The study is aboiut understanding the differences between mergers & takeovers in airlines industry

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Difference between a merger and a takeover


One of the primary aspects in the modern business era is to run the company on a limited budget and a specified allocation of resources. When two companies compete in a single industry for the top spot, one of them usually wins. And thus, comes the advent of merger and takeover. Both the biz terms are a significant synonym to the other- to incorporate both the firms in a single legal entity. The hypothesis and thereby, the justification of such unifications could be based on the important diversification of the company itself and the increased tax efficacy (Trautwein, 2013).

A merger involves the mutual collective agreement of both the firms to combine their efforts and become a singular robust entity. For example, back in 2016, the American telecom AT&T merged with Time Warner (TW) over a gross deal of $86 billion. To produce a sum of revenue that could be larger than the combined budgets of the parent firms is the usual motto or the reason behind a merger. It also gives hope to the subsidiary partners and the employee budget, which boosts the overall potency of the new firm.

  A takeover or an acquisition, as is known in the corporate terminology defines a procurement of the smaller company by the bigger, based on employee satisfaction index, overall revenue, competence of the succumbing firm in the daily market and stock analysis of its bigger counterpart. Unlike mergers, Robins (2017) stated that acquisitions need not be mutual; the larger company can initiate a ‘hostile’ takeover, confronting the defiance of the smaller company’s management. A very renowned example would be the acquisition of the Pixar Animation Studios by the Walt Disney Corporation in 2006.

Economies of Scale

The term economies of scale are classically defined as the pathway for an increased production with a simultaneous cost-savings scheme. From a household management to a gigantic bilateral merger, economies of scale play a pivotal role in defining the future paths of the overall budget and the accumulated revenue.  Mergers and Acquisitions (M&As) have been long sought out as the CEO’s favorite strategy to substantiate and consolidate the financial and the business growth as well as portray a significant robust value to its competitors. Globalization of the market by a single company becomes a huge challenge in a single industry adhering to the economic, social, cultural and environmental needs of its target audience

Differences between external and internal growth

Economies of scale has two main aspects: The first is internal which deals with the firm’s overall predicted change as a result of the merger or the takeover.

·  Technical- it depends largely on specialization, plant indivisibility, principle of multiples (whether multiple machines can be deployed for the same ongoing task), increased dimensions, etcetera.

·  Commercial- favors the larger giants of the business industry due to their ability to buy a product in mass quantities and to keep the profits higher because of their marketing repute.

·  Financial- large firms are also to arrange and consult cheaper rates for a product due to their demand in the consumer retail scheme.

The second analysis layout is external which deals with the retrieval of ulterior motives post-merger/acquisition The supply of skilled labor from cheaper origins can contribute to the overall profitability. Infrastructure and advanced training facilities in its arsenal also helps the firm establish a secure image to the common eye.

The BA merger with Iberia helped airlines analyst predictions in the favor that it would restore stability and financial profitability to the overall market. Such schemes and statistics helped the management to take the risks and avoid unnecessary complications keeping in mind, the bigger future of the national economy.

The second difference lies in the fact that while Internal growth strategies involve improvisation modules that are based on an expansion both financial and commercial. Internal outsourcing to tap the fullest potential is something the company chooses to perform at its very best, External growth strategies explore potential new business models even in the face of crisis aversion. Innovation schemes like external intellectual property are one of the many such ventures.

The Irish government’s decision to own 25 % of the shares of aer lingus

There has been a mixed reaction accounted regarding Irish Government’s decision to own 25% of the stake of Aer Lingus. According to the “Irish Congress of Trade Unions”, it has been noticed that the government had unsuccessful to attain any guarantees on probable job losses and outsourcing in Aer Lingus (irishtimes.com, 2018). On the other hand, it has been accounted that IHF announced information regarding this decision of government that this welcomed the extra guarantees secured by the Irish government from IAG in advanced of an effective sale of the State’s share in Aer Lingus. This governmental decision also could make a positive impact on creating revenue along with an effective return for the country by selling its stake. This decision will also help in developing an effective Irish airline, which will be capable of competing with other leading European airlines.

This type of governmental decision will expand the opportunities of access to larger international scale that will increase development around the network, develop country’s position as a natural gateway communicating North America and Europe, will provide Irish tourism to core traffic flows along with consumer loyalty programs with offering effective access for business interests (irishtimes.com, 2018).

With reference to one internal stakeholder and one external stakeholder: “larger is not always better” from the perspective of the airline industry

The disadvantage, of M&As, however is little in number yet has a stark impact on the overall sector. The reputation of the larger firms may lead to the obstinate monopolization of the business itself, leading to higher consumer rates in the target audience, thereby turning the favorable tides against them. Thus, a novel company might take possible aid of the situation and overcome the revenue barriers in the zone, specifically leading to consumer satisfaction of cheaper prices, regardless of the quality of its ongoing products and services. For example, there is drastic resilience to the merger situation between BA and BMI and thus flights leaving Heathrow (UK) would be set at a much higher rate. Another example would be the merger phenomenon between US Airways and American Airlines. Job losses are a significant downside of an acquisition or a ‘hostile’ takeover. Besides, there is no or little room left for the customers to avail a different option for monopolized trade services such as the airlines in a zone. This leads to breakdown in the management, conflict of opinion and multiple board reviews before the firm faces permanent disablement.

Hence, ‘larger is not always better’ is evident in the fact that bigger firms might try to sabotage unintentionally the whole market or perhaps, just a specific zone.

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