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M&A and Antitrust
Mergers and acquisitions (M&A) have continued to dominate the American investment market across industries. Indeed, many of the country’s mega-companies, popularly known as Fortune 500, have grown to their current size because of merging and or buying rivals. The merging companies aim at harmonizing synergies that end up increasing internal efficiency that leads to market competitiveness at both national and international levels.
In most instances, the merging companies enter into these agreements as equal partners, meaning that shareholders and other stakeholders get similar treatments. There are, however, few instances where the bigger company plays the central role in running the resulting entity. About acquisitions, it is the bigger market players that buy smaller players that become part and parcel of operations. The smaller companies may continue to run their operations independently or as departments of the buying company.
Whereas two companies mutually agree to enter into a partnership as one entity, acquisitions generally develop from one party, especially the buying company. The acquisitions could be friendly when the smaller party agrees to be bought over, or unfriendly when stakeholders are adamant in allowing their company to be bought over.
M&A arrangements affect various stakeholders in different ways. For instance, employees of the two companies start wondering what would happen to their jobs after the merger. Management of the involved firms does their best to assure employees of job safety as well as severance packages for those whose jobs could be abolished. Shareholders of the companies involved in M&A have to be assured of the creation of value in their investments. Indeed, there is hardly an M&A arrangement that can reach the execution stage without shareholders’ approval.
Legislators at both local and federal levels are key stakeholders in these arrangements. However, this class of stakeholders becomes involved mainly with bigger M&As that happen to have a serious impact on the general public. Industrial competitors are also regarded as key stakeholders during M&A. Th aspect of mergers and acquisition ends up affecting the entire industry, because of increased competition of resources and client base, both of which threaten the successful existence of other players (Layer 16). These kinds of threats lead to companies being faced forced to refuse the merger and consequently go to the courts or the relevant competition. The other class of stakeholders that have to be considered include several special interest groups that feel strongly about the merger.
The Federal Trade Commission (FTC) is tasked with the responsibility of approving M&A undertakings in the United States. Foreign firms with operations in the US or intending to acquire or merge with local firms must have their plans approved by the commission before embarking on M&A procedures. The FTC, therefore, exists to cater to the interests of the above-mentioned stakeholders. Indeed, any stakeholder group with opinions regarding certain M&A is usually approaching the FTC, which considers such opinions before making decisions. The Commission’s decisions are made using Antitrust laws that have existed since the early 20th century (Zhang 25).
The laws are used to ensure that all stakeholder interests are considered before making decisions. Antitrust therefore help in ensuring that M&As happen for the good of the industry, not for the few shareholders in the involved companies.
However, Antitrust laws have previously been accused of blocking mergers and acquisitions that could have been good for the American economy. The laws have also been used to dismantle some of the country’s largest corporations into small ones, some examples include Standard Oil, AT&T, and the Microsoft Corporation. However, the globalization of the world economy is forcing FTC to change the way it has been using antitrust laws because continuing to block some mergers and acquisitions would result in refusing American businesses an edge in competition (Malloy 114).
America’s airline industry is among the economic sectors affected by recent FTC decisions. Indeed, the Commission has since the 1970s refused to allow mergers in the industry despite constant appeals by players. Pressure from international competition is, however, forcing FTC to reconsider its stand on mergers in the industry. Concurrent sections of this analysis will illustrate how the coming M&A in America’s airline industry will continue to shape the entire economy.
Industry Deregulation, Protectionism, and Antitrust Laws
America’s airline industry has experienced few mergers and acquisitions since it was deregulated in the late 1970s (Morrison 141). Though the deregulation provided players in the industry with much liberty to run their affairs, the government continued to prevent the industry participants from merging. As it will be shown in this section, players have not been completely free to manage the industry in the best means they know-how.
As a result, the entire sector cannot be said to have greatly benefited from the many reforms that took place in the 70s. This has happened as competitors in other parts of the world, especially Europe have embarked on a merging spree that has created competitive ventures. American players have been left admiring the freedom experienced by their competitors. In similar regard, the FTC and other stakeholders are slowly waking from the reality that lack of complete freedom in the industry, which includes the liberty to merge, might lead to the Americans being seen as irrelevant in the world. Globalization is slowly leading to the Americans being forced to open this market for international players, meaning that local companies stand to be out-competed if they do not take the necessary measures.
Airline reforms that took place in the 1970s allowed the industry to freely set prices for their operations, which the governments had previously taken a central role in (Morrison, Simon &. Winston 14). Given that companies were no longer guaranteed profits through government-set prices that had been higher, individuals management embarked on the process of cutting expenses, which eventually resulted to lower ticket prices.
Most of the companies embarked on this process and therefore increased competition. Inefficient airline companies that were not able to cut their costs ended up closing down. On the other hand, the efficient ones continued to compete and eventually helped bring down the cost of air travel in the country. However, American air travelers continued to demand cheaper fares, which resulted in the birth of the country’s budget airlines, starting with Southwest (Yong 310).
The demand for improved efficiency was starting to rise fast in the industry, and the players started showing interest to merge. For instance, both Northwest and Delta airlines have been expressing this interest many times compared to other players. However, the FTC has adamantly refused to grant neither party a go-ahead with their plans. Indeed, none of the many major airlines’ merger plans have been approved by the FTC since the industry deregulation.
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FTC’s failure to allow mergers in the airline industry has resulted in individual companies expanding on their operations in order to serve more clients and achieve efficiency through economies of scale. Considering that this happens during the upswing in the industry, it becomes hard for airlines to deal with expanded operations when the demand for their services has decreased. The higher cost of operation has therefore exposed companies to heavy losses.
This could have been avoided had FTC allowed companies to merge when demand increased, and realign lines of business when business was down. The biggest losers in this affair have been the American people because the government has been willing to aid the struggling companies. Indeed, many of the country’s major airlines have been on perennial bankruptcy lists. Some have been lifted from bankruptcy by public money. Others have ended up releasing many employees from their jobs to cut operating costs. Despite interests in the airlines to merge and attempt to escape the costs, the FTC has continued to say refuse to give assent to airline mergers and acquisition procedures.
Rather than helping the industry retain competitiveness, Antitrust laws have been used to block competition internally and externally. As the industry looks today, there have been several merger interests among key players but have been slow to express interest, because of the poor history of such appeals. Indeed, companies have become used to develop internal solutions to efficiency problems, which has sometimes resulted in poor development of long-term problems as indicated in the bankruptcy filings.
Therefore in attempting to protect the industry against itself, the FTC has achieved the opposite-industrial exposure to long-term investments that have resulted in losses and repeated bankruptcy fillings. Further, many investors in the country have been less willing to venture into the commercial airline business that has proved to be a preserve of the few traditional players. Protecting the industry from take-overs has denied it the very tool that has resulted in the expansion of many other American industries.
The industry has been denied the genius behind M&A in other American businesses. Indeed, the well-moneyed investors that have been buying companies in US companies have shied away from the industry. Most importantly, the industry has lacked access to expertise that could have been involved in increasing efficiency.
The international competition has been mostly affected by FTC’s dealing with M&A in the airline sector. This has been done through a protectionist approach. FTC has completely refused foreigners to own airlines in the country. In addition, government authorities have denied foreign-based airlines the freedom to fly passengers from one United States city to the other (Dresner 96). As it happens, a foreign airline can only ferry passengers to just a selected port of entry.
Domestic airlines then ferry passengers from ports of entry to other fringe airports. In this regard, American airlines are shielded from foreign competition—they just get passengers fed to their routes without much try. The failure to let foreign companies operate intercity flights in the United States has resulted in local companies resting assured that they will have a business and make profits because competition is non-existence. The long-run effect has been a decrease in competitiveness, which will continue to affect profitability. This has also resulted in companies’ failure to develop long-term solutions to competition pressure. However, as will be illustrated in a later section of this report, the globalization pressure is forcing the country to reconsider the current protectionism in the airliner industry.
Other than operational protectionism, American authorities have historically blocked foreign-owned firms and individuals from owning airlines in the country. Indeed, no single airline in the country can have foreign ownership of more than 25 percent (Taylor 230).
This means no foreign individual or company, despite the professionalism in the industry, can outrightly own and operate an airline business in America. This has denied many foreign investors the opportunity to invest in the country’s much lucrative industry that needs greater competition for efficiency. Investors that have been at the forefront of improving competitiveness in other countries are denied the opportunity to make an impact in the country’s airline industry.
In addition, portfolio investors have also been blocked from participating in the industry in large proportions. This has resulted in the airline industry becoming less attractive to investors worldwide as other sectors of the economy continue to attract money from many parts of the world. Though the government has consistently claimed national security as the main reason for blocking foreign companies from investing heavily in the airline industry, it has not been proved that such a threat could occur. The FTC has further contributed by consistently holding that American firms would be subjected to unfair competition.
The protectionism in America’s airline industry was recently brought to light when the British-based Virgin Groups embarked on establishing an American subsidiary (Oster 120). Considering that the company had been blocked from owning Virgin America outrightly, it had to look for other local shareholders that would get most of the shareholding before it was allowed to fly again. In addition, Virgin Group could not ferry one of its Europe-based managers to starts managing the company.
The company was again forced to source senior management from the American market. The company was finally able to go through the red tape and established operations in the country. However, a lot of time and resources were wasted in the process. Unfortunately, the American airline industry has so much been used to protectionism to an extent of failing to lobby the FTC to end its continued uncompetitive legislations.
The entry of Virgin Atlantic into the market will have less impact because management’s hands are tied by the current antitrust laws. Only the removal of all the regulations could lead to improvement of the industry because many more investors will have an opportunity to bring expertise and competition to the industry. Government authorities should be at the forefront of ensuring that local and foreign investors have greater freedom to run as airline establishments in the country. Failure to take such measures would lead to a continued decline in industry competitiveness. It is therefore important for the state to embark on taking the necessary measures that will open America’s airline industry to competition. Current players should feel obliged to embrace new reforms that will result in increased competition in the industry.
The New Wave of Airline Merger
Despite the lack of support for airline mergers and acquisitions in the industry, players have not shied away from wanting to merge. The last one years has seen several airline companies indicating interest in the merger. This was sparked by Northwest and Delta Airlines, fifth and second-largest aniline companies in America respectively (Vakil 25). A successful merger between the two companies will produce America’s biggest airline that will be in a position to compete effectively with other international careers. Their success is also mentioned to have the ability to cause an M&A in the entire American industry.
This will forever change the industry’s environment forever. Several other airline companies have already embarked on talking to each other regarding the possibility of merging. Should all these talks bear fruits, the companies are poised to create formidable airlines that will withstand the challenges that have continued to cripple the industry. Beneficiaries of such programs include Americans themselves because the governments will no longer be using lots of taxation resources to deliver struggling companies from their troubles. The resulting larger companies will further be well braced to faced challenges posed by European anilines that will flock the American market once it fully liberalized.
Though FTC is yet to approve some of these airline mergers, it is all clear among analysts that final decisions would be favorable. This is drastic from the traditional immediate refusal to approve mergers. Such a favorable decision is good news to the airlines and other stakeholders because would be in a better position to address industrial challenges. Specifically, Northwest and Delta stakeholders will be well placed to tackle operational challenges that have affected their operational efficiency in the past.
For instance, the new airline will be able to negotiate better about oil prices. The increased quantity of oil commodities that the new airline will be making will attract better discounts from suppliers compared to the ones being provided to the independent companies. In addition, the resulting company will be able to get better discounts when it comes to sourcing the aircraft. Again, this will rise from the greater number of orders that will be placed with the chosen supplier.
Such discounts will be applied in many other inputs that are vital in aniline business operations. Having these discounts will result in a drastic reduction in operations costs and therefore have an impact on ticket prices, which serves as the foundation of increasing competitiveness.
Given the international competition in air travel, the merger between Northwest and Delta will most likely be supported by the rest of the stakeholder groups, starting with employees (Petraf 130). This is because it is in the public domain that, save for budget airlines especially Southwest, the American industry is less competitive. Secondly, stakeholders understand that failure to reform the industry could lead to being completely out-competed when other carriers are allowed to operate in the United States.
In this understanding, the labor unions that have been at the forefront of blocking mergers will have to reconsider that position. The legislators at the federal level also understand the challenges that are currently facing the American airline industry and therefore embark on repealing outdated laws that have been making American airlines less competitive in both domestic and international markets. This understanding will lead to improved support for the airlines from all stakeholders.
The special interest groups are also posed to support the idea because of the long-run benefits that will accrue to the American industry and general populace. Delta and Northwest competitors are at the forefront of supporting the merger. Indeed, it is in every airline’s dream to see the merger work despite the increased competition that could accrue from the new company. Many are the airline companies that would like to learn from the two companies and then embark on molding their respective mergers from that perspective (Shepherd 200).
The strong support that the Northwest-Delta merger attracts from companies in the industry and other stakeholders leads to the conclusion that FTC will have almost no grounds for revoking the merger. This will be good news for other companies in the industry that are also considering joining. Equally, America will be destined to have stronger industry players. The success of the merger, coupled with the removal of ineffective policies will immediately attract foreign investors that have been blocked from investing in the industry.
About portfolio investment, the successful merger will lead to individual foreign investors embarking on increasing their demand for airline stocks in America’s markets. this shall eventually lead to the increase of available working capital. The rise in demand will further result in an increase in airlines’ creditworthiness among other providers of capital. In the long run, companies will have access to the much-needed funds for improving facilities and equipment, which shall further improve operational efficiency. The success of the merger and the continued reform in the sector will result in companies from other countries embarking on helping to put their investments in America’s aniline industry (Ott 54).
For instance, airlines that have operated successfully in other nations might choose to perform M&A in the United States. This will be a major boost to the country’s struggling Anilines, which will now have access to the much-needed technical and management personnel that will drive competition. Further, international investments groups could embark on venturing into the American airline industry and therefore provided easy capital and performance pressure for individual airlines.
Given all these benefits, FTC will most likely support the merger initiatives. Going against the will of many stakeholders in the airline industry could lead to the commission losing goodwill from the American people regarding this important issue (Ott 59).
Indeed, Americans have continued to pay the heavy price for the commission’s failure to cultivate proper competition in the industry. Had the commissioned allowed players in the aniline industry to merge before, the current inefficiency could not have been present. Today, individual companies are less inclined to improve the way they running their activities, because violent takeover can hardly happen. In other industries, competing companies are quick to take over rivals that fail to meet market expectations. Unfortunately, the commission has been against that idea in the airline industry, which has provided the less efficient firms to continue operating.
Such companies have further been kept afloat by federal laws that through the use of tax funds. Some companies have been bailed out by federal companies several times. Despite all these occurrences, FTC has consistently failed to provide the much-needed support for mergers that will serve the industry well in the long run. Approving the current request by Northwest and Delta will therefore amount to a major shift in policy.
Several globalization pressures have been changing the legal environment in the United States M&A arena. For instance, sharing codes and operating facilities have been among the ways that airline companies all over the world have been undertaking. The increased association between international airlines has resulted in mergers of competitive brands that have been willing to venture into the American markets, but with little success. For instance, the KLM-Air France merger has resulted in a formidable airline that is eager to look for partners in the American market. However, FTC is not ready to accept such a move, because it would be uncompetitive for the local industry.
Though such big companies are yet to make a formal appeal, indications are rife that they will dive into the fray when regulatory authorities relax their controls in the industry. The American government is actually under pressure from European and Asian countries that have to open their air space for global competition, only for the American government to fail in the following suit. Governments and players in these foreign markets want their American counterparts to respond in kind (Meyer 198).
Specifically, the European governments have entered into the Open Skies Agreements, which intends to provide US and EU airlines with unprecedented freedom to operate in the two regions without restrictions. The American government is thus under pressure to let go of the protectionism that it has boldly defended for three decades.
The M&A environment in the United States airline industry has been improving in the last two years. Indeed, companies have been expressing interest in joining their operations into more successful establishments. The Federal Trade Commission, which regulates competition in the industry has this time round been supportive of the mergers. Though FTC has not made decisions regarding the mergers, it will most likely be in support. Previously, the M&A environment in the sector has been overcrowded by stakeholders against the undertakings. Employees and their labor unions have been expressing job security concerns that have been listened to by FTC.
Equally, the commission has listened to calls by the legislators who have been wary of the mergers. The other group whose interests have been considered include the interest groups from various advocacies. However, the current sorry state of the airline industry has all the stakeholders understand that reforms are necessary for American airline companies to remain relevant in today’s increasingly competitive market. Such an understanding is therefore translating to support of the Northwest-Delta merger.
Most importantly, competitors in the industry are more than ready to support the two companies, because their success would be a lesson on best practices in the undertaking. Already, several airline companies have embarked on starting talks of their merger.
This is an encouraging step for an industry that has been faced with serious inefficiency and massive loss of competitiveness in the global transportation industry. Considering this massive support from all the stakeholder groups, the FTC should move quickly in giving its nod to the Delta-Northwest merger. Taking such a bold and important stem would lead to the creation of a strong foundation for the country’s struggling air transport sector. The failure to be supportive of the merger could lead to the eventual collapse of the sector that is so important in the economy.
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