Economic trends in the airline industry due to the global recession are continuing. It started with the 2008 merger of then Continental Airlines with United Airlines. More recently, US Airways and American Airlines have announced that they are currently in negotiations to merge. This global recession does not limit itself to only the airline industry. With this continuing trend, it’s important to know what to look for when considering a merger with another company.
How to pick your target
According to David Harding and Sam Rovit, authors of “Mastering the Merger,” studies have shown that 70% of major mergers fail. This is why it’s important to target deals that will advance your main business operations. Creating an investment thesis that explains how and why an acquisition can improve an existing core business is the first step. Understanding the basis of competition within in your industry is fundamental to creating the investment thesis.
When determining whether a target is a fit for your company, the “due diligence” process should be taken very seriously. To accurately determine a target’s value, you will need a thorough understanding of cash flows and how to read the financial statements. Remember that your target has more than likely been trained to dress the value of the business. According to Harding and Rovit, “half of the executives surveyed, discovered their target had been dressed up for sale.” Without an extensive background in reading financial statements accurately, you may not have the ability to see this clearly.
In addition, you should measure the true synergy value of your company and the target. According to Harding and Rovit, “two thirds of acquiring executives said they had overestimated the synergies available.” To measure the synergy, you should first evaluate cost savings. Then evaluate the time it will take to reach successful synergy revenue. Finally, subtract any negative synergies (service interruption, customer losses, and employee turnover) from your estimate. Test your findings against what makes business sense. If there is doubt or uncertainty, then be prepared to walk away from the deal.
At this stage in the merger, you will have to make decisions such as, where operations need to be integrated and where the merging companies’ operations can carry on separately. There are four principles that will help when making these decisions:
- Creating the integration plan months in advance;
- Integrating quickly in critical areas;
- Placing significant importance on the cultures;
- Keeping the strength in the operations of each of the merged businesses.
By making sure all the decisions are in line with the investment thesis, integration will be much easier and more successful.
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