US Airlines Mergers
Mergers and Acquisitions are an important part of business operations. In the jargon of Mergers & Acquisition (M&A) it is often said that one plus one makes three [M&A, 2007]. The key principle in M&A is that two separate companies when combined offer more value to the shareholders than two separate companies. Merger and acquisition, both amicable and hostile have been the norm in the business operations. Airline industry in United States has had more than its fair share of mergers. In 1985 there were more than 20 major airlines, the mergers in mid 1980s saw almost half of them disappear, merge or acquired by other major airlines.
That round of merger saw Ozrak, Piedmont PSA, Republic, AirCal and Western Airlines disappear from the scene, while Northwest, Delta and American emerge as much larger airlines. The aftermath of 9/11 and post Iraq war high oil prices threatened the survival of many airlines once again and airline merger is once again being presented as inevitable and necessary for the US air industry. Recent merger speculation about United Airline merger with Continental Airlines triggered other airlines joining forces as a defensive move to compete with much larger potential rivals.
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The Pro-merger advocates claim that financial stability of consolidated larger airlines will benefit the airlines and the consumers [Reed, 2006]. The consumer watchdog organizations claim that airlines merger will result in higher fares, fewer choices, fewer flights, poor service and the giant airlines will prevent new more competitive airlines from even getting started [Hasbrouck, 2000]. Thus from different perspectives airline mergers offers both advantages and disadvantages. This paper reviews the pro and cons of US airline mergers.
Mergers and Acquisitions In order to understand the pros and cons of mergers we need to know the philosophy behind mergers and acquisitions (M&A). Often used together, M&A are sometime considered synonymous but these are actually quite different. Acquisition When a company purchases another company and establishes itself as the new owner, the purchase is called an acquisition. In legal terms the purchased company closes down however, it retains its public listed registered status as a shell until liquidated.
In some cases another private company can use this shell status to ‘reverse merge’ with this shell to acquire a stock market listed status and operate as a new company with public listed status. In cases where a company tries to acquire a company through clandestine operations such as by buying publicly available shares or from some large share holders the acquisition may be termed hostile. The real difference in a friendly and hostile acquisition is how the company management, employees and shareholders view the acquisition.
Acquisition carries a negative connotation and quite often a friendly acquisition is presented as a merger of equals and makes it more acceptable to the management of the company undergoing acquisition. Mergers When two companies of more or less the same size agree to combine to form a new single company for improved operations and profitability, it is described as a merger [M&A, 1007]. Stocks of both companies are surrendered and replaced with new company stock. Recent mergers of pharmaceutical corporations to form even larger companies such as Glaxo Smith Kline, Hoechst Marion Roussel are examples of mergers.
In reality even when a company is being acquired by another company it is often projected as a merger. Mergers are intended to add shareholder value although in many cases mergers may not result in this outcome. Many of the mergers fail due for various reasons. Quite often the motivation behind mergers may be ill conceived, the anticipated economy of scale may not be achieved and roughly two third of the mergers result in disappointment forcing further reorganization or spin-offs [M&A, 2007].
Economies of scale, increased market share, better use of complementary resources (synergy), tax considerations, diversification and vertical integration are some of the reasons for mergers. Mergers and acquisitions are monitored by regulatory bodies to prevent creation of monopolies and unfair trading practices. And large corporations such as airlines have to seek regulatory approvals for mergers which can impact consumers negatively.