DAL/NWA: Proposed Merger So Large, Yet It's Worth Less Than Yahoo

In reading about the Delta (DAL) - Northwest (NWA) proposed merger, I ran across one particular paragraph in USA Today, and it struck me how values differ so much from one industry to the next. Here's the paragraph:

The proposed merger would be the largest U.S. airline deal ever, creating a global giant with more than 800 jets, 6,400 daily flights and nearly $32 billion in annual revenue. The carriers estimate the value of the new company at $17.7 billion dollars, far above their current market value.

OK, so -- 800 jets, $32 billion in revenue, and, by the way, 79,000 total employees, and you wind up with a company valued at just under $18 billion.

That made me think of Navteq (NVT). I was aware of its value because Nokia (NOK) is trying to buy it -- for about $8 billion. It makes Web-based maps, including the ones you see when you call up a Google Map. It has 3,349 employees and had $853 million in revenue the past fiscal year. As an enterprise, Navteq is a sliver the size of Delta-Northwest, yet has a market value of nearly half as much as the merged airline.

How about Yahoo (YHOO)? Microsoft (MSFT) is trying to buy it for about $42 billion. It has 14,300 employees and annual revenue of $7 billion -- again, as an enterprise, a fraction of the footprint of Delta-Northwest, but triple the market value.

Of course, there's a perfectly logical explanation: the airline business kind of sucks. Still, it's almost hard to believe that all those planes, all those people, all that activity, would be worth one-third what Yahoo is worth.

Comments

[bocacassidy]

An industry such as Google is not comparable to a sector so fuel and labor intensive as an airline company . .Only if evolving circumstances provide the airlines sufficient pricing power to sustainably meet escalating costs can there be any normalization of market value .
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[Victor J.Cook, Jr.]

Last Friday DAL and NWA closed at $8.75 and $9.69 respectively with a combined market cap just under $5b. Tangible assets play a far less important role in valuation today than they did a several decades ago. These days intangible value accounts for about 75% of total capitalization.

What's the "normalized" market value of a company? Over the last 55 years the ratio of value to revenue was 1. If you're interested in the details see my paper on the value/revenue ratio at papers.ssrn.com/sol3/p...