The Merger of Ba and Iberia Essay

The financial environment in the UK is very competitive and impossible to predict - The Merger of Ba and Iberia Essay introduction. It is always changing and developing. Merger and Acquisition as the action of corporate, refers to the aspects of the strategy, finance and management of corporate that can help a company to develop rapidly. Merger and acquisition are developing enduring for more than one hundred year. Because of the recession, many companies in Europe implement merger and acquisition activities to deal with the economic crisis.

In this report, take the merger of British Airways and Spain’s national carrier Iberia as an example, the reasons of merger, the influences of the merger will be disabused. Merger and Acquisition A corporate merger is the creation of a single firm for two firms and combine their assets and liabilities. Merger tends to be used when the scale of the two enterprises are similar. It common occurs in high return industries. A corporate acquisition is the purchase of the target company by acquiring company.

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Acquisition tends to occur when the scale of the two companies are not similar, a lager company controls a smaller company, common in low growth industries (Teriesen). Acquiring company refers to the firm which shares are continuing exist, but it may be under a different name, and the target company is referred to the firm whose shares are substituted by the acquiring company. The merger of BA and Iberia With the influence of the economic crisis, many industries have a negative effect. T the air transportation in Europe also has a strong hit.

The majority of airlines in Europe are facing a difficult trading condition, losing a lot of money, especially in 2008 and 2009. There were many challenges to be faced for the most airline companies, such as the economic slowdown, high fuel prices, and the decline of the passenger numbers. The economic turndown of 2008 affected the level of merger and acquisition activities in UK. But when the economy begins to recovery, the merger activities became popular in Europe. In a sense, global financial turmoil also creates opportunities.

Many companies choose merger and acquisition to cope with the recession. In the UK marketplace, lots of merger and acquisition events are happening. In recent time, the most famous merger event may be the merger between British Airways and Spain’s national carrier Iberia. In November 2009, British Airways and Spanish airline Iberia announced a preliminary agreement for a merger. The merger would create the third biggest airline in the world. The shareholders of BA retaining 55% ownership of the company, and Iberia shareholders would take a 45% stake.

Both of the two companies said that the merger would be benefit on customers, employees and shareholders of the two companies (BBC, 2010). The merger resulted in a new parent company, it has a new band name—International Airlines Group (IAG). On 21 January 2011, the merger of British Airways and Spain’s national carrier Iberia was completed and shares in the new holding company—IAG. On 24 January 2011, IAG primary listed on the London Stock Exchange, and then, the shares also began trading in Madrid on that day (Guardian, 2011). The merger also resulted in many changes in the role of the managers of BA and Iberia.

Willie Walsh became the CEO of IAG. His previous position in BA was taken by Keith Williams. Williams became the new CEO of BA. The chief executive of Iberia is Rafael Sanchez (IAG, 2011). The motives for the merger of BA and Iberia Merger can be broadly classified into three types: Horizontal merger, Vertical merger and Conglomeration merger. Horizontal merger refers to the combination of two companies which are the competitors in the same industry. Vertical merger refers to the merger of two companies which operate in different production stages, but also in the same industry.

Conglomeration merger refers to the combination of companies which sell the products are not related within different market (Watson & Head, 2010). According to these, the merger of BA and Iberia refers to the Horizontal merger. They both serve the airline business and they are the direct competitors in this industry. There are a lot of reasons for BA and Iberia to merge. During the last few years, both of the two companies had a miserable time. They have been losing money during the recession. The expenditures of these two companies in 2009 were getting larger than that in 2008.

In 2008 the total expenditures on operation is 7,880 millions, the profit after tax is 726 millions, but in 2009, the expenditures on operation reached 9,212 millions, and the loss after tax is 358 millions (British Airways Annual Report, 2009). The merger may be the best ways for these two companies to deal with the downturn. Merger could bring them more benefits than the companies separate as individuals. When the two companies combined, May be they are worth more than when they are separate as two companies. The prevent value of combined company PVx+y, is more than PVx+PVy (Watson & Head, 2010).

The reasons for the merger of BA and Iberia may be the Economies of scale, synergies and the market share. Economies of scale The first motivation of this merger is probably Economies of scale, Economies of scale means that with the expanding of the scale of production, the unit cost of the product decline, and lead to the rate of turn increase. The scale of operation is larger after merger. Economies of scale are often arising in the areas such as finance, distribution, management and production. After merger, the new airline group IAG will combine their routes, employee and aircrafts.

The merger will resulted in the scale of new group became bigger. Before merger, BA has 245 aircrafts and fly to 141 destinations, Iberia has 174 aircrafts and fly to 109 destinations. After merger, the IAG owns 419 aircrafts and fly to 205 destinations ( BBC, 2009). The operation scale is larger than before. They also would save the costs by cutting down the overlapping rotes and reduce the staff, these make them have more abilities to buy new planes for its own company and also have ability expand to their business to more destinations, and get more profits.

Synergies The second reason for the merger of BA and Iberia is probably the synergy. Synergy may happen when the assets and operations of one company is the complement of another company, so that the output, value and performance of the combined company is more than the sum of separate companies. The mergers are executed to achieve synergies, compromising financial synergies, operational synergies, and managerial synergies.

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