Value creation of M&A in the European aviation industry

Abstract

Extensive research has been carried out on the market reactions of acquirers and targets to Merger and Acquisition transactions, not only at the announcement but also in the long-term. Less attention has been paid to perhaps another crucial element; the resulting operational and financial performance as a consequence of M&A deals. This unique study explores all three elements, and addresses the existing literature gap, in the European Airline Industry from 1986 until 2016. The market reaction to M&A announcements is analysed, but also the market reaction in the long-term (up to 5 years) and the post-M&A performance and profitability 5 years after the announcement. Additionally, worldwide benchmarks are provided to interpret and contextualize the European results. There is significant empirical evidence that the stock prices of the European Airliners react positively to the announcement of the M&A. However, in the long-term a value deduction with double digit negative abnormal returns is found and is in line with the negative operating metrics of ROA, ROE, Gross Profit and Operating Profit. Five years after the M&A deal announcement, only the free cash flow had increased, by more than 108%.