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PMI – Value Creation Strategies October 28, 2009

It is well-documented that most mergers disappoint, even in the best of times. No matter the industry, no matter the measure of success (ex revenues,market share, stock price, ROI, earnings), majority of the mergers fall short of their stated objectives. Though closing the deal gets most of the attention, it is the post-merger integration that is most crucial and where majority of the mergers fail. In this context, I am going to discuss several key components of merger integration starting with Value Creation Strategies. I would be considering examples of mergers from Airlines industry.

PMI: Value Creation Strategies

Value creation strategies can be for saving cost or increasing revenue or a combination of both. Cost saving has two focus area:

1. Rationalization: There is a range of levers that can be pulled to realize cost synergies: network rationalization, facility consolidation, manpower rationalization, procurement savings, working capital and balance sheet restructuring (ex renegotiating  aircraft leases etc.
2. Economies of Scale: economies of scale can be achieved, for example, by establishing fleet commonality that would increase efficiency in may of the activities – pilot training, crew scheduling, maintenance integration and inventory rationalization. Airport facility consolidation, common ticket booking and sales & promotions are some of the other areas where such economies of scale is possible.

Increasing revenue has two focus area:

1. Economies of Scope: For example, an airlines merger may allow meeting full set of corporate and frequent-travelers needs by increasing number of routes and flight times. Such merger may make combined entity operate more flexibly within changing market conditions and infrastructural conditions and compete more effectively.
2. Cross-selling: If it’s a merger of a full-service carrier and low-cost carrier, there may be opportunity to cross-sell high-end services to low-end customers with appropriate incentives to upgrade. Similarly, at the risk of cannibalization, some of the customers of high-end services downgrade to low-end services.