Corporate Merger Between Delta and Northwest Airlines essay

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corporate merger between Delta and Northwest airlines in order to find out the possible reasons why it was necessary. We evaluate the merits associated with corporate mergers and the challenges that might be faced in the process. A recommendation on how mergers should be carried out is also provided

Mergers and acquisitions form a very integral part of the contemporary corporate landscape. Kolker (2010) points out that initial six months of the year 2010 witnessed the total value of global acquisitions increase to 2.7% to a monetary value of $915 billion. This was an increase for the initial six months of 2009. 2010 however was off to a rather slow start as compared to 2006 which recorded an excess of $3.8 trillion in transactions related to acquisitions (Yeary, 2007). It is worth noting that it is never the volume of the deals that matter but their size. Averagely, there were a total of twelve transactions that were duly announced for each week of the year (2006).These were valued at an excess of $1 billion as reiterated by Yeary (2007).

The concepts of acquisitions are justified on the level of expectation of generating the value of incremental shareholders (Chatterjee, Lubatkin, Schweiger and Weber, 1990; KPMG, 1999). A lot of literature has been dedicated to the potential benefits associated with acquisitions. It is worth noting that the term merger and acquisitions are different.The strategies that are underlying these concepts are however similar to several researchers. As an example Seth (1993) postulated that market power, economies of scope, economies of scale, diversion of risk and coinsurance are some of the benefits associated with mergers and acquisitions. Tetenbaum (1999) also postulated that acquisitions can duly be justified on the basis of their potential to improve efficiencies while cutting costs (p.24).On the other hand, Nguyen and Kleiner (2003) did suggest that the acquisitions can afford the acquirers the positivity and hope of acquiring an increased market share, reduced cost structures as well as the widening of the service offerings. The work of Appelbaum, Lefrancois, Tonna and Shapiro (2007) also postulated that acquisitions are an outcome of an increase in the level of competition both in the domestic and the international sense and is therefore an effort be firms to "preserve their business model and improve profits" (p. 128).

Literature review

A lot of literature has been dedicated to the failure and successes of acquisitions. They are however focused on the concept of strategic acquisitions (Appelbaum, Lefrancois, Tonna and Shapiro, 2007; Bijisma-Frankema, 2001; Chatterjee, Lubatkin, Schweiger and Weber, 1992; Covin, Kolenko, Sighler and Tudor, 1997;Datta, 1991; Fubini, Price and Zollo, 2006;Jemison and Sitkin, 1986; Hyde and Paterson, 2002;Kiessling and Harvey, 2006; Seth, 1993; Tetenbaum, 1999; Marks, 1997; Nguyen and Kleiner, 2003; Olie, 1994; Vaara, 2002; Vasilaki and O'Regan, 2008; Waldman and Javidan, 2009).

The Rationale behind the merger of Delta Air Lines and Northwest Airlines

When two different corporations combine to form one business the situation is referred to as a business merger. A merger is normally said to be worth when the two businesses coming together dissolve and also double their assets and thereafter convert, a new third unit is created (Ramanujan,2006). Mergers and acquisitions occur in the business world and they are usually conducted in order to bring new assets into the business (Freeland, 2007). This usually results into the formation of a new corporation. Majority of the mergers are formed from friendly agreements. They are usually not forced into being (Gaughan, nd). The holders of stock from the two merging companies later come together to enjoy the benefits from the amplified profits of the newly formed entity (Peterson,2006). Acquisitions on the contrary refer to take-over. In this situation one distinct company takes over another company by buying it. In acquisition, usually a bigger company buys a relatively smaller one. There are usually two kinds of acquisitions. One occurs when a firm buys the shares from the owners of the shares of the firm which is being taken over or acquired. The other form is when the firm purchases only specified assets belonging to a company.

The benefits of mergers and acquisitions

Maximization of profits

There are indeed numerous benefits for which mergers and acquisitions are conducted in the world of business. The most common reasons why several firms merge or acquire or takeover is to maximize profit. Through the mergers and acquisitions, a company is capable of having duplicate departments. This will help in cutting costs. This also helps in the maximum use of the duplicate resources. When delta airlines merged with northwest airlines, air lines pilot association greatly supported the deal stating that the merged Delta will be more stable and more financially durable. They also stated that the formed firm will be beneficial to not only the employees but also to the community at large. Besides, they stated that it will be of benefit to the traveling public. These will only be as a result of profit maximization by the formed firm. The merger resulted into a very large firm. Indeed it was described as the largest airline in the world in terms of revenue passenger kilometers.

Saving of taxes

Mergers and acquisitions are beneficial in that it is tax saving. For instance a firm making profit can acquire a firm that is undergoes losses hence reducing its liability for tax. Mergers and acquisitions are also conducted by firms to get larger part of the market share. The merging firms can thereafter capture a wider market and can hence create a monopoly. This aids the firms to sell their products at the terms and prices which they set. When mergers and acquisitions exist between firms of different nations, the local currency of the firm that has been merged or acquired becomes stronger by one percent in when compared with the company that is taking over. When delta airlines merged with the northeast5 airlines in 1972, it became one of the key carriers in Boston and New York. When it also merged with western airlines in 1987, it became the fourth largest airline in the United States and the fifth largest in the whole world. It also began operating in other continents like Asia. This is because the market became wider. The market share of the formed firm was higher than any other firm after the merger, standing at 19.9% in the United States alone.

The overriding rationale that is applied to explain Merges and & Acquisition activity is that the firm that acquires the other is seeking to improve on its financial performance. There are however several other benefits which results from mergers and acquisitions. First of all are economies of scale. Economies of scale can be defined as the advantages that a firm will get as a result of its large scale operations. The company that is formed will minimize its fixed costs.Economy of scope is also an advantage that results from mergers and acquisitions. It basically refers to the effectiveness that is primarily linked with variations in the side of demand like escalating or diminishing marketing scope and distribution of various products.

Increased revenue

Enlarged revenue and the share of the market also results from mergers and acquisitions. When two or more firms merge, they will capture a larger market and can be in a position to set their own prices. When delta airlines merged with the northwest airlines, a large airline was born. The newly formed Delta airline had a total of 12000 pilots. This is because they covered a larger market. There are increased revenues when two firms merge. The revenue normally arises due to the following reasons. First and foremost, the enlarged market will make the company increase on its profitability. The two merging firms can create monopoly, they will therefore be at a position to set the prices of their goods and services .improved or more effective marketing strategies always results when two or more companies merge. This will in turn generate more sales and hence revenue will be increased. The firm will also enter into new markets. It will hence generate more revenues as there will be more customers (Boemeh, n.d). When the two firms merged, there was an increase in revenue generated by the formed firm. The combined carrier was to generate U.S.$35 billion annually.


Synergy will also result from mergers and acquisitions. For instance, managerial economies like a wide chance of managerial specialization. Similarly, the firm will enjoy purchasing economies

Effective use of resources

Resources transfer is also enhanced when two firms merge. The resources which were previously held by the two firms will be evenly distributed (Barney, 1991). They will be effectively used by the new firm. This will in turn make the company to improve on its profitability. Scarce resources can also be combined to achieve greater success. This will create value because information asymmetry will be overcome. (King et al., 2008)Merges and acquisitions are beneficial to the newly established company because cost savings in the airport…[continue]

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