Horizontal mergers and acquisitions, distress, relative size, and the firm’s unit costs

An often cited motivation for mergers and acquisitions (M&A) is that the merged entity can reduce costs below that of the independent entities through synergies achieved through better use of resources or simply leveraging economies of scale, scope and density. There is also currently ongoing discussion in academic circles about the relevance of the cost efficiency criteria in merger scrutiny by anti-trust authorities. Our review of the mergers and acquisitions literature revealed that studies looking into the efficiency theory have found weak or no unit cost effects from mergers and acquisitions. Our research confirms these finding for horizontal M&As in the international airline industry. In this paper we take this research one step further by asking if distress or relative size of merging firms affect unit costs. In our context of 19 U.S. M&A airline transactions and their long term impact on the merged entity (over the period of 1980-2013) no significant effects were detected on unit costs if distress was present or when the relative size of the firms merging differed. This suggests that the cost structures of the merged entities do not depend on the method of consolidation (friendly merger between equals vs. acquisition) or the financial situation of the relevant airlines prior the M&A transaction.