Mergers and acquisitions form a very integral part of the contemporary corporate landscape. Kolker (2010) points out that initial six months of the year 2010 witnessed the total value of global acquisitions increase to 2.7% to a monetary value of $915 billion. This was an increase for the initial six months of 2009. 2010 however was off to a rather slow start as compared to 2006 which recorded an excess of $3.8 trillion in transactions related to acquisitions (Yeary, 2007). It is worth noting that it is never the volume of the deals that matter but their size. Averagely, there were a total of twelve transactions that were duly announced for each week of the year (2006).These were valued at an excess of $1 billion as reiterated by Yeary (2007).
The concepts of acquisitions are justified on the level of expectation of generating the value of incremental shareholders (Chatterjee, Lubatkin, Schweiger and Weber, 1990 ; KPMG, 1999). A lot of literature has been dedicated to the potential benefits associated with acquisitions. It is worth noting that the term merger and acquisitions are different.The strategies that are underlying these concepts are however similar to several researchers. As an example Seth (1993) postulated that market power, economies of scope, economies of scale, diversion of risk and coinsurance are some of the benefits associated with mergers and acquisitions. Tetenbaum (1999) also postulated that acquisitions can duly be justified on the basis of their potential to improve efficiencies while cutting costs (p.24).On the other hand, Nguyen and Kleiner (2003) did suggest that the acquisitions can afford the acquirers the positivity and hope of acquiring an increased market share, reduced cost structures as well as the widening of the service offerings. The work of Appelbaum, Lefrancois, Tonna and Shapiro (2007) also postulated that acquisitions are an outcome of an increase in the level of competition both in the domestic and the international sense and is therefore an effort be firms to "preserve their business model and improve profits" (p. 128).
Literature review
A lot of literature has been dedicated to the failure and successes of acquisitions. They are however focused on the concept of strategic acquisitions (Appelbaum, Lefrancois, Tonna and Shapiro, 2007; Bijisma-Frankema, 2001; Chatterjee, Lubatkin, Schweiger and Weber, 1992; Covin, Kolenko, Sighler and Tudor, 1997;Datta, 1991 ; Fubini, Price and Zollo, 2006;Jemison and Sitkin, 1986; Hyde and Paterson, 2002;Kiessling and Harvey, 2006; Seth, 1993 ;Tetenbaum, 1999; Marks, 1997; Nguyen and Kleiner , 2003; Olie, 1994; Vaara, 2002; Vasilaki and O'Regan, 2008; Waldman and Javidan, 2009).
The Rationale behind the merger of Delta Air Lines and Northwest Airlines
When two different corporations combine to form one business the situation is referred to as a business merger. A merger is normally said to be worth when the two businesses coming together dissolve and also double their assets and thereafter convert, a new third unit is created (Ramanujan,2006). Mergers and acquisitions occur in the business world and they are usually conducted in order to bring new assets into the business (Freeland, 2007). This usually results into the formation of a new corporation. Majority of the mergers are formed from friendly agreements. They are usually not forced into being (Gaughan,nd). The holders of stock from the two merging companies later come together to enjoy the benefits from the amplified profits of the newly formed entity (Peterson,2006). Acquisitions on the contrary refer to take-over. In this situation one distinct company takes over another company by buying it. In acquisition, usually a bigger company buys a relatively smaller one. There are usually two kinds of acquisitions. One occurs when a firm buys the shares from the owners of the shares of the firm which is being taken over or acquired. The other form is when the firm purchases only specified assets belonging to a company.
The benefits of mergers and acquisitions
Maximization of profits
There are indeed numerous benefits for which mergers and acquisitions are conducted in the world of business. The most common reasons why several firms merge or acquire or takeover is to maximize profit. Through the mergers and acquisitions, a company is capable of having duplicate departments. This will help in cutting costs. This also helps in the maximum use of the duplicate resources. When delta airlines merged with northwest airlines, air lines pilot association greatly supported the deal stating that the merged Delta will be more stable and more financially durable. They also stated that the formed firm will be beneficial to not only the employees but also to the community at large. Besides, they stated that it will be of benefit to the traveling public. These will only be as a result of profit maximization by the formed firm. The merger resulted into a very large firm. Indeed it was described as the largest airline in the world in terms of revenue passenger kilometers.
Saving of taxes
Mergers and acquisitions are beneficial in that it is tax saving. For instance a firm making profit can acquire a firm that is undergoes losses hence reducing its liability for tax. Mergers and acquisitions are also conducted by firms to get larger part of the market share. The merging firms can thereafter capture a wider market and can hence create a monopoly. This aids the firms to sell their products at the terms and prices which they set. When mergers and acquisitions exist between firms of different nations, the local currency of the firm that has been merged or acquired becomes stronger by one percent in when compared with the company that is taking over. When delta airlines merged with the northeast5 airlines in 1972, it became one of the key carriers in Boston and New York. When it also merged with western airlines in 1987, it became the fourth largest airline in the United States and the fifth largest in the whole world. It also began operating in other continents like Asia. This is because the market became wider. The market share of the formed firm was higher than any other firm after the merger, standing at 19.9 percent in the United States alone.
The overriding rationale that is applied to explain Merges and &Acquisition activity is that the firm that acquires the other is seeking to improve on its financial performance. There are however several other benefits which results from mergers and acquisitions. First of all are economies of scale. Economies of scale can be defined as the advantages that a firm will get as a result of its large scale operations. The company that is formed will minimize its fixed costs.Economy of scope is also an advantage that results from mergers and acquisitions. It basically refers to the effectiveness that is primarily linked with variations in the side of demand like escalating or diminishing marketing scope and distribution of various products.
Increased revenue
Enlarged revenue and the share of the market also results from mergers and acquisitions. When two or more firms merge, they will capture a larger market and can be in a position to set their own prices. When delta airlines merged with the northwest airlines, a large airline was born. The newly formed Delta airline had a total of 12000 pilots. This is because they covered a larger market. There are increased revenues when two firms merge. The revenue normally arises due to the following reasons. First and foremost, the enlarged market will make the company increase on its profitability. The two merging firms can create monopoly, they will therefore be at a position to set the prices of their goods and services .improved or more effective marketing strategies always results when two or more companies merge. This will in turn generate more sales and hence revenue will be increased. The firm will also enter into new markets. It will hence generate more revenues as there will be more customers (Boemeh, n.d). When the two firms merged, there was an increase in revenue generated by the formed firm. The combined carrier was to generate US$ 35 billion annually.
Synergy
Synergy will also result from mergers and acquisitions. For instance, managerial economies like a wide chance of managerial specialization. Similarly, the firm will enjoy purchasing economies
Effective use of resources
Resources transfer is also enhanced when two firms merge. The resources which were previously held by the two firms will be evenly distributed (Barney, 1991). They will be effectively used by the new firm. This will in turn make the company to improve on its profitability. Scarce resources can also be combined to achieve greater success. This will create value because information asymmetry will be overcome. (King et al, 2008)Merges and acquisitions are beneficial to the newly established company because cost savings in the airport operations are reduced. Besides, there are cost savings in information technology and also cost savings in the supply chain economics. Cost savings can be referred to as economies of scale. The resulting company will always cut its fixed costs by eliminating the similar departments and operations. The costs of the company are also lowered as compared to the similar revenue stream, thereby escalating the profit margins. (Boemeh, n.d). When delta airlines merged with northwest airlines, the merger helped the two firms to save on costs by combining airport operations and sharing information technologies which was expected to lower prices for the customers.
Cost savings
Besides the above stated, there are several other ways through which cost savings is achieved. These include economies of vertical integration; management efficiencies are eliminated, the resources of the merging companies complements each other. When the market being controlled by the firm is efficient, incompetent teams of the management will swiftly be taken over by efficient people. When a firm is not being managed in line with maximization of wealth generated by shareholders, a different firm may make use of the opportunity to add value by merging with the inefficient firm. (Jensen & Ruback, 1983). The merged entity was said to generate about US$ 1 million as cost efficiencies in a year.
Reduced taxation
When two companies merge, taxes also reduce. This is by the fact that net operating losses are transferred to the profitable firms. Besides, debt capacity not used is maximally utilized. Similarly, re-investing back the surplus funds in non taxable merges becomes an alternative for the payment of dividends or is being used to purchase more stock. (Boemeh, n.d).When mergers and acquisition takes place, there are reduced financing costs that will arise from the following. First, from the big economies of scale whenever debt and equity securities are issued. Similarly, the firm that has been merged will have more access to the capital markets at a reduced cost. (Boemeh, n.d)
The synergies that may result from the Delta-Northwest merger.
Even though a large number of literatures are focused at the benefits that can be derived from strategic acquisition due to the synergistic advantages, the acquisitions can be viewed as financial in nature. Strategic acquisitions are initiated by firms who belong to the same industry or in industries that are related. The acquirer gains a lot of benefits from the strategic acquisition. Financial acquisitions on the other hand are the acquisitions by organizations in industries that are unrelated and there are no benefits apart from the earnings as well as the appreciated value that are accrued by the acquirer. The major sources of this type of acquisition (financial) are conglomerates and private equity firms. It is worth pointing out that the size and scope of this form of acquisition is normally insignificant. The period running 2005 up to 2007 saw private equity firm gain from acquisitions a total of $1.6 trillion (Kolker, 2010).
Analysis of the synergies that may result from the Delta and Northwest Airlines merger
Synergy refers to a situation in which a combined organization is more valuable than the total sum of the individual combining entities (organizations).In simple terms it refers to the 2+2=5 phenomenon.It therefore refers to the ability of a corporate merger to be more profitable than the individual entities (parts) that do come together (Gaughan,2007) Synergy does refer to the benefits achieved apart from the ones derived from the economies of scale. One form of synergy benefits is operating economies. Other than the operating economies, the term synergies may refer to enhanced capabilities of the management, enhanced creativity, Research and Development (R&D), innovativeness and market coverage and capacity as a result of the resource and skill complementarily. It may also result to a more widened scope of corporate opportunities. Synergy therefore makes the combined corporation to appear to possess a positive net acquisition value (NAV).
In this case Pasiouras, Tanna & Zopounidis (2005) points out that;
NAV= VAB - [VA+VB] - P - E whereby
VAB = the combined value of the two corporations
VA = a measure of a corporation's own value
VB = the market value of corporation B's shares
P = the premium paid for corporation B
E = the expenses of the acquisition process
Lawrence (2001) postulated that synergy does arise from three fundamental sources;
Operating economies
Financial economies
Increased market power
Other researchers however do have a broader perspective of the synergy concept and they do so by elimination inefficient management and replacing it with a more capable one. The work of Gammelgaard (1999) illustrates the classical approach of the concept in which the acquiring corporation improves the overall performance of the acquired firm by the transfer of both knowledge and material to the new subsidiary. The transfer of the managerial resources is the most common action.
The merger which results in the quest for more wealth for the shareholders is then described as having synergetic properties. Synergy in this case is then used to refer to the increase in the total value of the firm after combining two forms into a single entity. In other words, it denotes the difference that exists between the combined entities and the sum of the value of the individual entities. Ansoff (1998) came up with a classification of four synergies. Delta and Northwest Airlines merger can therefore achieve the following;
Operating synergy
Delta and Northwest airlines are likely to benefits from operating synergy. The key to the success and the existence of a given synergy is the fact that the target corporation controls a resource which is considered specialized and which makes it becomes more valuable if combined with the resources of the bidding corporation. The synergy source of the specialized resources varies and depends on the merger. In horizontal mergers, this synergy emanates from certain forms of economies of scale which aids in the reduction of costs. The synergy may also originate from the increased market power which aids in the elevation of sales and profit margins. This was the case for Delta airlines when it acquired Northwest airlines. Both airlines were experiencing losses as a result of soaring fuel prices and the effects of terrorist attacks. The merger allowed the two to benefits from the reduced cost of airport operations, supply chain economics and information technology. There are various ways in which the Delta and Northwest airlines merger can generate operating economies. Both firms may be able to reduce their operating costs at the airports and flight maintenance through the elimination of some of the fixed costs. The expenditure dedicated to research and development are also reduced substantially in the new arrangement through the elimination of similar efforts of research as nth repetition of the work that had already been done by the target corporations. Both firms may also effectively reduce their management expenses as a consequence of the corporate reconstruction. The firms may also effectively streamline their sales, marketing and advertisement departments. The savings as a result of common advertising leads to marketing economies. Marketing economies may also be produced as a result of the advantage gained from offering a more holistic (complete) product line (In terms of standardized fares and in-flight services). Therefore when Delta airlines and Northwest airlines combine their efforts and resources, they are at a position to provide better results as opposed to when they act and operate as separate entities. This is due to the savings in terms of reduces operating costs. They can therefore achieve synergistic operating benefits (Brigham & Houston,2009).
Financial synergy
This form of synergy refers to the elevation in the value of corporation that accrues the value of the combined firm from the factors financial. There are various ways in which the Delta-Northwest merger can achieve financial synergy as well as benefits. These are through;
The elimination of financial constraints
The enhancement of debt capacity
The lowering of the total financial cost
The improvement of credit worthiness
The elimination of financial constraint
Both Delta airlines and Northwest airlines were suffering from financial constraints before the merger. An example of financial constraints is the one faced by Delta that forced it to file for Bankruptcy. It in fact reported a net loss totaling US$1.2 billion in the financial year 2005 (Bhakraborty, 2009) .However, after the merger the company reported having achieved about $200 million in the form of synergetic benefits from their merger with Northwest in the first quarter of financial year 2010 (Schaal,2010).
Sales synergy
The merger between Delta and Northwest resulted in sales synergy as a result of common distribution channels, advertizing, sales administration and sales promotion.
Challenges that delta airlines may face to make the merger successful
Everything that has advantages must also have disadvantages. Indeed all coins have two faces. Therefore there are several disadvantages that are as a result of mergers and acquisitions .Approximately 66 percent of merges are not always successful. This is brought about by merges and acquisition indent. Inside the 33 percent that are said to be successful, the acquisitions attained a net gain from the acquisition either with or without merges and acquisition indent. There are several reasons for the failures of the mergers. The reasons indicate that merging and acquisition is indeed highly risky.
Mergers interferes with leadership
Mergers and acquisitions interfere with leadership continuity in target companies' top management group for minimum of a decade after the acquisition deal. Target companies lose one fifth of their executives every year for a minimum of 10 years after an acquisition. This is higher than twice the turnover that is experienced in firms that are not merged
One of the key problems that is associated with mergers and acquisitions poor feedback from the shareholders. The issue of people is the most sensitive issue though it is always ignored during the mergers and acquisitions process.
Hostility of the shareholders
The shareholders of the firm being taken over are always hostile. Furthermore, the mergers and acquisitions besides adding resources to the company also add numerous problems to the formed firms. The liabilities of the acquired or merged company are sometimes increased. Merges is expensive in terms of time and money. Mergers and acquisitions always take a lot of time and money (Ramanujan, 2006). When there are merger or acquisition plans, they are always kept confidential until the last minute. Only the lawyers, bankers, consultants, and the top officials of the firm are usually aware of the deal. Despite the fact that it is made public soon after that a given merger or an acquisition will be of great benefit to the shareholders the two firms, it is the task and role of the share holders to critically examine the planned deal for mergers and acquisitions before they accept the deal. For instance when delta airlines merged with northwest airlines, the announcement of the merger was received by conflicting responses from the pilots of the two firms. The governing body of the air lines pilot association however supported the deal.
Mergers brings together people from different culture
Merges, and acquisitions brings people of different co operate cultures besides people of various national cultures into a single company. This complicates issues in the company. Merges and the acquisitions should create fresh and stronger organizations. History however has it that many merges always do not achieve their expectations. Merges which crosses the boarder are always hard to manage.Similarly, as discussed above clashes of culture among various types of businesses may occur. This may reduce the efficiency of the merger. Delta airlines should therefore strive to look into this issue lest it bring the firm to its knees.
Diseconomies of scale
Diseconomies of scale can also result from merges and acquisition. Diseconomies of scale results when the formed company becomes too big to be effectively manage. When the company becomes too big, they will experience higher unit costs. Delta airlines should therefore adhere to this lest it makes huge losses from the expansion.
Mergers make workers redundant
Mergers and acquisition may make a number of workers to be redundant. This usually happens at the levels of management. Consequently, this will have a great effect on motivation. Delta should try to overcome this.
Difficulty in decision making
Decisions are always very difficult to make when two or more firms merge together. Conflicts of objectives between the firms that merge may come up. The smooth running of the organization will therefore be disrupted. To achieve its goals, the Delta Airlines should look into this.
The loss of the top executives correspondently results into the company's poor performance. For instance, when delta merged with northwest airlines, it made plans to cut approximately 4000 jobs. It also stated that it will be offering voluntary severance programs to adjust to the staffing needs. Despite the fact that the management claimed that it was due to economic crisis and declining air traffic, analysts argued that nit was as a result of the merger and acquisition.
Mergers causes instability among workers
The most recent mergers and acquisitions have given rise to even more instability within the executive workers. The trends in globalization and technology go on to increase the magnitude of competition. This generates turbulence in the industry. When delta airlines wanted to merge with northwest airlines, the northwest pilots at first objected the deal this was because the seniority of the pilots. There were claims that the pilots fro delta airlines wanted to disadvantage the northwest airline pilots economically with respect to their seniority. This should be tackled by the firm in order to attain much profit.
Future business prospects of Delta post merger.
The firms will greatly achieve attain huge profits from the merger. In the recent past, the firm made several losses due to the fact that there were economic crisis and high oil prices. They were faced with difficult economic environment and merger synergy. However, due to the fact that these won't be there in the future, the firm will attain great profits.
In the year 2008, the firm made loses because the first of all, the oil prices doubled in 2008. Because the oil prices can reduce in the future, the firm will be capable of making much profit in the future. Due to the fact that the market shares of delta airlines far above the other firms, beating the closest competitor American airlines, they will make more sales and hence more profits in the future. Delta airline became the largest airline in the United States after the merger.
