Jean Cyril, the chairman and CEO of Air France always believed that the airline industry would likely manage to capture the enhanced growth opportunities through consolidation and formation of mergers. Likewise, Leo Van Wijk, the CEO and the president of KLM observed that strong European partnership will provide a secure sustainable future for the two companies. The two companies had identified that factors affecting growth and operating margins include poor industry's conditions and lack of enhanced growth opportunities. A potential partnership would also be limited by the existence of cultural differences and visions. Another challenge hindering the effective implementation was a lack of trust amongst the Dutch on the French economy since they believe it is a ticking bomb. The objections including those from Dutch investors association portrayed concerns on matters related to loss of identity by KLM. This analysis will seek to explain the financial implications of the merger and also offer solution to those holding objections against the partnership between the Air France and KLM.
The Motivating Factors Behind Air France and KLM Merger
The first motivation factor is the availability of a single European market that is composed of more than 455 million people. Another motivation factor is the need for structures changes required in order to avoid fragmentation of the industry and the market structures (O'Connell, and Williams, 2016). The merger has greatly contributed to the presence of the new group in the whole world. The merger greatly contributes to cost savings due to the development of proper sales structures. Other benefits are as a result of establishment of the joint negotiation position. Revenues have also improved due to availability of improved products as a result of synergies. Centers of excellences are established through optimization of the usage of current F& M platform and the integration of the stock purchases. In overall, the mergers have resulted to improvement of the reported operating incomes after consolidation. The achievements are expected to be maintained due to continuous implementation of the cost saving platform for consolidation.
The Present Values of Synergies
The synergies of are calculated by adding the net present value of the merger to the premium. The mergers were expected to create a leading airline with PS19.2 billion aggregate revenue for the financial year period ended 2003. Annual improvements were expected in the range of PS385-PS495 million following gradual implementation of the synergy. The announcements of consolidation have resulted to the gradual growth of shareholders wealth consistently with the estimation of the expected performance.
The Extent of Justification of the Premiums By Improved Expected Performance
The premiums can be fully justified through comparison of the actual value of the firm before and after formation of mergers. Cost savings as a result of synergies are expected to contribute towards 60% of the expected performance. The expected synergies per year have continued to grow at a reasonable rate as expected.
Critical analysis of Dutch Investors Association Objection to the Proposed Takeover Price
Air France obtained 81% of the newly formed company while KLM hold 19% of the shares only. Key financial indicators have shown that KLM should be allocated more than 30% of the total shares held in the company. The allocation criteria have been fully supported by four different approaches which include the revenue contributions, the number of aircrafts, equity contribution by the shareholders and the headcounts. The various indicators of the true worth of KLM will be discussed in the next general meeting. Though there exist no indication that air France shareholders agree with VEB, KLM is properly represented in the board and this offers them an opportunity to shed light on the real worth of the company.
Reason for Support of the Proposal
Shareholders should note that a well implemented merger results to economies of scale. This occurs when revenues are maximized while at the same time considerably reducing the total costs. Unfavorable international cut throat competition is also reduced between the two leading European giant airlines. Mergers are also likely to result to greater investment opportunities presented by contribution by Air France. Previous studies have indicated that mergers and acquisition results to improved efficiencies due to improvement in overall productivity. The KLM chances of future growth in value are increased hence reducing probability of further loses to shareholders.
Merger transactions between Air France and KLM can also result to further strengthening of the two brands which has been considered reputable across Europe (Gudmundsson, 2017). The two companies can also serve as complementary networks since each of them stands in strong position to serve different regions with different capacity to further expansions. This also implies that the new company will have a great presence around the globe and this will offer the clients to enjoy a wide range of products. Information Technology applications are also likely to be converged and this will result to efficiency and savings on costs. The shareholders ought to understand that merging transaction will result to both increases in profitability and future growth in value.
List of References
O'Connell, J.F. and Williams, G., 2016. Airline Strategy: Keeping the Legacy Carrier Competitive. How Can Mature Airlines Stay Ahead in the Low-fare Airline Era?. In Air Transport in the 21st Century (pp. 179-194). Routledge, Taylor and Francis.
Gudmundsson, S. V. 2017. Mergers vs. Alliances: The Air France-KLM Story. Retrieved on 4th May2018, from https://www.researchgate.net/publication/256033317_Mergers_vs_Alliances_The_Air_France-KLM_Story. Online
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