Benchmarking - Mergers & Acquisitions

Introduction

Companies and organizations are challenged with daily decisions that can provide unlimited opportunities internally and externally. Finances and growth maximization also play a large role in these decisions. Executives and managers must make decisions on how resources will be appropriated, how to increase profits, sales, and the companies overall business portfolio. Companies are able to determine what is working and not working by analyzing the company's financial statements. At times the financial statements will tell a lot about an organization and their financial situation or background. When companies begin to lose out on profits or sales, they are at a point in time where they could be potentially bought out or go out of business. The current benchmarking paper Team C is focusing on is mergers and acquisitions that other organizations in diverse industries have faced. With LEI and Shang-wa potentially facing buyouts, we wanted to view organizations that have merged or partnered in order to keep the business flowing. Next, Team C will explore several companies that have dealt with mergers or acquisitions.

Airlines

The first mergers and acquisitions we will discuss include American Airlines, Comair, and Delta.

American Airlines was flown into existence in 1929 when the Aviation Corporation was formed to acquire younger companies, and in 1930 the Aviation Corporation's were incorporated into American Airways. In 1934 American Airways became American Airlines, Inc. (American, 2002). In 1937 American hit a milestone with carrying its one-millionth passenger. Through out the years American had its own milestones and changes with new routes being added, different planes, and even reorganization within the company. In 1982, stockholders approved a plan of reorganization and formed a new holding company AMR Corporation, which became the parent company of American Airlines, Inc. With American doing well in the industry and the consumer base was increasing, they decided to search out smaller airlines and see if they could boost their business. In 1998 American Airlines announced its acquisition of Reno Air, and American Eagles acquisition of Business Express. By August 1999 Reno Air was fully integrated. However, American was not done with increasing their business and clientele. On September 21, 1998, American and four other airlines joined alliances to start a customer driven global alliance called one world, which launched a multi-million dollar program that raised the standard of global travel. Acquisitions and mergers are also good for companies who are headed for bankruptcy yet still want to salvage some of the company's assets. In April 2001, TWA or Trans World Airlines assets were acquired by American Airlines. Another airline company that was actually acquired was Comair. Though the company initially did well, once they hit financial woes, they realized that being acquired could definitely keep them flying and in business.

Comair was initially founded in 1977 in Cincinnati, Ohio by a father and son team. It is considered a regional airline and introduced regional jets to the North America industry in 1993. Comair initially had a major impact on commercial aviation and its rapid growth helped lead to expanded air service for communities. Comair also became the first regional airline to operate an all-jet fleet (Comair, 1999). In 1981 Comair started its relationship and partnering with Delta Air Lines, when it became part of the Deltamatic computerized reservation system. In September of 1984 Comair became an official Delta Connection Carrier. In 1986, Delta purchased 20% of Comair's common stock, but later was acquired 100% by Delta in January of 2000 for approximately $1.8 billion (Comair, 2006), or $23.50 a share. At the time of purchase Comair was worth $2.3 billion.

Delta also purchased Atlantic Southeast Airlines the spring before for $650 million. This was paid as a tender offer to the shareholders. Delta began purchasing and acquiring the smaller carrier's strong balance sheets, improve their service and gain control of their growing fleets of new regional jets (Buying, 1999).

With the acquisition of regional jets fly faster and farther, which allow more routing flexibility for airline flights. This flexibility comes with 50 seat jets that can fly into smaller airports and terminals. The regional jets can be used on busy routes at off-peak times. By using the smaller jets, it also allows the larger planes to go on more profitable and efficient flights and destinations. In discussing Delta we will also view the Delta and Pan Am Merger in detail. As we can see many airlines tend to acquire and merge in order to gain a higher standing in the industry and over international markets.

In Delta's quest to become a "world class carrier" (dl net, 2004) precipitated a major historical event. Delta, a U.S. carrier had been deemed the number two preferred airline for travel in 1990 (dl net, 2004), and was now looking to extend its popularity to a global market. Delta airlines decided to purchase the European routes of Pan America Airlines. The acquisition of Pan America's routes would provide Delta their entire European operation with the exception of a Paris-Miami route. This was thought to be an acquisition that would allow Delta to capitalize on the European markets and expand its customer base. Though Pan America's financials in the 80's were plagued with forced sales and other acquisitions, Delta experts saw this acquisition as a profitable measure to ensure border growth and increase shareholder wealth. They decided to use the resources gathered from their profitable domestic markets, to acquire international routes from Pan America. On August 12, 1991 Delta Airlines purchased the assets of Pan America for $416 million dollars. They also assumed $389 million in liabilities. Delta rendered payments of $80 million cash upfront, then a second installment of $35 million to Pan America. Part of this agreement was that Delta would pay Pan America $4 million dollars to help its reorganization and emergence from bankruptcy.

Pan America eventually sued Delta for this part of the agreement when Delta attempted to write off this amount due to Pan America's failing financial state. Pan America lost the suit and 3 months later was officially out of business. Many experts state that the plan was always to force Pan America out of business (Harvard business, 2006). Either way, Delta did see an immediate 30 percent increase in profit for 1991-1993 (centennialoffflight, 2006). Delta also became one of 3 major carriers in the world, controlling one-third of all the commercial aviation market.