UAUA, CAL, LCC, AMR, DAL – who wants to merge with whom?

April 23, 2010 / Jeff McAllister

US Airways headquarters in Tempe, Arizona - Fo... — Image via Wikipedia

A sign of health returning to the economy, and most notably to us in the markets, is the resurgence of mergers and acquisitions. You’ve probably been hearing a lot about them lately.

Microsoft (ticker: MSFT)looking for companies to acquire, Google (GOOG) reportedly about to “buy up stuff” and most recently from the options Guru himself – Larry McMillan (see his weekly newsletter for more www.optionstrategist.com – not an endorsement! But I do like to read his stuff…).

Anyway, you would have had to have been living under a rock somewhere to have missed all the talk of airline mergers over the past two weeks. First it was United (UAUA) and USAir (LCC), then no, USAir is out and now it’s United and Continental (CAL). But wait, what about Delta (DAL)? Oh yes – they recently merged with Northwest (if you want to see some interesting, but somehow legal, funky accounting, check out the 10-K and 10-Q filings for these two prior to the merger and then post… sheesh… talking about “irregularities” – but all legal, of course…) www.sec.gov . How about American (AMR), well, they bought out TWA a while back and lets just say that it didn’t go so well… How about Southwest (LUV) – the darlings of the airline world! Nope, they’re staying completely in-house. Hey, when you have a business model that works, why mess it up (“if it ain’t broke, don’t fix it!”).

So, that leaves only three real players in this courtship: CAL, UAUA, and LCC. Since LCC has already been ruled out, they no longer count. What of a merger between CAL and UAUA? Might be interesting. However, the question is – who is it really benefiting? The employees? No, thousands of those will be let go as their positions are redundant. The passengers – well, though they will be told that it is for their benefit, the track record of such mergers is also a resounding no. How about the upper level managers? Ah, no there’s a group that stands to benefit from all of this! Sadly though, not in the way that is, as President Obama said yesterday “What is good for Wall Street should be good for main street” (sic). So who else stands to prosper from such marriages? Well, as investors – we do. Such talk of mergers is always justified by “scaled efficiencies” and “elimination of non-competitive routes” and the ever popular “synergies of the whole”…. (my personal fav…). So those of us who are nimble and trade on all of this excitement generally do pretty well. It’s happening now. Take a look at this quarters results for the airlines – pretty dismal. AMR lost about $500 million, CAL lost about $146 million, and I’ve already forgotten how much that DAL lost, but it was more than analysts expected… None the less, all three powered higher today on continued talk of mergers.

In the final analysis, these mergers, while attractive on paper, rarely play out as designed. The ultimate winners in the game are the executives of both airlines, the clever investment bankers who broker and craft the deal, and the nimble share holders who see this for what it is – an opportunity to quickly grab a directional trade.

Anybody remember what DAL’s share price was when it came out of bankruptcy with Northwest? I do. It was more than $20/share with all kinds of excitement about it’s prospects for a long bullish run. Well, it never happened. In fact, that was the only time that DAL shares were above $20… Today, after trading off of a low of $4.00/sha year ago, DAL has pulled back up to 13.01.