M&As in the airline industry: motives and systematic risk

Purpose – The purpose of the current study was first to identify the motives for mergers, and second to examine the effect of mergers on the systematic risk of bidder firms in the airline industry. Design/methodology/approach – To evaluate the effect of mergers in the systematic risk, two different market models are estimated for each company in the sample, one with pre‐merger data and one with post‐merger data. Then the results obtained from the two data sets are compared so as to identify possible differences. Findings – The study has identified three diving motives behind the merges, namely cost efficiency, economies of scale, and market power. All of these motives are expected to affect the new firm's earnings stream and in turn affect its systematic risk. With the use of the market model the individual merger results are mixed and in line with the relevant literature. Nonetheless, the average results showed a decrease in the post‐merger systematic risk. Research limitations/implications – A reduced post‐merger systematic risk indicates a success in achieving management objectives. Mergers can generate synergetic gains from increasing cost efficiencies and/or scale economies and can also increase shareholders value through the reduction in the new firm's cost of capital. However, to have a more valid perspective a larger number of mergers should be included in the sample together with alternative calculation of systematic risk to test the robustness of the results. Originality/value – Taking into account the current economic hardship this paper addresses the issue of shareholders wealth maximization through mergers.