Feb 8, 2021 in Business

Mergers and Acquisitions

Background

Mergers and acquisitions have remained a famous strategy that business entities adopt in a bid to enhance growth and organizational profitability. One of the major reasons why organizations embrace the strategy is their interest in competing efficiently within existing markets or new ones. Alternatively, organizations are always interested in expanding product offering, realize operational synergies, and enjoy from the strategys associated benefits.

Upon carrying out a study on mergers and acquisitions, Cartwright and Schoenberg established that the strategy had influence on organizational performance. The authors also noted that the first modern mergers and acquisitions are traceable to business events that took place in the 19th century within the United States. Ferris and Petitt pointed out that the merger between Italian banks, Monte Pio and Monte dei Paschi that took place late in the 19th century were some of the initial examples of the application of the strategy. During the 20th century, mergers and acquisitions assumed dominance routine as many changes swept the business environment.

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It is also worth noting that mergers and acquisitions have taken place in phases that began around the 1890s. One of the most noteworthy phases include the following: 18901903, 19101929, 19501973, 19811989, 19932001, and 20032007. On the basis of their evaluation, the end of every phase coincided with an economic decline. Ferris and Petitt used the case of 2007 to illustrate that, indicating that mergers and acquisitions slumped as the 2007/8 financial crisis set in. Nonetheless, Ferris and Petitt agreed that other factors including credit availability, technological, regulatory shifts, and industrial shocks were critical in influencing mergers and acquisitions.

Mergers in the airline industry take place when at least two airlines come together to operate as a unified entity. However, at another level, one airline may buy out another, in which case a takeover/acquisition is said to have taken place. However, as Tobin observed, stakeholders of firms may retain an interest in merged or acquired companies. The researcher proceeded to indicate that the primary motivation for adopting the strategy is to increase profitability. In other cases, poor performing companies merge with well-performing ones with a view to offsetting incurred losses since they are counted as write-offs. One notable outcome underscored by Tobin is that mergers and acquisitions influence or are related to market prices. Bamber, Gittell, Kochan and Nodenflycht supported the findings by Tobin having found that when mergers took place within the airline industry, price increases followed. In this regard, Bamber et al. was of the opinion that merging was instrumental in increasing efficiency among airlines, although such advancements did not translate to lowering of prices.

According to Travis, Carleton and Lauritsen, merging has been found to lower the levels of competition across some routes. The authors argued that reduced competition often led to higher prices since passengers were forced to pay more to secure travel tickets. Merging allows entities to operate like monopolistic businesses. Hence, merging airlines have the power to manipulate prices leading to a rise travel charges.

Theoretical approaches are also useful in understanding the background of mergers and acquisitions. Based on the rational expectations theory, investors hold rational expectations upon assessing the prevailing information. Thus, it is assumed that investors base their decisions on current knowledge or information. Concentrating on shareholder wealth, evidence shows that shareholder wealth is gained from trading stock. Given the assumption that stock prices increase in the long run, investors forecast current or present values of future earnings before making their investment decisions.

Another valuable theory helpful in understanding mergers and acquisitions is the monopoly power theory. Obtaining monopoly power precedes a possibility of improving long-term performance. For this reason, merging or acquiring firms present opportunities to increase shareholder wealth. A monopoly has the capacity to benefit out of producer surplus, which could otherwise be difficult to attain under perfect competition market conditions. Building empires is also seen as another motif that mergers or acquisitions pursue. The position is held since when an organization merges or acquires another one, the resulting expansion enhances the ability to generate more revenues.

Introduction to the Problem

Often, it is thought that mergers and acquisitions (M&A) are beneficial to organizations. Despite the popular argument, the veracity of the argument remains contestable since the results from the adoption of the strategy have varied markedly. It is also observed that the primary motives of mergers and acquisitions vary from one organization to another. Therefore, there is a high possibility that the variation in the motives of merging may lead to a difference in outcomes. Based on an analysis done by Marks and Mirvis, between 1990 and 2007, the worth of mergers and acquisitions rose from 460 billion US dollars to 4.5 trillion US dollars. According to Marks and Mirvis, creating shareholder value was one of the primary motives of adopting the M&A strategy. As the scholars found out, every instance involving an acquisition witnessed a rise in shareholder equity for shareholders of the acquired firm whenever an entity bought off another to contain competition. In spite of the rise in the equity of the acquired entity, the acquiring firm often suffered losses because its share prices often tumbled after the completion of such deals. Further, Marks and Mirvis observed that almost two thirds of mergers preceded a decline in their market share as soon as the close of the first trading quarter upon the completion of the deal.

After assessing mergers and acquisitions, Walter indicated that over two hundred thirty thousand mergers and acquisitions were recorded between 1985 and 2000 across the world. In total, the M&As were roughly priced at $15.8 trillion. According to Walter, fifty percent of the mergers and acquisitions valued at $8.5 trillion took place in the financial services sector. The above statistics indicate that the M&A strategy continue to play an important role as a corporate strategy. In spite of the widespread adoption of the strategy, Cartwright and Schoenberg accepted that overwhelming evidence supported the position that M&A were facing high failure rates.

Since there is a high degree of environmental dynamism, business organizations are under increasing pressure to implement strategies that boost their global competitiveness. For example, Kaplan and Norton observed that a number of changes to such as technological developments, regulatory frameworks, and competition have pushed organizations to adopt the M&A strategy. Correspondingly, widening client access, geographical markets, and functional lines have emerged as to critical factors in the adoption of the M&A strategy.

Statement of the Problem

The principal motive that explains mergers and acquisitions is to create or increase shareholder value. Creating shareholder value continues being a fundamental goal for many organizations. Therefore, organizations look for opportunities to advance shareholder value, using many approaches. For that reason, it is not surprising that mergers and acquisitions have become part of the strategies that organizations employ in pursuing an increase in shareholder value.

It is noted that a larger part of the world embraces capitalism. In a capitalist system, business entities are incentivized to pursue wealth creation, as well as multiplication. Amongst investors, stock prices are the basic measures of wealth. This is affirmed by Moyer, McGuigan and Kretlow, who observed that stock prices show the feature of timing, risk, and their association with projected benefits. Moyer, McGuigan and Kretlow further indicated that mergers and acquisitions were useful in improving efficiency, profitability and synergy. In addition, organizations that adopt M&A accrue other strategic advantages such as enhanced customer base as observed by Sirower.

Despite the popularity of the M&A strategy, Gugler, Mueller, Yurtoglu, and Zulehner observed that a number of entities that embrace it did not attain the expected outcomes. Particularly, the scholars opined that over the preceding fifteen years, forty-five of the mergers yielded lower profits compared to non-merged entities. In addition, fifty percent of the merged business entities failed to reach the anticipated value. The above results demonstrate the possibility of obtaining negative results despite the widespread assertion that mergers and acquisitions led to positive results. For instance, chief executive officers of merging firms often promise high returns to shareholder in order to advocate the adoption of mergers and acquisitions. Some of the most highlighted outcomes of mergers and acquisitions include an increase in market reach, economies of scale, consolidation of synergies and activities. Among airlines the effects of mergers and acquisitions may be seen on market prices, level of competition, shift in market power among the merged airlines, monopolies and higher prices. When the level of competition falls, changes in market capacity and share occur leading to more market power, which precedes changes in prices. Thus, it is hypothesized that a correlation exists between airline mergers and increases in prices.

From the above review, mergers and acquisitions do not seem to yield clear outcomes. Hence, delving into the topic in order to gain an insight into the relationship between mergers and acquisitions, and prices within the airline industry is timely.

Purpose

Mergers and acquisitions rose to prominence as early as the 19th century. From that time on, their influence in the business world has been significant. Supposedly, the primary reason for adopting mergers and acquisitions is to enhance the profits or earnings of the firms involved. Hence, the strategy has been associated with yielding gains for firms. Despite such assertions, the outcome has not been guaranteed or straightforward. For that reason, the proposed research has the purpose of pursuing an understanding on the results of mergers and acquisitions. However, the primary purpose of the proposed research is to find out whether a relationship exists between mergers and acquisitions, and prices in the airline industry.

Research Questions

The fundamental research question assessed in the current study is: is there a relationship between the mergers and acquisitions strategy and prices in the airline industry? In order to answer the question, the proposed research will also respond to the following questions:

  1. Is there a relationship between mergers and acquisitions and market size?
  2. Is there a relationship between mergers and acquisitions and organizational profitability?
  3. Is there a relationship between mergers and acquisitions and efficiency in resource use?

Research Objectives

The main goal of the proposed study is to identify whether a relationship exists between the mergers and acquisitions strategy and prices in the airline industry. Similarly, the study addresses the following specific objectives, which include identifying and analyzing whether:

  • mergers and acquisitions lead to an increase in market size;
  • mergers and acquisitions enhance organizational profitability;
  • mergers and acquisitions affect efficiency in resource use.
  • Rationale

Companies continue to merge in an effort to build shareholder value with many failing to achieve post-merger objectives. In addition, there is diversity in the research findings on mergers and inconsistent evidence that mergers improve firm performance. Researchers now question if there are other components beyond what has been researched to understand factors that enhance or erode shareholder value. DeGraffs examination of additional factors in the medical device industry has contributed to the merger literature.

As already indicated, business organizations continue to embrace the merger and acquisition strategy in a bid to increase shareholder value. However, not all entities that adopt the policy attain the target goals. Besides, there is considerable diversity demonstrated by various studies on the topic. Such inconsistencies in research underscore the need to seek clarity regarding the usefulness of the strategy in business circles. Of particular concern to researchers is whether there might be other attributes or aspects that influence mergers and acquisitions besides those studied.

According to Amick, analyzing fares before and after mergers or acquisitions indicates that prices increase on airline routes where merging companies competed previously. The effect of merging also affects the airports involved. Centers that could be accessed easily by other airlines fall under the control of one airline. Such adds strength to the merging airlines which decide to increase the prices that they charge. This monopoly-type of arrangement paves the way for merged or acquired airlines to increase ticket prices. For that reason, the research by Amick emerges as an important piece of literature about mergers and acquisitions, and should form the basis upon which further research should be conducted.

Based on a thesis by DeGraff, a positive association exists between the mergers declaration stock prices and cash flows after mergers. The results by DeGraff allude to the existence of some form of a relationship between the two components. Put differently, there is a possible link between stock value and merger announcement dates. The findings support the efficiency market hypothesis which is one of the most significant models in understanding the operation of markets. The proposed study seeks to build on such contributions as that by the DeGraff study in understanding relationships surrounding mergers and acquisitions.

Besides the above rationale, findings from the proposed study would contribute to research and theory not only on corporate mergers and acquisitions as a whole, but also to the airline industry as a collectivity through the determination of the existence or absence of a relationship between M&A and ticket prices.

Significance of Study

The proposed study is expected to contribute to the theory and to some extent practice in mergers and acquisitions. It should be noted that theory building is enhanced through studies of this nature since they are grounded in an extensive literature review. By conducting such a review, the theory on the business strategy would be improved. Similarly, the findings from the study might be useful in informing industry players about the relationship on ticket prices and mergers so that they make sound decisions regarding the adoption of the policy. Another contribution is related to the study findings, which are expected to reveal the presence or absence of a correlation between ticket prices and mergers and acquisitions within the airline industry. In the event that a relationship is found to exist, then airline stakeholders would be informed adequately on whether to embrace or discard such a strategy. Similarly, finding that there is no relationship would inform players on the way to incorporate the strategy into their businesses. It is also noted that the proposed research would lead to an extension on current research on the topic as it relates to the airline industry. Depending on the significance of the findings, there remains a possibility to generalize to other industries although on an exploratory basis. Another expected contribution is towards informing future studies on the topic. It is noted that the topic attracts widespread interest owing to the high rate of the adoption of the strategy by business organizations. In this regard, the study is significant not only to airline industry players, but also to the scholarship community on understanding how value is created in through the adoption of the business strategy.

Conceptual Framework

In the past, studies on strategic leadership on M&A have focused on the identification of strategic and process components that explicate the variance in performance among individual acquisitions. The literature on strategic fit concentrates on connecting strategic components and performance within merging firms as observed by Roller, Stennek and Verboven. Particularly, the literature has concentrated on the extent to which target companies businesses correlate to those of the acquiring firms. King, Dalton, Daily and Covin provided an in-depth analysis regarding the contribution of acquisitions and mergers to the creation of value through resource sharing. According to Ahuja and Katila, mergers and acquisitions remain integral in transferring knowledge from one organization to another. In spite of the argument in favor of an increase in the value of M&A because of strategic fit, the issue of underperformance after M&A is not adequately explored.

Market shares contribute towards explaining the relationship between airline mergers and increases in ticket prices. It is argued that market dominance often result from airline mergers or acquisitions since the strategy increases route sharing with regards to the point of passenger origin. Such influences the creation of monopolistic tendencies in the business environment since merged entities can easily manipulate prices.

Based on the process literature, integration or acquisition strategies are significant. In particular, strategy and organizational behavior scholars hold that inappropriate negotiations, and integration processes might contribute to poor performance. In the same vein, Cartwright and Cooper indicated that it was necessary to provide contingency frameworks to mitigate integration issues emerging after acquisitions or mergers. Furthermore, the scholars underscored the significance of drawing upon experience from other acquisitions or mergers when working on the integration process. Hayward supported the position having observed that the nature of previous M&As were useful in informing mergers and acquisitions.

Definition of Terms

Merger

A merger takes place when organizations with roughly equal pedigree agree to form become one entity. Consequently, a merger brings together two or more organizations.

Acquisition

An acquisition reflects activities of companies for the purposes of enjoying economies of scale, increased market visibility, and efficiency. An acquisition takes place when one entity buys another.

Ticket Prices

Such prices are those charged by airlines for services rendered to customers.

Conclusion

It appears that mergers and acquisitions remain a famous strategy employed by business entities seeking to increase their growth and profitability. It is also demonstrated that one of the main reasons organizations use the strategy rests on the need to compete efficiently within existing or new markets. Similarly, organizations consider avenues to expand their product offering, realize operational synergies, besides enjoying other benefits associated with the strategy. It emerges that in the airline industry the strategy is related to an increase in ticket prices, an aspect that might translate to higher profitability for organizations that adopt the strategy. Therefore, in order to answer the question about whether to merge of not to merge, conducting a study within the airline industry should be considered.

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