The US Airways: America West Airlines Merger - Case Study Example

MЕRGЕRS, АСQUISITIОNS АND АLLIАNСЕS Insert Name Course, Class, Semester Institution Instructor Date Mergers, Acquisitions and Alliances Introduction The business world is one dynamic sector with so many unforeseen disturbances. In the contemporary business world, competition is considerably stiff, with each organization trying to emerge as a market leader. To contain such competition, business managers and investment advisors employ various strategic tactics. Strategic policies differ from those employed at the tactical and operational level in the sense that strategic decision making concerns itself with the long term (Moss & Mitchell 2012). Among the most prominent strategic alternatives available to organizations are such things as mergers and acquisitions. Mergers are formal agreements between two businesses, usually in the same industry and controlling a substantial section of the market, to come together and form a new entity with the old businesses ceasing to exist. When two businesses merge, they lose their identities and a new business organization is born. Apparently, in most cases, the new business will be named after one of the two merging entities depending on the wishes of the shareholders of the new company. There are many reasons why businesses merge, synergy being the most prominent. Apparently, most businesses merge so as to gain various synergies associated with big businesses. One such synergy is a wider market share. This paper endeavors to look into the various opportunities and risks associated with mergers and acquisitions, in light of the US Airways merger that took effect in the year 2008. The US Airways-America West Airlines Merger Arguably, the most renowned American airline, U.S Airways has been through rough economic situations, constantly surviving, thanks to the strategic options the strategic teams adopt. The airline has emerged as a pace setter in American business environment. Headquartered at Tempe, Arizona, the organization has 198 destinations in many areas, majorly the United States, Europe and the Middle East (Lehman 2013). Apparently, U.S Airways came into the limelight after an intended merger with America West Airlines in the year 2005. U.S Airways, then a bankrupt entity was in serious search of strategic options to get the organization back on its feet. The research and development team identified America West Airlines as the most potential merging partner, considering that the strategic fit was near perfect. The organizations went public about the intended merger on the 19th day of May 2005. The organizations agreed that they would continue under the name US Airways, as the name portrayed national outlook and wide American scope. On the 13the day of September the same year, the shareholders of America West Airlines voted in near unanimity in favor of the intended merger. Considering that the organizations had indicated intent of merging earlier in the year 2000, the plans of bringing the companies together were not as complicated. Diligence studies indicated that the organizations were considerably similar in the manner that they operated (Jones 2000). Their cultures were not much different and so were the financial structures and policies. The organizations, both being players in the international arena, had a considerable share of the market. This made it easier to project the synergies that the strategic teams looked forward to. The primary aims of the merger included the effort to have the U.S Airways case at the court cleared while trying to gain a competitive advantage over the competitors in the industry. The merger, which was fully effected by the law on October 2008, became a success. The new entity acquired 350 mainline jet airlines and 290 regional jets. The organization has been operating successfully to date. Currently, the organization looks forward to more mergers that will make it the biggest airline in the international scene. Motives of the merger The reasons behind the U.S Airways 2008 merger with America West Airlines were considerably solid as to warrant the combination. Among the primary reasons was the point that back then U.S Airways had run bankrupt, and had a case in court. The merger was to help the organization affect its bankruptcy charges in court. Apart from this motive, the organizations involved had similar goals and they realized that, in order for them to achieve, they had to combine their efforts and resources in such a manner that they would gain competitive advantage over their business rivals in the industry. They endeavored to form an organization that had a national outlook and covered a wider scope. This explains why immediately after the merger, the new organization retained the name U.S Airways. Another motive behind the merger was the effort to expand their market share (Morschett et al 2010). Worth noting is the actuality that after the merger, the number of destinations went up as a result of simple math: the destinations that U.S Airways covered prior to the merger, plus the destinations that America West Airlines covered prior to the merger, Minus the number of destinations covered by both airlines prior to the merger. As a matter of fact, U.S Airways had better management and investment advisors than America West Airlines. On the contrary, the latter had more resources than the former. Their objective therefore was to combine these unique capabilities in such a way that they could reap the most out of it. The combination of strengths would later minimize the weaknesses of either organization (Levy & Sarnat 2012). The result, as they projected, would be a big organization capable of venturing into new markets without much hassle. According to gurus in strategic financial management, bringing together two or more organizations to form a new entity is one of the ways of keeping operational costs on the low. As such it can be argued that the merger was aimed at minimizing the operating costs. This was especially so with the labor aspect of the costs. Besides expanding the market, the merger was aimed at widening the asset base and combination of best talents. The organizations had people with different capabilities. This implies that either organization performed differently according to departments. The essence of the merger was to take best performing departments from either side. Combination and employment of talent is one of the best and most effective ways of introducing creativity and efficiency within an organization (Kim & McConnell 2012). The different talents will be combined in such a way that they come up with clear ideas while bringing a new breath of life to the management of the resultant organization. Apparently, creativity and uniqueness is one of the factors that give an organization competitive advantage over other players in the same industry. Strategic fit between U.S Airways and America West Airlines The concept of strategic fit is a prominently used principle in strategic management. Strategic fit is determined by a keen analysis of the nature of either organization in an intended merger. In straightforward terms, strategic fit is a concept concerned with determining whether or not the structures of the two organizations are complementary and compatible (Lindow 2011). By complementary it means that they can work together without clashing unnecessarily. Diligence was employed in determining the strategic fit between U.S Airways and America West Airlines. The cultures of the organizations were exceptionally similar. This made it easy for the organizations to plan their structures in such a manner that they could come up with a robust structure with minimal loopholes if any. The financial structures and policies of the organizations were similar and complementary. It is imperative to mention that complementary systems are in such a way that either caters for the inefficiencies of the other. The organizations’ structures governing labor costs were particularly compatible and complementary. Worth noting also is the fact that the networks of the organizations did not clash at all. They were sufficiently complementary. The fact that the organizations had many common destinations explains yet another aspect of the strategic fit. Common destinations eliminated the need for restructuring and complex scheduling that could affect the image of the new organization. Looking at the organizations from the point of view of physical location, it can be concluded that they perfectly fit. Both being American corporations, the conditions under which they operated were considerably similar, both in the legal sense and the physical aspects of it (Karenfort 2011). Other aspects of strategic fit include the intangible elements such as technology. Talking of technology, both organizations used similar jumbo planes like the 350A jets that operate in the international market. Similarly, they both offered such things as online ticketing also referred to as e-ticketing or e-Booking which enabled clients to get their tickets through online correspondence with the relevant departments. Upon the merger, the organizations would simply continue with the e-Ticketing functions through the U.S airways website. The human resource departments of the two organizations operated in a similar manner right from recruitment to promotion or dismissal of staff. For instance, both organizations appraised their staff in exactly the same way. This kind of strategic fit is considerably important for purposes of continuity and resilience after the merger (Franks et al 2011). The public images of the organizations were comparably similar. The organizations enjoyed almost equal public corporate image. This meant that neither organization had detrimental effects on the goodwill of the newly formed organization. In simple terms, the organizations were of almost equal status. The strategic fit analysis gave the America West airlines shareholders the reasons to approve the proposal by U.S Airways. Potential gains of the merger between U.S Airways and America West Airlines Apparently, there are many benefits that accrue to business mergers. Among the most prominent advantages is the aspect of market synergy. Merging enables the organization control a larger fraction of the market. This is because the organization equips itself with adequate resources and gains from the customer loyalty enjoyed by both partners prior to the merger (Lovechild 2007). Similarly, merging comes with a psychological effect on prospective consumers that may perceive the combined efforts as a positive sign. The organizations brought together their respective markets and made a larger market. Other synergies relate to assets. Apparently, merging two organizations entails the bringing together of resources from either side. This makes the new organization posses and controls a wide asset base. In the case of the U.S Airways merger, the number of planes went higher, under the name of one company. This makes operations easier. For instance, it enables the organization to access new destinations without overstretching its resources. Another potential gain is the ability to operate under minimal costs. The organization will be in a position to trim down the costs by reducing such things as staff costs. Apparently, when two organizations merge, some members of staff have to be rendered redundant as a way of avoiding unnecessary overlapping of duties (Ferencz 2012). Paying people that duplicate duties is a sunken cost for an organization. As such, the organization will trim down the costs of operation hence increasing relative revenue. It is a matter of common knowledge that the net income of an organization is arrived at after subtracting the total expenses from the gross pretax profits. It therefore follows that through merging; organizations not only cut down on costs, but also increase their income. Obviously, combining the personnel from two companies is a way of increasing the ideas in the decision making process. People are homogeneous in the way they do things. Similarly, such homogeneity applies to the manner in which things are done in different organizations. People in U.S Airways did things differently from the way people in America West Airline did their duties. When such organizations come together, they table their strategies and approaches, and then carry out a comparative study to determine best practices (Ellert 2012). Eventually, the best practices are employed. This way the new organizations operate more efficiently. The essence of such merging is to eliminate inefficiencies of the organizations through complementing the weak points that are identified prior to the merger. Financial analysts argue that the tax burden of a merged organization is far much lower compared to the tax burdens of the pre-merger organizations in relative terms. As much as the tax figure may appear large in absolute terms, the obligation is far much lower in comparative terms (Garlichs 2011). Worth noting is the reality that taxes are among the heaviest deductions that companies experience. Coming up with ways of reducing the tax burden is a step towards better net income. Associated with this point is the fact that through merging there is a potentiality of the organization enjoying economies of scale. Large organizations acquire things such as assets at a much lower cost than smaller organizations. This is due to economies of scale. Economies of scale have been described variously as the merits and benefits that accrue to buying goods in bulk (Bruner 2011). Purchasing goods in bulk enables the buyer to access such facilities as the quantity discounts and so on. It is a straightforward fact that bringing together two reputable organizations to form one organization creates a good corporate image. The corporate image that is currently associated with the post merger US Airways can be accrued to the fact that the premerger organizations had considerable goodwill as separate entities (Megginson & Smart 2009). Combining the resources and management efforts of the two organizations brings a perception that the new organization will deliver better quality services than all other organizations. There is as well a perception that when organizations merge, management changes bring ma new fresh breathe of life to the organization enabling it to do greater things and to access new markets. In a nutshell, the organization’s corporate image improves in the post merger period. Corporate image is a significant strength as it enhances stakeholder confidence in an organization while creating customer loyalty. Potential risks of the merger between US Airways and America West Airlines As much as merging has a considerably big positive side, the concept has some serious negatives. For instance, the synergies sought by the organization sometimes come with serious negative effects. For instance, thinking about the large organizations, there is what economists refer to as the diseconomies of scale (Hoskisson & Hoskisson 2008). For instance, an organization that is considerably big will at all times endeavor to buy may assets in one bulk. There is a possibility that such assets will grow out fashioned or rendered redundant by technology. If US Airways buys 100 planes made from similar technology, and novel technology comes some months later facilitating the manufacture of new planes, the organization will suffer a great loss as they will have to go for new technology as a way of keeping abreast with the times. Leadership wrangles have been identified as one of the most detrimental characteristics of a merger, especially in its early years (United States 2001). The managers from the premerger period will want to retain their positions. This is a serious risk to the good performance of the organization. Clearly, there can hardly be progress where the leaders are not working kin coordination because of personal differences over power and control. Such wrangles are likely to cause lack of cooperation – something that may threaten the continuity of the organization. Another risk associated with mergers is the risk of brain drain. When organizations merge, it is rather obvious that some human resources will be rendered redundant as a way of avoiding duplication of duties. In the process of doing such lay-offs, the organization may lose talents (Eckbo 2012). It is important to note that some people play a complementary role in such a way that something will not be deemed well done without the assistance of the person. In lay-off, it may be difficult to identify such people. When organizations merge, the new organization formed inherits the responsibilities, rights and obligations of the constituent organizations. In straightforward terms, the debts and legal disputes of the pre merger US Airways and America West Airlines will be taken over by the post merger US Airways. When they take over such debts and legal obligations, there is a potentiality of financial distress. Financial distress is the inability of an organization to meet its short term obligations, as and when they fall due (Periasamy 2009). Taking over the debts and obligation could make the new organization experience stunted growth for some time. During this time, competitors will have taken over the market. Additionally, financial distress makes an organization have a bad reputation and negative public image. Outcomes relative to expectations Notably, there is not much variance between the expectations of the two organizations and the actual outcome. For instance, prior to the merger, the organizations endeavored to have US Airways’ bankruptcy case solved. Three months after the merger, the case was done in what the court described as a reverse takeover (Ben-Yosef 2005). Similarly, the new organizations were capable of accessing new destinations, especially those in the Middle East. The organization has reaped a lot from the new markets as were the projections of the team handling the merger. The costs of labor have considerably gone down in relative terms. This is to say that the total expenses and variable overheads have reduced considerably. Still, there are some expectations that have yet to be met. For instance, it was projected that after the merger, the organization would be the largest airline in the global airline industry. On the contrary, the organization currently faces serious competition from most American airlines as well as some Asian giants like China Airways (Melka & Shabi 2013). There are plans of having the organization engage in a merger in the third quarter of 2013. After the merger, it is projected that the organization, which may still bear the name US Airways, will be the largest airline in the world. Perhaps this will be the time it will cater for the variance existing in its projections. In general, the projections and the actual outcomes are not so much different, especially considering that it has been just eight years since the merger became effective. Business alliances A business alliance refers to a formal agreement between two or more business firms or organizations, usually in the same industry, with the primary aim of cost reduction. Worth noting is the actuality that any business alliance is managed by a combined project team whose main aim is to trim down the costs of operating. Notably, business alliances are characteristic of the airline industry. While the concept of alliances has come into other industries in the period after 1950, business alliances were common undertakings in the airline industry as from the year 1938. (Ferenczy, I. 201).The first airline alliance was initiated in Brazil by Panair do Brasil and parent company Pan American World Airways. It is critically important to note that the trend of forming business alliances reemerged in 1989, and since then, the biggest merger has been the virgin Group involving Virgin America, Virgin Atlantic and Virgin Australia. Financial analysts say that the alliances are the most effective cost reduction tools in the airline industry considering that such costs as the labor cost are extremely high in the airline industry. US Airways is yet to consider alliances, in the future that is, with many of the main airlines, especially those from the United States (Ferenczy, I. 201). Conclusion In conclusion, it is notable that the decision to merge US Airways with America West Airline was a potent idea. The post merger US Airways is a success story considering that it is able to reach new destinations. The many benefits that accrue to being in a merger revolve around economies of scale and other market synergies. It is significant to note that among the primary advantages of merging is the actuality that better talent is introduced into decision making and day to day operations. Similarly, resource base becomes wider. Among the primary risks is the actuality that there will always be management wrangles. The strategic fit between the organizations was diligently evaluated. This explains why the organization has been able to perform well over the years. Reference list Ben-Yosef, E. 2005. The evolution of the US airline industry theory, strategy and policy. Dordrecht, Springer. Bruner, R. F. 2011. Applied Mergers and Acquisitions Workbook (Vol. 175). Wiley. Eckbo, B. E. 2012. Mergers and the value of antitrust deterrence. The Journal of Finance, 47(3), 1005-1029. Ellert, J. C. 2012. Mergers, antitrust law enforcement and stockholder returns. The Journal of Finance, 31(2), 715-732. 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