Finance: (mergers/takeovers) - Essay Example

Although we notice that the move is often sparked off to enrich top management and shareholder wealth, sometimes the entire effort may backfire in the worst possible way. The recent merger of British Airways (privatised carrier of the UK since 2003) and Iberia (private carrier of Spain) which was finalised in January 2011 will form the basis of this paper. The Importance of Mergers and Acquisitions in the Corporate World The 1980s has been considered as the decade of mergers and acquisitions.

So fruitful and lucrative was this exercise that many banks and brokerage firms were even led to open their own M&A (merger and acquisition) division, in which they gave advice to CEOs, CFOs and other influential and high net worth individuals to merge or acquire other firms in the same or even related industries. Vertical integration, horizontal integration and even the formation of a conglomerate could be some of the reasons behind mergers and acquisitions. It’s all a question of the plan and the strategy behind the move, and the anticipated synergies.

A merger occurs when the top managements of two related companies decide to pool in and integrate their skills and resources in order to do business together. In this case a new company is created and the old companies lose their corporate status. In an acquisition, the larger of the two entities takes over the ownership and control of the smaller one. A merger or an acquisition invariably results in new shares being floated on the stock exchange, and financial analysts make their own predictions about the success or failure of the move.

In recent years we have seen the merger/acquisition of Lloyds and HBOS which occurred in January 2009, and Kraft and Cadbury’s which took place in February 2010. Potential Motives for the British Airways/ Iberia Merger As indicated above there could be a variety of reasons for a merger or an acquisition. But what is commonly seen is that it is expected that the value of the new entity will increase, and this is usually the result of a synergy of skills, efforts and abilities that the merger or acquisition is expected to provide.

A merger or acquisition may create a corporate giant in a particular sector, and may even be welcomed by both parties due to the meshing of skills and other economies of scale. Some common tasks could be pooled and expenses reduced. On the other hand there could be specific company factors that lead one company to acquire another in the same industry, or the two entities to merge. In the case of the British Airways and Iberia merger, the overall state of the airline industry in general and certain company specific factors were both reasons behind the merger.

It is known that the airline industry is really cost heavy as it takes a lot of money to operate an aircraft. Safety and security, meeting inspections of travel-worthiness and service quality standards are other concerns. The airline industry which had earlier been impacted by the events of 9/11 today stands to lose in competitiveness because of increased aviation fuel rates, worker strikes, lower per seat revenues and profits and a tough competition on travel routes. Online bidding for tickets has also cut into its profit margins and airlines eagerly look out for the tourist season and events like midsummer vacations and the Christmas-New Year season when they can recover their costs.

Both BA and Iberia had been making losses prior to setup of IAG. One of the main reasons for the