The Reemergence of Mergers

Posted on Feb 15, 2013 | 5 Comments

If an English gentleman hunting foxes is, in Oscar Wilde’s formulation, “the unspeakable in pursuit of the uneatable,” then the prospective merger of American Airlines with U.S. Airways should perhaps be called “the unreliable in partnership with the unacceptable.” Or perhaps that’s just our personal airport nightmares talking.

At any rate, bankrupt American Airlines hopes to save itself by merging with deservedly unpopular U.S. Airways to create the world’s largest, and, one hopes, not worst, airline company.

All of this is part of what the New York Times heralded this week as a comeback of the mega merger. “In the opening weeks of 2013, merger activity has suddenly roared back to life,” Peter Lattman reported. “The deals have benefited from an improving economy, as well as robust lending markets that allowed companies to push back the large amounts of debt that were to have come due in the next few years.” Wall Street, while knocking on wood, is supposedly “giddy.”

But is this going to be good for the companies in question?

In Men, Ideas, and PoliticsPeter Drucker categorized mergers as “offensive” and “defensive.” In the early 20th century, tycoons went on the offense and pooled resources to grab large shares of the market.  In the following decades, smaller companies engaged in defensive maneuvers and likewise pooled resources in order to prevent being crushed. By the mid-20th century, mass markets and increased international competition encouraged a third wave of mergers, once again of the defensive sort.

Photo credit: David el Nomo

Photo credit: David el Nomo

As we’ve noted, Drucker had five rules for making a successful acquisition. But he had mixed feelings about M&A activity in general, considering such mashups to be sometimes useful but other times a substitute for proper thinking.

He noted that the most gargantuan mergers were often defensive and panicked. “They are intended to slow the decline of an industry,” he wrote in Management: Tasks, ResponsibilitiesPractices, “or to slow the declining profitability of an industry by cutting overhead costs.”

He also warned that merging brings a whole host of new problems, many of which leave the new venture worse off than either of the originals. “There has never been an acquisition which really fitted, and which did not have to be reconstructed before it began to give the expected results,” Drucker declared.

At the same time, some mergers are essential, and those companies that fail to pursue them are doomed. An example was Chrysler in 1960. “It did not have the resources to grow from within,” Drucker wrote in Managing in Turbulent Times. “Its growth would therefore have required a merger, in all probability with a European company. Instead, Chrysler decided to remain ‘conservative’ and to become ‘a factor’ rather than ‘a leader’ in the industry. This turned out to be a disastrous mistake.” In the end it survived only with government help.

What do you think? Will a combined American Airlines and U.S. Airways make for a stronger company? Will customer service improve?


5 Comments

  1. Fred Pieplow
    February 16, 2013

    I believe it was Ken Iverson of Nucor Corporation, when referring to consolidation in the struggling steel industry, who said: ‘it’s like welding two boat anchors together to see if it will float.’ In this case, I think it’s like taping two pigs together to see if it will fly.

    Reply
  2. Mike Grayson
    February 16, 2013

    American Airlines had a revenue of $24.9B and expenses of $27B in 2012, with $23.9B in assets and $15.6B in debt. With financials like that, is it any wonder that their stock is trading at $2.54 a share.

    Their focus needs to be on what they need to do to become an effective company and pull out of the Chapter 11 bankruptcy. What do they need to abandon? What can they improve? What do they need to do well?

    It is obvious that the merger is designed to make the balance sheet look good, but does nothing to solve the problems with the business model or operational issues. This is just more high level smoke and mirrors that is likely to hurt a lot of people in terms of layoffs and moving families from one city to another.

    I cannot see how this decision benefits anyone.

    Reply
  3. Alba Patricia Valencia
    February 17, 2013

    Everything is possible. Life in only a dream and we have the imagination between living and dreaming, but there is a third thing. Predict it.

    Reply
  4. We Realize You Have a Choice of Airline (Sort of), and So We Thank You For Flying American-United-Southwest-Delta | The Drucker Exchange | Daily Blog by The Drucker Institute
    May 8, 2013

    [...] Although, as we’ve noted, Drucker was a skeptic of mergers as a form of salvation, he did make an exception for businesses of the wrong size. “Indeed, being the wrong size is one of the few cases where serious thought about merger and acquisition is a must,” he allowed. “The problem cannot, to repeat, be cured by growth from within as a rule. It requires a ‘quantum jump.’ And this, of course, merger and acquisition can provide.” [...]

    Reply
  5. Mergertech
    January 17, 2014

    Airline Mergers have been a way of development since the fledgling industry began, these days, it’s predicted than in any given several years there will be a variety of airliner mergers. A merger outcomes when two organizations come together to type a single company. Thanks for sharing.

    Reply

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