The Reemergence of Mergers
If an English gentleman hunting foxes is, in Oscar Wilde’s formulation, “the unspeakable in pursuit of the uneatable,” then the prospective merger of American Airlines with U.S. Airways should perhaps be called “the unreliable in partnership with the unacceptable.” Or perhaps that’s just our personal airport nightmares talking.
At any rate, bankrupt American Airlines hopes to save itself by merging with deservedly unpopular U.S. Airways to create the world’s largest, and, one hopes, not worst, airline company.
All of this is part of what the New York Times heralded this week as a comeback of the mega merger. “In the opening weeks of 2013, merger activity has suddenly roared back to life,” Peter Lattman reported. “The deals have benefited from an improving economy, as well as robust lending markets that allowed companies to push back the large amounts of debt that were to have come due in the next few years.” Wall Street, while knocking on wood, is supposedly “giddy.”
But is this going to be good for the companies in question?
In Men, Ideas, and Politics, Peter Drucker categorized mergers as “offensive” and “defensive.” In the early 20th century, tycoons went on the offense and pooled resources to grab large shares of the market. In the following decades, smaller companies engaged in defensive maneuvers and likewise pooled resources in order to prevent being crushed. By the mid-20th century, mass markets and increased international competition encouraged a third wave of mergers, once again of the defensive sort.
As we’ve noted, Drucker had five rules for making a successful acquisition. But he had mixed feelings about M&A activity in general, considering such mashups to be sometimes useful but other times a substitute for proper thinking.
He noted that the most gargantuan mergers were often defensive and panicked. “They are intended to slow the decline of an industry,” he wrote in Management: Tasks, Responsibilities, Practices, “or to slow the declining profitability of an industry by cutting overhead costs.”
He also warned that merging brings a whole host of new problems, many of which leave the new venture worse off than either of the originals. “There has never been an acquisition which really fitted, and which did not have to be reconstructed before it began to give the expected results,” Drucker declared.
At the same time, some mergers are essential, and those companies that fail to pursue them are doomed. An example was Chrysler in 1960. “It did not have the resources to grow from within,” Drucker wrote in Managing in Turbulent Times. “Its growth would therefore have required a merger, in all probability with a European company. Instead, Chrysler decided to remain ‘conservative’ and to become ‘a factor’ rather than ‘a leader’ in the industry. This turned out to be a disastrous mistake.” In the end it survived only with government help.
What do you think? Will a combined American Airlines and U.S. Airways make for a stronger company? Will customer service improve?