Impacts of the Air France–KLM merger.docx

Lu Yaxiong ID:2014121School of International Business of SISUE-mail:524380054@Impacts of the Air France–KLM mergerAbstractThis paper presents empirical evidence on the shareholder value effects of the announcement of the horizontal merger of Air France and KLM between September 2003 and May 2004. Using an event study methodology, the stock price reactions around the announcement days when the intention of the French and the Dutch flag carrier to merge became public as well as on the announcements during the following tender offer period are analyzed. Obviously, for KLM shareholders, the offer represented an immediate premium over KLM’s latest share price, while the stockholders of Air France as the acquirer earned insignificant positive returns of +0.24% on the announcement day. This finding is in line with empirical research by Kyle et al. (1992), Knapp (1990) and Zhang and Aldridge (1997). Contrary, KLM as the target firm experienced significant positive abnormal returns of +1.67%. In particular, to shed light on the hypothesis whether efficiency gains were achieved by exploiting economies of scale, scope and density (Caves etal., 1984) an event study during the exchange offer period is conducted. Synergistic gains are either derived from the elimination of redundancies, through the exercise of market power or an increased concentration as rivals earn spillover benefits. Major airline consolidations increase opportunities for collusion in the form of higher product prices or reduced service quality. Therefore, financial market efficiency implies that carriers’ share price responses of merging firms as well as of rival firms are a positive function of the implied change in airline industry concentration.Keywords:Mergers and Acquisitions, Airlines, Shareholder Value, Event Study, Abnormal Returns, Efficient Market HypothesisIntroductionWith the announcement of the merger between KLM and Air France on September 13, 2004 KLM officially joined the Sky Team alliance, t