Last week we saw British Airways and Spanish airline Iberia announce that they have reached an initial agreement for a merger which is planned to be completed by late 2010. This merger, which will need the European Commission's seal of approval, will lead to the creation of the world's third biggest airline. The deal would see the new company being split with Iberia being allocated a 45% stake and BA the remaining 55%. The new business would have 419 aircraft and over 200 destinations.
In corporate finance we always seek to find the financial rationale behind any proposed mergers and acquisitions (M&A) to ensure that they will benefit the two sets of shareholders involved. In the new edition of "Reading and Understanding the Financial Times" (due out on December 7th) I explain that the most powerful argument in favour of M&A is that it can lead to significant gains through the exploitation of the synergies that exist between the two companies involved. In this view the value of the combined business is going to be significantly more than the simple sum of the values of the two companies. This can be because the new business will be able to make significant cost savings or enhanced revenue opportunities because of its more powerful position in the market. It is certainly the case that following virtually all M&A deals there will soon be announcements of rationalisations as duplicated operations are shut down. If there are many winners from M&A deals the losers are often the lowliest employees who find their services quickly become surplus to requirements.
In the case of the BA/Iberia merger there has already been much speculation about the scale of job cuts that will be prompted by the merger. Indeed BA chief executive Willie Walsh has warned job cuts among back-office staff would be inevitable if the plans to merge with the Spanish airline go ahead. He said: “I’m not going to deny that there will be some job cuts. It is clear, that when you put two companies together in a group structure like this, you can make savings in back-office activities.”
Nov 16, 2009
BA and Iberia "a blue sky marriage"
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8 comments:
The concept of corporate governance is relevent but the key focus is on the concept of the stakeholder vs shareholder approach so a merger good for shareholders as it boosts interest in shares because in most cases mergers are a sign of success so their share prices go up in the short term bad for employees (stakeholder) as they will lose their jobs as there is no need for duplication of a job.
Is this marriage justified you can imagine if it was a church the shareholders would be the family and friends glady celebrating and the employees are like the ex-girlfriends and boyfriends who are jealous with the marriage and want to object but are silenced by the shareholders cheering.
The point im trying to get to is the concept of equity surely everyone is entitled to there say the shareholders may be the owners but the employees have contributed to that wealth and they are jsut brushed aside.
I think if we look at the article in general the might as well be saying tghis:
As long as corporate governance is all fine and dandy to hell with equity anything that helps the shareholders and makes a company even more of a powerhouse is the best thing in the world employyes are disposable they are the past lets move on to the future.
It mentioned in the blog that job cuts will follow the merger of the future third biggest airline in the world. But this is expected news and even the CEO of BA mentions it. Nothing more to add, but merges do not please everyone especially the employees. However I think it is a good move by BA to merge at this time.
The merger I think was a good economic move as individual airlines both were struggling, BA more. But the merger allows them to have synergies and grow as a company together, minimising the effects of business risk. Under the terms of the deal, BA holds a 55% stake in the new company with Iberia holding 45%.
Combined the firm now has 419 aircrafts flying to 205 destinations, and BA and Iberia said it would save them a total of £358million in costs a year.
I believe this is expected to have a positive effect on BA shareholders and passengers. In an interview with the BBC, Mr Walsh they mentioned since the merger they have faced no complaints about the lack of service and passengers are satisfied with the overall service. The current aim is to create the world’s third largest airline; this will increase competition in the aviation sector. Overall the merger has several positives attached to it, and the merger will remain firm as long as BA large pension deficit problem is resolved.
One of the ways to survive the recession is mergers and acquisitions, although there are signs that the economy is picking up but this cannot be said with a great deal of certainty. Therefore the advantage for BA and Iberia merger which have been struggling like many other companies is that it will bring about strategies to help them survive through the current economic situation through practices such as cost savings. It will increase their customer base by encouraging diversification, and it’s also an advantage for shareholders as the share price will increase and there is a possibility for higher dividend payments. They will be the third biggest airline in Europe, this in turn will increase their market power and reduce the amount of competition. They can take advantage of economies of scale and spread business risk over the two companies. However this is not good for employees as there are going to be severe job cuts adding to the high unemployment rate. And also the merger could be taking place for the benefit of the management team and not the shareholders of the company.
There were many companies looking for merger and acquisition in this difficult time, ba and Iberia merger makes them became the 3rd biggest airline in the world which allows them to survive from the recession and to be more competitive as well as reducing competitors. Although they can gain synergies from the merger according to revenue and cut cost, but it will also cause more unemployment which is unwelcome in the current economic situation. Moreover, Iberia shareholders might have less authority in making decisions for the new company than the BA shareholders.
Under the agreement, the two carriers would continue as individual brands, but operate under one holding company with British Airways taking the majority 55 percent stake and Iberia taking the remaining 45 percent. Critics of the proposed merger have raised concerns that passengers could face higher fares and poor service.
Ryanair CEO Michael O’Leary compared the deal to two drunks trying to hold each other up as they stumbled home. “All you get when you put two high-fare, loss-making airlines together is even higher fares and even bigger losses,” he said in an interview with CNBC.
British Airways CEO Willie Walsh was quick to dismiss the claims that the merger would have any negative effects on prices or the quality of service.
"The merger between Air France and KLM five years ago is a success, so why not this new merger?
10 years from now would it end up like AOL/Time Warner?
What're the differences?
Can they avoid the pitfalls?
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