Monday, May 03, 2010

United and Continental Merger

In the Heard on the Street column over the Wall Street Journal, I read the following about the United-Continental merger:

"Like a jet cutting across a clear blue sky, a merger between UAL's United Airlines and Continental Airlines could be seen coming miles off. And no wonder. Announced synergies, when taxed and capitalized at 10 times, equate to two-thirds or more of the airlines' combined market capitalization. Roughly three-quarters of this is revenue synergies. Longer-term, that should worry competitors like American Airlines."

Hmmmm... I found the synergy numbers quite interesting. 75% of the synergies are on the revenue side, and only 25% on the cost side, according to this article. Typically, investors find cost synergy estimates by executives to be much more credible. After all, cost synergies typically represent more tangible estimates based on concrete actions such as facility closings and consolidations. Revenue synergy estimates often are less credible. After all, they represent much less tangible projections of how two companies can drive more sales by working together. In sum, like most investors, I would have liked to have seen a greater percentage of the projected synergies on the cost side of the equation. I would have much more confidence that those merger benefits could be achieved.

By the way, for more on the merger, see my favorite airline industry blogger, Dan Webb.

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