Victor Cook

Unintended Consequences of a Delta/Northwest Merger

Kurious,

Actually I’m not short DAL or NWA. And I'm not long on LUV! I’m just curious to find out why investors continue to allow senior airline management to throw their money down the drain.

I appreciate it’s a sexy business -- on a par with America’s Cup. But the scale is so much more overwhelming and the implications so far reaching I think investors would have had enough by now.

BTW I’m quite happy with my position in the ivory tower. ;-)

Thank you for your comments.

~V

Delta/Northwest: Evaluating Company Performance in a Dysfunctional Industry

Waves,

Your inside view on the personal impact of Delta’s past deals and your insight on the industry are really valuable.

It is strange that we use the term “de-regulation” as if it were a fact. When it works only on the demand side of the market.

I share your wish that Mr. Anderson paid more attention to the concept of value-sales differentials in assessing long-run performance.

Maybe this will get his attention:

6/30/94

DAL’s value share = 16.8%. Revenue = 17.7%: -0.9 points.

2/29/08

DAL’s value share = 13.9%. Revenue = 16.5%: -2.9 points.

6/30/94

LUV’s value share = 23.0%. Revenue = 4.0%: +19.0 points.

2/29/08

LUV’s value share = 34.3%. Rrevenue = 8.8%: +25.5 points.

Conclusion: over the long-run, large scale mergers have not created more relative shareholder value in the domestic airline market.

Thank you for your comments.

~V

Delta/Northwest: Evaluating Company Performance in a Dysfunctional Industry

Airbusdriver,

“So what is our air transportation system - infrastructure or a free market system?” Both. That’s the problem.

On the demand side, in the competition for customers, it’s a free market system. But as you say, on the supply side it’s a quasi-regulated utility. It’s the “quasi” part that’s the biggest disconnect between the demand and supply sides of this market.

What’s the solution? I don’t know. I’m just trying to understand the consequences of the deal by looking at it through the lens of enterprise marketing.

Thank you for your comments.

~V

Unintended Consequences of a Delta/Northwest Merger

Independent E. G.

Okay, definitely not! But it’s also definitely true that the combined NWA and DAL will not be number one in share of market value anytime soon.

“But why you are writing this?” These posts are designed to test my theories in the market for ideas. Writing a book is not enough. To build a bridge between marketing and finance I think it’s necessary to do the construction in public. Seeking Alpha helps me do that. As you point out, some of the conclusions of enterprise marketing analysis are controversial. But it if makes you think, it’s a good thing.

“How does negative market share work in the real world?” It’s called bankruptcy! Theoretically it’s an IF statement: m < 0.0 is returned as 0.0%.

Thanks for your comments.
~V

Unintended Consequences of a Delta/Northwest Merger

Frm airline exec,

Of the nine airlines in my analysis, the M&A transaction costs of AMR, DAL, NWA, UAUA and LCC over the period from 1979 through 2007 exceeded their market cap on December 31, 2007. By a large margin. The combined transaction value of their M&As totaled $29.6b. Their combined market cap at the end of 2007 was $15.5 billion. That’s a ratio market cap to M&A costs of 52%.

But, then you were talking about a DAL and NWA merger. The combined M&A costs of DAL and NWA over the same period were $16.6b. Their combined market cap at the end of 2007 was $7.5b. That’s a ratio market cap to M&A transaction costs to of 45%. As a former airline executive, you must have access to inside information on presumed synergies of the combined company that I don’t know about. If so, please share it with me. If not, you may have confused a fatal error in my analysis with a wake up call to Delta and Northwest management.

Thanks for your comment. It motivated me to look more closely at the assumption that 1 + 1 = 1. Clearly I was wrong. In this case 1 + 1 = ½.

~V

Unintended Consequences of a Delta/Northwest Merger

Tyroni,

Your right, if instead of the most recent closing prices I had used the stock values of DAL and NWA at their February highs, the combined market cap would have increased from $3.759b to $5.390b. This would have significantly increased their risk-adjusted differential from -4.9 to -1.7. This in turn would have placed the merged companies just inside the bottom-feeder upper limit of -2.0. Still uncomfortably close to the tail end of the distribution, but in a much stronger position.

But markets don’t use the highest prices in a relevant series to anticipate the effects of a merger. Typically the most recent closing prices best reflect investor assessments of stock values. That’s why I used the closing prices on Friday February 29, 2008. I did not, as you imply, intentionally “skew the results of my analysis” using the lower prices. If the prices on that date have been $18.00 I would have used them instead. If the prices had been $25, reflecting investor sentiments that the merger was a good thing, I would have used those prices instead.

My belief in writing posts published on this site is that SA readers are both smart and well informed. Thank you for your comments.

~V

Yahoo + Adobe: It's a Vision Thing

RJ,

I agree, processor-intensive applications appear to be out of reach. I use Adobe's "Connect" to narrate (and edit the sound trakcs to) the slide shows I sometimes link to my posts. This is one of your processor-intensive applications.

What do you think about the idea of a Yahoo!-Adobe deal -- combining as it does YHOO's access to eyeballs with ADBE's high margin boxed software and its free online applications?

~V

Unintended Consequences of a Delta/Northwest Merger

Airplane99,

The methodology becomes clear when you think about how market cap is created: the closing price (say $13.35) on a given day (say 2.29.08) times the number of shares outstanding on that day (to keep the math simple say 1M). The market cap of this company on that day is $13,350,000.

Now, if the price of the stock falls to $12.98 the next trading day, it's worth $12,980,000. If you owned this stock you lost $370,000. Since market cap is a stock variable, you cannot add the value at one point in time to the value at another point in time. But you can average the two. Now, this is a very simple approximation. As Iggningot says, profit ratios may change since the combined companies will operate differently. So an average value is just a guess. But, so is every forecast future market value. Is this guess less reliable than a detailed analysis of how investors will value the combined company? Not really. As Bill@Sabre says, one analyst's guess of the discounted present value of combined earnings will be $2+$2=$5. When the actual post merger earnings turn out to be $2+$2=$3. These numbers are additive because earnings is a flow variable.

If the company had earnings of, say $6M in the last year and earnings of $8M in the current year, its earnings in the two years were $14M. We can add these two numbers because earnings is a flow variable. Earnings represent an accumulation of value over several points in time. While market cap is a store of value at a give point in time.

Thanks for your comments,

~V

Unintended Consequences of a Delta/Northwest Merger

MyAmerica,

Thanks for your kind words and update on LUV's future. I understand those hedges are getting to be pretty expensive. Do you have any knowledge on their cost/returns at Southwest?

~V

Yahoo + Adobe: It's a Vision Thing

Dennis.

1. Aunt Sue and all do object to advertising on TV--thank god for Tivo?

A quick web search suggests TIVO has a US market penetration in the 18% range. Not exactly a repudiation of TV advertising!

2. Believe me, it's well worth not having advertising popups and overlays and "click here if you don't want to wait 45 seconds."?

I don’t know Dennis. Last week 46% of visitors to yahoo.com went there for an email screen filled with display-ads, pop-ups, videos and all kinds of things. My more benign gmail screen is full of AdWords in the left-hand panel and across the top navigation bar. These are far less annoying and I even open them once in a while.

3. Microsoft should buy both Adobe and Yahoo?

Wouldn’t that be a hoot!

~V

Yahoo's Audacious Option: Who Would Pay $50 for an $18 Stock?

Thomas,

One of the people who reviewed a pre-publication version of my last post "Yahoo's Audacious Option!" at customersandcapital.co... made this comment right next to the paragraph suggesting that Jerry Yang team up with Shantanu Narayen to take on MSFT in the new desktop wars:

"Jerry doesn't get it. Yahoo is the faded former glamor queen. Yahoo is, in fact, a great target for Microsoft based on today's numbers (your Alexa numbers)...but it only has a future if Microsoft can find a way to breathe life into a languishing property. And, to tell you the truth, I don't think that anyone at Yahoo! can find it for themselves. And, by extension, Yahoo! buying Adobe might just bring Adobe down with them, given their demonstrated track record."

I didn't use this in my post because I will always have faith in a founder's ability to see beyond past mistakes. You and this reviewer may be right. Just call me naive!

~V

Will Microsoft's Proxy Threat Force Yahoo!'s Hand?

Make that Yahoo's Audacious Option! at customersandcapital.co...

Will Microsoft's Proxy Threat Force Yahoo!'s Hand?

Maybe there's another alternative. See "Yahoo's Aduacious Option!" at customersandcapital.co...

Did Microsoft 'Massively Undervalue' Yahoo?

Ted,

Thanks for your comment. I agree Yahoo! appears to have limited options, most of which are unattractive.

Tomorrow evening I'll post an article, "Yahoo's Audacious Option!," which proposes taking the company on a different path to its future. I’d like to get your comments on that story before I post it. If you’re interested please send an email address to me. Thanks

~V

Did Microsoft 'Massively Undervalue' Yahoo?

User 127562,

Those required multiples will depend in large part on how investors perceived the future value of Yahoo! cashflows given on the strategic direction management took to achieve optimal earnings. Will they not?

~V