Why Does a Merger Fail? A Case Study on Air India and Indian Airlines Merger
“Indian Airlines merger has caused Air India’s downfall”, remarked Ashwani Lohani, the Chairman and Managing Director of Air India, on account of the poor performance of Air India.1 Since long, the financial performance of the leading public sector aviation company of India had been unsatisfactory. Air India has also been facing numerous other problems like pilot issues, managerial issues and operational issues. The merger created discontent and frustration among the employees and the customers lost their trust in the company. What were the reasons behind the Air India crisis? Did Air India actually benefit from the merger? Was the merger of Air India with Indian Airlines the reason behind all the crisis at Air India? Was the merger a success or failure and was it able to achieve all the anticipated synergies?
In 2007, both Air India and Indian Airlines, two public sector aviation companies of India, merged with each other to form one of the largest airline under the company, National Aviation Company of India Limited (NACIL), which was later renamed as Air India Limited. After the merger, the merged company has been working as Air India and it is the largest public sector aviation company of India. The merger of these two aviation companies was equally important for the Indian and the global aviation industry along with Indian public and private aviation sectors. To achieve some common synergies along with individual synergies was the principal motive behind the Air India and Indian Airlines merger.........................
Air India: Company Overview
Air India, was founded in 1932 as Tata Airlines and was launched by JRD Tata who is considered as the father of Indian civil aviation industry. After the Second World War, in 1946, Tata Airlines changed its name to Air India and was converted into a public sector company. This conversion made Air India, the national carrier of India. In 1947, the company signed an agreement with the government of India to operate internationally under a new company named, Air India International Ltd. The government of India acquired 49% of the airline post-independence in 1948. In 2000-01, the government attempted to reprivatize Air India but it did not work................
Indian Airlines: Company Overview
Indian Airlines6 was set up in 1953 under the Air Corporation Act, with an initial capital of INR32 million. Seven domestic airlines named Deccan Airways, Airways India, Bharat Airways, Himalayan Aviation, Kalinga Airlines, Indian National Airways and Air Services of India were merged to form a company named Indian Airlines Corporation. Indian Airlines Corporation changed its name to Indian Airlines in 1993. It was a government owned domestic company administered by the Ministry of Civil Aviation (MCA), India.............
Reasons Behind the Merger Deal
Both Air India and Indian Airlines were the two most important air service providers in India. In 1986, both the companies made an attempt to merge internationally but failed. Later in 2007, the companies went ahead with the process of unification. The Performance Audit Report of Indian Civil Aviation, on March 22nd 2006 prepared a presentation for the then Prime Minister, which highlighted the reasons for the merger of Air India and Indian Airlines.
Due to the consolidation in the global airline industry, it was necessary to work together for Air India and Indian Airlines to achieve the strength to compete effectively in the international market. Accenture India Private Limited (Accenture) facilitated the merger process as a consultant for both the airlines..............
Details of the Merger Deal
The unification deal between Air India and Indian Airlines became a great topic for speculation in the Indian corporate scenario. The procedure of the deal started much earlier than the announcement date. Some important events of the unification of these two public sector Indian aviation companies are given in Exhibit I.............
Financial Ratios of the Combined Firm
For the determination of financial performance of the merged company after the merger, Paired T-test14 is applied with the financial data. It is used to determine the level of difference in the pre and post-merger performance of the individual and combined entities. Exhibit II shows the financial analysis of the combined firm, three years before and three years after merger period.................
Businesses are done to generate profit and net profit is the actual amount of profit which a business gets after excluding all its expenses. Business entities use the net profit margin for upgrading their future business plans.............
Anticipated and Achieved Synergies
The deal between Air India and Indian Airlines was based on a particular blueprint, in which some anticipated synergies were mentioned to achieve. Exhibit III contains a comparative analysis on the projected-synergies of both Air India and Indian Airlines along with the achieved-synergies...........
An Inharmonious Corporate Marriage
The post-merger scenario of the two national flag carriers of India was full of challenges along with unsatisfied financial performance. The merged company did not achieve the expected synergies because of numerous issues. Many times, leadership and human resource issues were reported as crucial disputes as a result of this unification. Tough competition from the competitors in the aviation industry, poor infrastructure and buying unnecessary fleets after the merger were cited as the prime reasons for unsatisfactory performance of the unified entity by several industry analysts..............
Reasons for which merger strategy could not benefit the companies
Though M&A is a famous and widely accepted corporate restructuring activity, many research reports mention it as a failed strategy with statistics of approximate 50% of failure. Most of the time the transactions fail to achieve its actual synergy and the same happened with Air India and Indian Airlines merger. Here, are some suggestions for other companies to make their deal successful one:
• The process of integration should not be too late after the M&A deal as happened in Air India case. Incomplete integration creates performance issues and raises the operating expenditure.
• ................................
Assignment Questions
I. What were the important reasons that lead to the merger of Air India and Indian Airlines?
II. ....................
Exhibits
Exhibit I: Details of the Merger between Air India and Indian Airlines
Exhibit II: Financial Analysis of the Companies in the Pre and Post-Merger Period
Exhibit III: Anticipated and Achieved Synergies of the Deal