In my book Intended Consequences, I have not exactly been gentle with United Airlines, the air carrier that lied to me, lost my bags, canceled my flights, and abused me unlike any other (airline). Yet, I am hopeful that the United-Continental merger holds promise.
As we endured the merger bubble of the 90’s and the giant sucking sound that followed, we learned that mergers based on “efficiencies” and “cost reductions” work for the investment bankers, but not too well for us stockholders. In a post great recession world, all the costs have been stripped from the system. Synergistic mergers are generally those that improve the value proposition and enhance revenue growth.
Continental flies to 136 cities not serviced by United. United is stronger flying to the Pacific Rim, while Continental has more routes to Europe. The merger offers more than the world’s largest airline, it provides consumers more choice. While both sides are talking about a modest cost savings, efficiency isn’t the impetus to the deal.
Of course the same principles hold true for smaller companies looking for business combinations that could provide some type of advantage. During the pains of the downturn, acquirers could be selective and cherry pick customer lists and inventory from troubled companies. Now that business has somewhat stabilized (I would not call it normal by any means), more sensible deals may prevail. If you are a potential buyer or seller, look for mergers that will provide more value to the marketplace in terms of better service (such as through a vertical integration), enhanced delivery system or geographic coverage, but not those that will simply allow you to slash a few administrative positions. Such bloodletting rarely provides an adequate return to stockholders nor does it improve the customer experience.