XYZ Airlines’ Mergers and Acquisitions Management

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Table of Contents

Introduction
Literature Review
Methodology
Analysis and Findings
Discussion and Conclusion
References

Introduction

Rivalry in the airline industry across the globe, and particularly in the Middle East, has resulted in airline companies looking for avenues to boost their competitiveness and stay profitable. One of the strategies that some firms are using is merger and acquisition. It is imperative to acknowledge that not all companies that opt for this approach end up achieving the intended goals (Manuela, Rhoades, & Curtis, 2016). Nonetheless, the cases of failures of mergers and acquisitions do not deter airline organizations from leveraging the same in a bid to improve their performance. XYZ is one of the firms that are experiencing challenges in managing mergers and acquisitions. This company is among the leading airline businesses in the United Arab Emirates, which runs over 1000 flights weekly.

Since its inception, this corporation has remained profitable and witnessed exponential growth. However, competition from companies like Fly Emirates and Qatar Airlines has led to this firm embarking on an ambitious expansion strategy by merging with and acquiring other non-performing airlines. Today, some of the merged and acquired businesses are at the risk of being closed due to poor performance. The company is also contemplating terminating contracts of many employees as a strategy to reduce operations expenses. The primary aim of this report is to analyze the reasons that are contributing to the challenges in managing the underperforming firms at XYZ airline. Many airline companies are contemplating mergers and acquisitions as a tactic to improve their growth and overcome competition. Hence, the rationale for conducting this study is to assist these businesses in making informed decisions.

Literature Review

The issue of mergers and acquisitions in the airline sector dates back to many decades ago. Scholars identify three primary motivations that encourage investors to go for this mode of business operation (Huschelrath & Muller, 2014). They are a speculative, monopoly, and ordinary business intentions. The existing literature is inconclusive, as it does not clearly differentiate between various motivations. Nonetheless, Huschelrath and Muller (2014) argue that these three motives play a critical role in many mergers and acquisitions, particularly in the airline sector. Manuela et al. (2016) state, “Despite all the good intentions of mergers, the picture that emerges is a pessimistic one: widespread failure, considerable mediocrity, and occasional successes” (p. 142). An analysis of over 6000 mergers and acquisitions across different industries reveals that they do not necessarily improve organizational efficiency and profitability (Prince & Simon, 2017). Some researchers argue that hubris, personal benefits, and synergy are the three vital incentives that contribute to mergers and acquisitions.

The synergy theory maintains that most managers believe that mergers or takeovers help to improve the value of an organization. Proponents of this hypothesis contend that this strategy assists the management in boosting shareholder value, reduce rivalry, and improve efficiency. According to Schosser and Wittmer (2015), the synergistic benefits attributed to mergers and acquisitions emanate from economies of scale, proficient management, enhanced production mechanisms, redeployment of resources, and integration of complementary assets, among other value-generating methods. One of the forces that led to XYZ Airline resorting to mergers and acquisitions was the desire to boost efficiency and expand its market coverage. This company’s leadership trusted that it could use this strategy to grow its global reach by curtailing political interference, particularly in hostile markets. Although XYZ Airline has managed to realize these goals in some mergers, others have proved difficult due to external influences.

The hubris theory identifies overconfidence amid the management as one of the conditions that result in firms deciding to acquire or partner with their rivals. Huschelrath and Muller (2014) allege that, at times, bidding teams may have erroneous information regarding the worth of the target company, leading to them making a grievous judgment. In some instances, overconfident executives overestimate the advantages of their targeted takeover. As per Cortes, Garcia, and Agudelo (2015), audaciousness among managers contributed to the failure of the merger between Volvo and Renault. Overconfidence among the leadership of XYZ has led to the company partnering with the wrong airline firms. The management failed to determine the degree of control that it would enjoy after merging with some airline businesses, especially those that were government-owned. Thomas and Kummer (2015) posit that the success of mergers and takeovers depends on the degree of power that the buying firm has over the purchased businesses. Despite this airline changing the management of the purchased firms, it faced challenges from labor regulations. For instance, workers’ unions made it difficult for this airline to alter its hiring terms to boost profit.

The personal benefit theory asserts that organizational leadership may promote mergers and acquisitions with the objective of enriching itself at the expense of shareholders. As per this hypothesis, private gains motivate some amalgamations where corporate leaders take advantage of their powers to obtain value for themselves (Cortes et al., 2015). For instance, under leadership control, if a firm has a consistent flow of revenue, the management team may use the surplus money to venture into value-destroying or low-profit partnerships instead of issuing bonuses to shareholders. Much of the existing studies have focused on the role of synergies in mergers and acquisitions decisions. Limited literature has analyzed the contribution of hubris and personal benefits to takeover resolutions.

It is imperative to appreciate that the processes of mergers and acquisitions involve multiple players with varied interests, hence the need for due diligence before making the final decision. The executive of a company that is being acquired may use varied strategies to prevent the takeover. At the same time, the acquiring firm may utilize its financial power and foothold shareholding to manipulate the process. Empirical studies such as Managerial Equity Holdings, Target Management Resistance, and Bidders Toe-Hold have tried to explain the conditions that determine the success or failure of takeovers. However, they do not elucidate the factors that encourage organizational leaderships to enter into partnerships or acquire rival companies. Presently, there is no single theory that demonstrates the correlation between hubris, synergy, and personal benefits, which are the three primary forces that cause partnerships and takeovers. Therefore, there is a need for further research to come up with a hypothesis that integrates these three motivations to mergers and acquisitions.

Methodology

Research Design

This study relied on descriptive research design as it is helpful in developing a profile regarding a given phenomenon. Bengtsson (2016) defines this mode of investigation as “a systematic, empirical inquiry where a researcher does not have direct control of independent variables, as their manifestation has already occurred or because they inherently cannot be manipulated” (p. 9). The pollster’s main goal was to determine the factors that contributed to the success and failure of some of XYZ’s mergers and acquisitions.

The population of the study

This study’s target population consisted of managers from XYZ, as well as the partner and acquired firms. Presently, this company has formed alliances with seven airline businesses. Additionally, it has acquired two firms in an attempt to expand its market coverage and overcome competition. The pollster selected 25 managers from these companies. The participants were pooled from different levels of administration, including human resources, cargo handling, air hostess, and pilots. The researcher chose to use managers as they had adequate knowledge of the daily operations of their respective firms and the challenges that they encountered.

Data Collection and Measurement

This study used both primary and secondary data. The researcher utilized a questionnaire to gather primary information from the participants. The survey comprised open-ended questions to allow the respondents to explain their answers. These queries aided in the collection of structured responses that were helpful in making concrete recommendations. The investigator used a few members of the population (5 executives) to evaluate the reliability and validity of the questionnaire. It was assessed to ascertain its consistency in gathering information from the respondents. The questionnaire was later sent to all the selected managers, both as hard and soft copies. The researcher also gathered secondary data from peer-reviewed journals. The publications were selected based on their year of publication (Not older than 5 years) and content. This study used journals that discussed the issues of mergers and acquisitions, specifically in the airline sector.

Data Analysis

This research relied on qualitative data, thus making it difficult for the pollster to use statistical methods of analysis to evaluate the acquired information. Therefore, the pollster applied content analysis techniques to establish the primary themes that were manifested in the responses gotten from the executives and secondary data. According to Bengtsson (2016), “content analysis is a research method that provides a systemic and objective means to make valid inferences from verbal, visual, or written information in order to describe and quantify specific phenomena” (p. 11). The process of data analysis involved four critical stages, which were decontextualization, recontextualization, classification, and compilation. The researcher repeated the individual phases several times to guarantee the validity and quality of the analysis. The decontextualization process entailed reading and re-reading the information gathered via questionnaires and secondary sources to have clear insight. The investigator used different codes to identify the concepts that were perceptible in both the secondary and primary information. The major themes that were apparent included synergy, external interference, and lack of absolute control of mergers. The recontextualization stage involved ensuring that all the significant meaning units were captured. The researcher re-read the questionnaire and secondary information and crosschecked it against their list of meaning units to ensure that nothing was missing.

Before the classification procedure began, the investigator condensed all extended concepts by minimizing their number of words, making sure that they retained the intended meanings. The categorization phase covered the identification of the main themes that appeared in both the secondary and primary data. The researcher ensured that all the selected concepts were internally homogeneous. After establishing the main categories, the researcher embarked on the analysis and compilation process. They evaluated all facets of experience that the respondents described, including labor relations, managerial challenges, and activities coordination, and established the themes that were common amid the answers given by different managers. It helped in arriving at a conclusion as to why some of the XYZ’s mergers and acquisitions succeeded while others failed.

Analysis and Findings

The management of XYZ identified three main factors that contributed to either success or failure of its numerous mergers and acquisitions. They included overconfidence amid the leadership, lack of absolute control, and external interference. The move to own stakes in numerous airlines enabled XYZ to expand its global coverage and enter into markets that were initially deemed politically hostile. For instance, the airline managed to target the Indian market, which is potentially profitable due to the country’s high population. Nevertheless, some mergers and takeovers did not attain the expected outcomes. Managers from underperforming alliances and acquisitions (12 out of 25) cited hubris among the management as one of the factors that contributed to XYZ investing in a fruitless business.

The executive failed to conduct due diligence before acquiring some airlines. It assumed that because many takeovers had turned out to be productive, all the others would work the same. In some mergers, XYZ was not given control over the airlines, making it difficult for the company to introduce changes. Therefore, this corporation could not guarantee synergy between it and the “partner airlines” due to the inability to make autonomous decisions. Other participants (11 out of 25) identified external control as among the factors that inhibited the success of the takeovers. For instance, influential labor unions prevented XYZ from making radical changes that could have enabled the acquired airlines to become profitable. The literature review highlighted the three factors (hubris, synergy, and external influence) as the most predominant forces that contribute to the failure or success of mergers and acquisitions. Thus, to some extent, the findings of this study corresponded to what is already documented regarding the challenges encountered in the management of takeovers.

Discussion and Conclusion

Mergers and acquisitions help organizations minimize competition and grow their global reach without having to establish operations from scratch. Nevertheless, lessons from XYZ indicate that due diligence is paramount before choosing companies to partner with or acquire. Although mergers and acquisitions may result in a corporation benefiting from economies of scale and resource redistribution, it is imperative to determine the degree of power that the acquiring firm will have over its partners. Overconfidence is a great hindrance to the success of mergers and acquisitions, as it may lead to the acquiring firm overrating the performance of the target business. This study highlights hubris, synergy, and external influence as the main factors that determine the success or failure of XYZ’s mergers and acquisitions. The lack of full control of partner airlines makes it difficult for XYZ to introduce significant transformations that could help to turn around the performance of the struggling firms. The inability to manage some mergers and acquisitions has led to XYZ sacking many employees. As a consultant, one would recommend that this airline terminates unproductive partnerships and closes or sells nonperforming companies to minimize operations costs.

A major impact of this study is that it highlights the importance of ensuring that one does due diligence before deciding to partner or acquire a particular company. Moreover, the findings shed light on some of the factors that determine the performance of mergers and acquisitions. The main limitation of this study is that it used a very small sample population, making it difficult to come up with comprehensive findings. Moreover, the method of data analysis used was subjective, hence prone to bias. Future studies should comprise a big sample size to obtain inclusive and universal results.

References

Bengtsson, M. (2016). How to plan and perform a qualitative study using content analysis. NursingPlus Open, 2(1), 8-14.

Cortes, L. M., Garcia, J. J., & Agudelo, D. (2015). Effects of mergers and acquisitions on shareholder wealth: Even study for Latin American Airlines. Latin America Business Review, 16(3), 205-226.

Huschelrath, K., & Muller, K. (2014). Market power, efficiencies, and entry evidence from an airline merger. Managerial and Decision Economics, 36(4), 239-255.

Manuela, W. S., Rhoades, D. L., & Curtis, T. (2016). The U.S. Airways Group: A post-merger analysis. Journal of Air Transport Management, 56(1), 138-150.

Prince, J. T., & Simon, D. H. (2017). The impact of mergers on quality provision: Evidence from the airline industry. The Journal of Industrial Economics, 65(2), 336-362.

Schosser, M., & Wittmer, A. (2015). Cost and revenue synergy in airline mergers – Examining geographical differences. Journal of Air Transport Management, 47(1), 142-153.

Thomas, M., & Kummer, C. B. (2015). M & As in the airline industry: Emotions flying high. Strategic Direction, 31(8), 17-19.

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