Options University Live Trading Labs And Merger And Acquisition Cemetery
Discover the Ultimate Trade Analyzer and learn this little crazt trick that works for forex, stocks, futures and options and tells the best day, best time and the most profitable trade setup. Give 14 days RISK FREE trial to Options University Trade Alert Service and the Live Trading Labs! Matthew “Whiz” Buckley, Chief Education Officer, Options University Airline Merger: The Acquisition (Part 12)Chicago, IL Shares of Chicago based United Airlines (UAUA) and somewhere based (it says Delaware but that doesn’t strike me as a major airline hub) US Airways (LCC) shot higher this week on rumors of a potential merger or acquisition. And this will be that last good news you’ll hear about this for years… My name is Matthew Buckley and I’m a victim of an airline merger/acquisition/something.
The merger and acquisition cemetery is filled with sad stories that looked great on paper but failed miserably in execution. The largest vault is stacked with the rusty hulks of airlines where executives with lots of letters after their names looked at numbers, did the math, and pressed forward with visions of performance-based bonuses in their heads.
The airline industry is obviously not unique to M&A activity. The recent financial typhoon resulted in the shotgun wedding between Mother Merrill (MER) and Bank of America (BAC). The technology sector has also seen a lot of activity. Dell (DELL) purchased Perot Systems; Hewlett Packard (HPQ) acquired EDS; Xerox (XRX) purchased Affiliated Computer Services (ACS).
But the airline industry serves as a good example of what happens when the suits ignore the most important factor in creating a successful merger or acquisition: people.
People are the backbone of any organization and as such operate in a system. These systems take on certain characteristics and become a way of life for the people in it. Not examining the culture of a potential merger partner and how it would integrate into the acquiring company is a recipe for trouble. I left active duty and flew for Fed Ex (FDX) for 10 months and got my first taste of working at a post merger/acquisition company. Fed Ex purchased Flying Tigers in 1989 to establish a beachhead in the Pacific Rim. 11 years later Flying Tiger and Fed Ex pilots were still complaining about the merger and the resulting impact on their seniority.
For the uninitiated, seniority at an airline is everything. You’re assigned a number on your first day of work and that number is your life; it controls how much you make, what equipment you fly, what your schedule is, whether or not you get your birthday off, even whether or not you keep your job.
Also on your first day at work as a pilot for an airline you calculate when you’re going to make it “to the left seat”, or Captain. The big money…or at least it used to be. More on that in a minute. So on day one you have a date in mind of when you can expect to make big money and command an airliner, responsible for the safety of hundreds of passengers.
When the airline suits decide that their horrible business model can maybe be saved by merging/acquiring a less horrible business model, they create a perfect storm by changing the set expectations of a 2 groups of type A employees. Many airline pilots like me are former military aviators and not inclined to back down from a fight or give an inch.
Hilarity ensues and years later, neither group is happy. The seniority lists are ‘merged’ and people are bumped up, down, sideways, and even off (as in fired, or to use polite airline management speak, “furloughed”). This creates a lot of unhappy employees with long memories. Delta (DAL) purchased Northwest Airlines (NWA) and the integration of the seniority lists is still simmering. US Air purchased America West and ‘walled off’ the lists so imagine how it’s going to look if the current deal goes forward.
I left Fed Ex (because I like my sleep) and went to work for American Airlines (AMR). The last time US Air and United dated it scared American enough to purchase troubled TWA in 2001. The terrorist attacks further devastated an already struggling industry that continues to be on life support. Add the fake bankruptcy scare from former American CEO Don Carty in 2003 and to this day there exists tension between some American and TWA pilots about who got the raw end of the deal. I mean merger or acquisition.
I’ve subtly used the terms merger and acquisition interchangeably and that’s a problem. There’s a big difference between a merger and an acquisition and not clearly examining the impact of either situation on the employees can mean the difference between success and failure.
I believe the pop in shares of both US Air and United will subside and they will trade sideways for a while, opening up opportunities for bear call spreads or iron condors. We take a look at these types of strategies each week during our Live Trading Labs and will take a look at some potentially profitable trades in many of these names.
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