Opinion

The Great Debate

Why airline mergers are inevitable

The American Airlines/US Airways merger talks are on hold due to the ongoing antitrust trial led by the Department of Justice. The D.O.J. is concerned, from the perspective of protecting consumers’ interests, that the resulting airline would have too much market power in many of its locations. Though this is true (assuming nothing about the airlines’ business was changed and no assets were divested), the underlying issues are broader than that.

This is an inevitable story of consolidation and creative destruction and the cyclicality of the two. This proposed merger — or one like it – will happen. It’s just a matter of time. But let’s compare an American Airlines/US Airways pairing with two, comparable, big-headline mergers.

Back in 2012, the music industry consolidated from four big players to three as EMI was split up. Its music business went to Vivendi’s Universal Music Group and its publishing business to Sony/ATV. In this deal, similar concerns of market power led the European Commission to stipulate that Universal had to sell a third of EMI’s assets. And that deal went through.

Meantime, ending in a different fate in 2011, AT&T finally admitted defeat in its attempted bid for T-Mobile. It would have consolidated the cohort of this nation’s cellular operators from four to three. In this latter case, the firms were up against both the D.O.J. and the Federal Communications Commission.

So why are airline mergers inevitable? It’s because, in many ways, the passenger airline industry is more like the music industry than the wireless-operator industry.

Does bad publicity kill merger plans — and should it?

Last week Fairfax Financial Holdings chief executive officer Prem Watsa insisted that he would not walk away from a BlackBerry deal. “We’ve never renegotiated,” he said. “Over 28 years our reputation is stellar on that front. We just don’t do that.” Watsa’s statement followed a 6 percent loss in share price. The firm was in a tough spot. Reporters covered the market’s lack of enthusiasm and the deal looked like it could be a goner.

What Watsa does is anyone’s guess. But a new paper in the Journal of Financial Economics that examines the media’s role in acquisitions sheds light on the complexities of Watsa’s bad press amid falling share prices. Baixiao Liu of Florida State University and John McConnell of Purdue University found that a CEO was more likely to shelve a bad deal if reporting in the New York Times, the Wall Street Journal and Dow Jones News Service was negative, not necessarily because of its merits, but because of its effect on managers. The authors conclude that news reporting can be a force of good in corporate governance, even when managers act in their interest.

Liu and McConnell examined 636 acquisition attempts by 537 firms between 1990 and 2010 valued at more than $100 million. Of the 636 acquisition attempts, 121, or 19 percent, were abandoned. Annual rates were evenly distributed over time and industries. Between 1990 and 1999, 20 percent were abandoned and from 2000 to 2010, 7 percent were. They controlled for stock ownership, companies in heavily-regulated industries, and other variables that might nudge an acquisition toward the trash heap.

Fee bonanza spells more trouble for banks

Alex Smith-GreatDebate– Alexander Smith is a Reuters columnist. The views expressed are his own –

Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they’ve had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday. Click here for related news.

True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching — often in disbelief — the huge amount of capital raising that has been going on in both the equity and bond markets.

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