Mergers and Acquisitions A Case Study of America Airline and US Airways

MERGERS AND ACQUISITIONS 8

Mergersand Acquisitions: A Case Study of America Airline and US Airways

Mergersand Acquisitions

Mergersand acquisitions are aspects of corporate finance, and strategicmanagement that deals with the buying and selling. Also, the divisionand combination of diverse companies that have same entities that canassist an enterprise to experience rapid growth in its location oforigin or sector, or a new location or field, without having tocreate a subsidiary, another child entity or use a joint venture. Theactivities of mergers and acquisitions are defined as a form ofrestructuring resulting in some reorganization of an entity with theaim of providing growth or value that is positive. Achievement ofacquisition success is a proven difficult task, with various studieson M&ampA showing that 50% of acquisitions made were unsuccessful.The acquisition process is very complex, with a number of differentdimensions influencing the outcome.

Whethera purchase of an entity is perceived as being hostile or friendlydepends largely on how communication of the proposed acquisition doneand the target company`s perception of its board of directors,shareholders and employees. Normally, M&ampA communications dealstake place in what is commonly referred to as a confidentialitybubble whereby the information is restricted as a result ofconfidentiality agreements. In the instance of a friendlytransaction, there is a corporation in the companies’ negotiationswhile in a hostile deal, the management and the board of the targetare not willing to be purchased, or the target`s board lacks priorknowledge of the proposed offer. Most often, hostile acquisitionsbecome &quotfriendly,&quot when the acquirer secures thetransaction endorsement from the of the acquiree company board. Thisnormally requires offers improvement in terms of negotiation.

AmericaAirline and US Airways

AmericanAirlines Group, Inc. is an airline holding company that is publiclytraded with its headquarters in Fort Worth, Texas. It was formedthrough a merger in December 9, 2013 of AMR Corporation, the AmericanAirlines parent company and the US Airways Group which are the USAirways parent company. The merger of these two airline groupscreates the largest airline in the world. The merged airline pridesitself with 6,700 flights to more than 336 destinations in 56 nationsacross the world. It has approximately $40 billion in its operatingrevenue, more than 100,000 employees, with plans to acquire 607 newaircraft which will include 90 wide-body international aircraft and517 narrow body aircraft. The integration of US Airways and AmericanAirlines and under one operating certificate will be completed in thelatter part of 2015. (Morning Herald, 2013).

AmericanAirlines had for a period been seeking to merge with an airline. Abankruptcy court filing in early July noted that US Airways was acreditor to the American Airlines and also a &quotprospective mergerpartner.&quot On August 31, the US Airways CEO Mr. Doug Parkerannounced that US Airways and American Airlines had signed anagreement that was a nondisclosure in which the possibility of amerger would be discussed (Leveragedloan, 2012). In the deal, thatwas expected to be sealed in the third quarter of 2013, the AMRstakeholders would own 72% of the company shares and the remaining28% of the US Airways shareholders. The combined airline carries theAmerican Airlines branding and name with the holding company renamedto American Airlines Group Inc. The management team of US Airwaysincluding its CEO Doug Parker retained most of the positions inoperational management. The new airline headquarters was alsoconsolidated at American Airlines current Fort Worth headquarters inTexas. The US Airways was compelled to exit Star Alliance once themerger was completed while the American Airlines retained itsOneworld alliance. The merger was approved by Judge Sean Lane on the27t of March 2013 but did not approve a proposed severance package of$20 million to AA executive Thomas Horton. On July 12, shareholdersof US Airways approved the merger. The settlement required the mergedairlines to give up some of their gates or landing slots across sevenmajor airports (Maxon, 2013). Under the merger deal, the new Americanwas expected to sell a total of 104 slots at RRW National Airportand another 34 slots at the La Guardia Airport.

Bythe end of 2014, the US Airways will maintain an aircraft fleet thatis nearly all-Airbus with the exception of a small fleet of Embraerjets and some Boeing aircraft. The greater part of the remainingairline`s Boeing jets is anticipated to retire by the end of thedecade. The retention of the non-Airbus aircraft is to meet therequirements of the union`s minimum fleet size. The combined airline,with the post-merger, will continue its operations of the largestfleet of Airbus aircraft globally. All the airframes will beeventually transferred to American Airlines on the award of a SingleOperating Certificate by the Federal Aviation Administration. A keyaspect of the government`s objection to the proposed merger was thecombined share of landing and takeoff slots in the slot-controlledairports which are existing hubs for US Airways and AmericanAirlines. Slot-controlled airports include restricted new airlineentrants access or services that are expanded by competitor airlines.

Unionsfor US Airways ground workers and mechanics did not support themerger, citing that CEO Parker neglected their negotiating for a newcontract with their unions but instead focused on going after theAmerican. Now that the two carriers are combined, the two unions wantnew contracts to be drawn before integrating with their new Americancounterparts.

The2014 for the workers` unions in the new American will becharacterized with union representation decisions, contractnegotiations and the creation of an all-important seniority list thatis integrated. Individual work groups are approaching the task adifferently.

TheUnited States Airline Pilots and Allied Pilots Associations,supported the merger. Consequently, in January 2013, they signed a“memorandum of understanding” that laid out steps to becoming asingle union and began negotiating for a new contract. However,disagreements over the development of a seniority integration listhave seen the unions land in court. USAPA sued in February, inWashington, D.C. federal court, asking to commence the process thatis laid out under federal law, immediately to create a singleseniority list

WhileAmerican Airline pilots are still working under a contract thatnegotiated during the bankruptcy, the two pilot groups of US Airways,known as East and West, had never had a joint contract and they arestill currently working under close to decade old deals. The mainreason of their lack of integration was that it was a management costadvantage for US Airways. The one group is of the opinion that itwill make no business sense when the same management that has nowjoined American attempt to develop a similar business modelgenerating similar record profits with the same again.

Ifthe pilot groups are unable to sort out the seniority integration ina timely manner, the company may take legal action to ensureenforcement of the timetable that is spelled out in the MOU.Accordingly, the union needs to submit to American the finalseniority list on or before Dec. 9, 2015. The Association ofProfessional Flight Attendants, representing American, and theAssociation of Flight Attendants, representing US Airways, alreadyagreed to their union representation and their integration process oftheir seniority list.

Flightattendants from each of the airlines are currently working under newcontracts. They are also looking toward new deal negotiations at themerged airline. For ground workers, store clerks and mechanics, theindividual work groups of the airline started in 2014 on verydivergent situations.

Atthe old American, the workers were recipients of a new contract whichincluded pay raises that were in exchange for concessions. As part ofthe process of bankruptcy, the carrier shuttered maintenance facilityat its Alliance Airport and shifted work to Dallas/Fort Worth andTulsa maintenance hangar. However, ground workers and mechanics at USAirways have been in management, contractual talks since 2011, andhave had no progress being made as CEO Parker pursued after themerger.

Conclusion

Themerger between American Airlines and US Airways was a strategic movethat was considered to accomplish two primary goals. The first was tosave a sinking ship from being totally run out of business on itsfiling for bankruptcy. The second was to create airline dominance bycreating the largest airline in the world. The merger quicklydisplaced Delta Airlines from its dominant position. While thecompletion of the merger is expected later in the year 2015, thereare a number of issues that are still unaddressed and have resultedin court battles between the employees of the two companies. Eachairline would like to retain some form of control while at the sametime remain in a united merger that will secure the jobs of theiremployees. Apparently, exist an impasse on the generation of theintegrated seniority list which only time will tell on its result.Though the merger appears to have been a friendly takeover, thecontinuous court battles prove to be more of a hostile takeover withboth sides being unrelenting in their quest to retain theirsovereignty.

Thecombined information suggests that shareholders of most-acquiredfirms often realize significant and positive abnormal returns to thecompany that is purchasing the other company. In addition, they mostlikely experience a wealth effect that is negative. However, theoverall M&ampA net effect seems to be positive: where almost allstudies are reporting positive returns for investors in the combinedtarget firms and buyer. This therefore implies that M&ampA has thepotential to create economic value, by transferring assets to themanagement teams capable of operating them more efficiently (Douma &ampSchreuder, 2013).

Themerger of the two companies has had an overall positive net effect onits asset base and financial standing. Both companies have benefiteddespite the warring on the employee and union fronts.

References

Creditor,`prospective merger partner` US Airways gives support to Americanexclusivity extension&quot.LeveragedLoan.com. July 15, 2012.

Douma,Sytse&amp HeinSchreuder(2013). &quotEconomic Approaches to Organizations&quot, chapter 13.5th edition. London: Pearson.

Jones,Charisse (July 12, 2013). &quotUSAirways shareholders OK American Airlines merger&quot.USAToday.Retrieved July 15, 2013.

Maxon,Terry (December 11, 2013). &quotConfirmed:Settlement reached in the American Airlines-US Airways case&quot.DallasNews.Retrieved November 12, 2013

&quotWorld`slargest airline formed as American Airlines and US Airways merge&quot.SydneyMorning Herald.Agence France-Presse. December 10, 2013.Retrieved December 10, 2013.