Introduction
This case is talking about the merger of American Airline and US Airways. The whole deal is about $11 billion dollars. American Airline keep the brand and has 72 percent of total equity share. This deal saved American Airline saved from bankruptcy at the edge. On the other hand, the paying side US Airway doesn’t keep much left. Total remaining 28 percent share goes to US Airway, and it may be required to pay a termination fee of $55 million or $195 million under certain circumstances outlined in the Merger Agreement. The true reason why US Airway is in such a disadvantage is because the credit rating is low at B-. With bad reputation in this monopoly competitive market, it is almost impossible for US Airway to have any advantage in this merger. What is more, this merger definitely violated antitrust law that they need to file guaranteed approval from the Federal Government.
On the Financial Front
To calculate the firm value in 2012, there are a few assumptions that need to be made. The discount rate is 5.3% (https://www.statista.com/statistics/193533/growth-of-global-air-traffic-passenger-demand/). The networking capitals from 2013 to 2017 are estimated by using the growth rate of NWC from 2011 to 2012. The capital expenditure applies the same method. The detailed results are shown in the spreadsheet. Based on the DCF approach, American Airline’s firm value is $8,438.49 million without synergy and negation part from two parties. The final price for this deal is $11 billion dollars, which means US Airway is willing to pay about $3 billion dollars to American beyond its book value.
After the merger, the company can choose whether to pay the debt or not. This is the part inside their agreement. However, if they decide to keep the debt on the balance sheet instead of paying out, the new company’s credit rating can be hurt since it shows the lack of solvency of the new company. Due to the low credit ratings of US Airway, the biggest concern is that how they pay for the $11 billion offer. Looking at its balance sheet, US Airway does not have enough money to pay for the offer. Because of its low credit rating, the amount of debt it can issue is limited. Therefore, US Airway could have a little liquidity issue in the merger process.
Generally, synergies after M&A should bring the new company more benefit than the two individuals. However, if the performance of the new firm is not as good as expected, the firm could face some adverse impact as well. In the Merger of American Airline and US Airway case, one of the main purposes of becoming a new company is to survive in the highly competitive market in the U.S. However, there is no guarantee that the new “survivor” corporation will gain a better performance than before. If this is the case, the company’s revenue will fall, and it may not have enough money to pay its debt, so it will have a lower credit rating. The shareholders may not benefit since the stock price may be hurt as well due to lack of performance.
The Legal Perspective
Airline industry is a special business that for sure is a monopoly business with government’s acceptance. Any of the governments wouldn’t accept a foreign company to have the control of the air traffic of their own countries. So even when the merge of American Airline and US Airway violated the antitrust law and US Airway must file a Hart Scott Rodino, they still have some way to come across the Department of Justice and Federal Trade Commission. The first thing they should do is go to DOJ and FTC by themselves to tell the federal they know the merger is in some way violated the antitrust law. And in another way the merger also creates greater competition in the market between Delta and United Airline. In this case, this industry has three big companies. If the merge does not happen, American Airline is going to bankrupt first and then with bad reputation US Airway going down right after. Which only left two big companies Delta and United Airline in this monopoly market. Considering three big heads is a little bit better than two big heads, DOJ and FTC would agree on the merger in certain circumstances.
After the government agrees on the merger with the Federal Government, the new board of directors needs to come to negotiating terms with the government. The government needs to make sure that the new board does not lay off a lot of employees for the new company. Because with the bankruptcy of AA and US Airway if they do not merge it would definitely cause a huge unemployment problem for the government.
The new company also need new legal agreement with international business with European Union and other international associations like British Airway and other international airway companies to come into new agreements to maintain the business for both companies. In this situation, they can keep the synergy for the merger and develop business in the future.
Conclusion
In many of the reasons like we discussed, this is not a good merge. One of the best reasons, big company merges, causes the power for the pricing. In a certain way, the government opened a green light for American to survive in the system. Maybe this one is not as obvious as government aid General Motors or even does not match the help like Merrill Lynch, but the new company should hold high social responsibility by themselves to keep the new company competitive inside the market. If they ruin the reputation and the credit rating again, there is no more reason for them to stay in this business.
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