Will US Airways acquire Delta?

Most of the headlines seen in most daily journals today, deal with new or existing talks of a merger. Companies in a broad range of sectors from financial services to commodities seek mergers, but for what reasons? Normally a company will merge in hopes that the synergies created between the two companies will produce one company that is more efficient than the former two companies were independently. Synergies can come in the form of “reductions in redundant work force, utilization of market share and technology of other party to the deal, and combinations of service offerings.” However, more than 20% of mergers do not achieve hoped for synergies. Knowing this is it wise for US Airways to acquire the struggling industry giant Delta?

First, we should look to how US Airways’ recent past has put it into a position to make a valid bid for Delta. Doug Parker, the current CEO at US Airways, was only 14 months ago the CEO of America West. As CEO of America West, he sought to merger with the US Airways, who was at the time coming out of its second bankruptcy and struggling- similar to the way Delta is now. Parker decided to acquire US Airways in a $1.5 billion dollar merger that created the 5th largest airline in the industry. So far, US Airways has been able to realize many of the synergies that it hoped to create. It has centralized management, eliminated some unprofitable routes, lowered overhead costs, and been “generally profitable” since the merger.

In spring of 2006, Parker brought up the idea of merging with Delta CEO Gerald Grinstein, and in September, Parker made a formal offer in the realm of $8 billion dollars ($4 billion in cash and $4 billion in stock). Both were declined by Grinstein, who plans to bring the company out of bankruptcy on his own. If the companies wait until after Delta emerges from bankruptcy, the $1.65 billion dollars of annual revenue and cost synergies would be lost, according to Parker. The merged airline would fly under the Delta name and would bring in $18.5 billion dollars in revenues annually, making it the world’s largest airline ahead of American Airlines. Parker does not think the deal would be hard to get approval from the US Department of Transportation or Department of Justice because the highly fragmented industry will remain fragmented even after the merger. No airline currently has more than 20% of the US market and neither would the “New Delta”. Finally, Parker’s last offer in February resembled a hostile takeover at $10.3 billion. If everything about this deal looks good, why would Delta turn US Airways down and how have they done it?

Nate Carden