A Case Study Of Mergers And Acquisitions

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M&A Case Study

Module: Number: MHN311689
Module name: International Financial Services & Institutions
Module Leader: M.Shahid Nawaz
Student ID: S11 08260
Word count: 2,147

Introduction Mergers and Acquisitions are the processes which companies can use to restructure themselves by either acquiring a smaller company or by merging with them1. There are three types of M&S vertical, horizontal and conglomerate2. The latter being a company buying an unrelated company, the second being a company buying a competitor and the first is where a company buys a company in the same field but not a competitor for example a distribution company buys a manufacturing chain. This report deals with a merger, where both companies were absorbed into a new entity, American Airways, this is commonly referred to as a merger of equals3. Mergers and Acquisitions are an expensive strategy with the top ten M&S deals of 2013 totalling a bill of $271.8 billion4 and increasing in 2014 $348 billion by the end of the third quarter5. This shows there is big money being spent on M&S’s the question is are they an effective strategy, this report will discuss one of the top ten mergers of 2013, the merging of American Airlines and Us Airways which was priced at around $11 billion6, and what its chances of success are by looking at but not restricted to the valuation of target company, other bids, defences to bid, impact of merge and the future of merged entity.

Background of both companies
US Airways instigated the merging process so we will discuss their background first. US Airways is an American domestic airline, which started its life as America West Airlines in 19807, was doing well before the merger. The smaller company had seen a continuous rise in stock prices which were around $12.50 at the start of 20138 although according to short sellers (which are people who sell stocks they don’t own, but have borrowed from the brokerage, with the hope the prices will fall and they can buy them back making a profit) a stock price decrease was imminent9 although there seemed to be no reason for this as US Airways seemed to be doing well. “I have been a long proponent of consolidation in the industry,”10 This makes it look like W. Douglas Parker, the chairman and chief executive wanted to do this merger to consolidate the progress his company had recently made.

America Airlines has been one of America’s largest and most successful airline companies pioneering coast to coast jet travel in the 50’s. They were the number one choice for flyers until Delta Air Lines’ merger with Northwest Airlines put it at second then the merger between united and continental airlines put it in the third position in 2010 at this time the board of executors stated that it would not be forced to merge to compete across the US but would concentrate on five big cities.11 This strategy didn’t seem to be working with a total of $12 billion of losses since 200112 this culminated in American Airlines filing for court protection in 201113 although bankruptcy in the airline industry is not a result of financial calamity but careful planning as it has been used by nearly all the big companies to cut costs with little effect on people’s confidence14 .This said the consolidated revenue from November 2012 was 1% higher than November 2011 if you subtract the effects of hurricane sandy and the late November snow storms15.
The Bid
The bid in this instance was quite complicated and was initially rejected by Americas board of directors but W. Douglas Parker, the chairman and chief executive of US Airways did not let this stop him and after more than a year of campaigning and after getting all three of Americas labour unions behind the merger16, resulting in a unanimous agreement from both boards. The bid W. Douglas Parker originally made to American Airlines was a 50/50 split but this was eventually negotiated down to a 28/7217 split due to Americans much larger size and
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