to protect the investment of Piedmont stockholders." A potential buyer would have to pay for stock in cash based on its price in the open market. This requirement could be skirted with the approval of 75% of Piedmont's stockholders.

Employees were well aware of what was happening within the industry and how the board had responded. Asked about the possibility, President and CEO Bill Howard noted that several mergers had been suggested but none made sense. "Piedmont has done well on its own and any consolidation with another airline would have to ensure that the merged company would be as strong as Piedmont is today."

Meanwhile the employees had plenty to keep them busy. On July 25 that year, Piedmont applied to operate the last remaining trans-Atlantic route available between the United States and Great Britain under an agreement between the two countries. Federal approval was needed because bilateral agreements still controlled international routes. Piedmont proposed a route between Charlotte and London. But it had competition. American proposed a Raleigh-London route, Delta wanted to fly to London out of Cincinnati, and Pan Am out of Pittsburgh.

Word came in February 1987 that the U.S. Transportation Department was recommending that Piedmont be awarded the London route. "The record demonstrates that in the years following the Airline Deregulation Act's passage Piedmont has truly flourished," wrote the department's public counsel. "It has one of the stronger balance sheets in the industry and the best debt/equity ratio of all the applicants."

The first months of 1987 found all hands dealing with the triple initiatives of converting to all first-class service, integrating the wide-bodied 767 into the fleet and winning the London route. Under any circumstances this would have been challenging enough. But Piedmont's employees found it all but impossible to concentrate on the tasks at hand because of the shocking developments that came to a head with an announcement from the president's office on March 9: Piedmont and USAir were to merge.

The announcement capped two months of meetings and negotiations that began on Jan. 26, 1987, when Norfolk Southern railroad reported to the Securities and Exchange Commission that it had retained an investment-banking firm to advise it on a possible acquisition of Piedmont. Norfolk Southern already owned 20% of Piedmont's stock, which it had acquired in 1981 when it was Norfolk & Western. Piedmont was expanding its fleet and needed "a ton of money," as Tom Davis put it. The purchase gave Piedmont $38 million without having to borrow money at a time when interest rates were in the double digits. And it helped Norfolk & Western diversify its portfolio. The two companies placed members on each other's boards, and the railroad agreed that it would not pursue any further stock purchases for at least five years. The Norfolk Southern filing pushed Piedmont's stock up dramatically. On Jan. 30 it closed at a record high of $58 3/8. A year earlier it had closed at $39. What followed was a whirlwind of meetings, offers, counteroffers and intrigue.

On Feb. 4, Piedmont's directors held a special meeting, appointed a committee to consider any acquisition offers and hired First Boston Corp. to assist the committee in considering any offers. Immediately after the committee was appointed, it met with representatives of Norfolk Southern, who indicated that the railroad would pay Piedmont $63 a share in cash to acquire it. The offer was not totally unexpected; nor was it unwelcome. The railroad generated a substantial cash flow and had...