Lufthansa Austrian Airlines Takeover Essay Example for Free

Lufthansa Austrian Airlines Takeover EssayTaking a skeleton look on the economic development in atomic number 63 up to the year 2008 reveals high gross domestic product growth rates and reminds us about the time of prosperity that we almost all(a) so nostalgically recall. But Austrian Airlines have never seen any boom in revenues, profits and the number of transported passengers. This unsocial is a occasion for great c oncern as airlines have never been a counter-cyclical credit line. If the society is uneffective to sustain itself in the times of prosperity what loss allow for they carry in the books in the times of economic downswing?Finding a powerful strategic partner seems give care inevitable for the Austrian party. In 2008 Austrian Airlines was the 11th better-lookinggest airlines in Europe with 10,7 million passengers and 2,5 billion in revenues. On the early(a)(a) side Lufthansa has 7 times to a greater extent passengers and postulates 10 times more mo ney in revenues. pose these two categories into relation shows how company? s size creates numerous benefits, particularly financial ones. In 2008 Austrian Airlines had revenue of 233 per passenger while Lufthansa attained 357 per passenger.Now it is obvious how size matters and that synergies create great cost-cutting strength and increase profitability. If Lufthansa manages to bring Austrian Airlines to its own level of profitability they would have EBIT of 140 million if the expenses and passenger number stay on 2008 levels. Not to mention the strategic benefits of this learnedness, and probable Lufthansa? s ability to make use of synergy effects i. e. to cut be and sell even more flight tickets convey to wide-spread sales offices all over the world.Acquiring Austrian Airlines proves as lucrative for a Lufthansa if they transform the company and as a good raft for current shareh emeritusers who can count on even more losses if Austrian Airlines decide to pursue stand-alone strategy which means that they depart eventually slip all the capital they put up . This simple analysis show why did consolidation coil in airlines industry pick up on speed. It really seems that main task for carriers is to get big as fast as they can or to face with a demise of their business.Immediate recapitalization of Austrian Airlines in the amount of ergocalciferol million proficient supports above statement as even the biggest European airline would be unable to cover such a huge accumulated loss if it weren? t for the help of the Austrian government and the European brotherhood. Lufthansa plans to take advantage of the Austrian Airlines? geographic location and their know-how and expertise in CEE and Middle East. After the fall of communism in Europe Austria has played a significant role as a gateway to Eastern and Southeastern Europe.Austrian Airlines took its business one shade only and established new amount market in the Middle East. For an inter discipline company like Lufthansa Austrian Airlines represents a cornerstone in the expansion towards Middle Eastern and Asian markets. Austrian Airlines is a first mover in CEE and Middle East and a market leader with 61 destinations in the region whose expertise in the Eastern markets entrust be of a great use ones Lufthansa decides to go East more aggressively as Austrian Airlines ordain share their core competence with the classify. lancinate overlapping flights and optimization of its articulatio offer and sales doingivities will ameliorate Austrian Airlines business activity right away. Further developing of Austrian? s successful hub system at Vienna drome will also bring positive effects in the long run. Since Lufthansa and Austrian Airlines are old partners within the framework of the Star Alliance and they know each other very well integration in the Lufthansa Group should play out without major obstacles.Companies co make ford within the context of a bilateral joint venture for Austrian-German flight traffic as well as in the important foreign markets of Switzerland and Brussels. scour their technical services have been cooperating jamly and that is also one of the reasons why Austrian executives have rely in Lufthansa and why did they choose exactly Lufthansa among 12 initial bidders. Companies expect to be able to model extensive synergies and assess these to amount to 40 million in cost savings and additional revenues. isolated from all this, Lufthansa has assured Austrian Airlines that they will be tending(p) extensive autonomy within the meeting and that they will preserve their Austrian identity which stands for quality and Austrian hospitality. Vienna will remain the hub of all flight operations, so that Austria will continue to feature very good international flight connections. Its key position in the heart of Europe make it easier for Lufthansa to grant them autonomy. No major downsizing of the legislate is planned which would be unt hinkable if they wanted to pursue stand-alone strategy.On an organizational level, Austrian Airlines will operate as a profit center within the Lufthansa Group what represents a great bonus to get out of the red once and for all. As a part of Lufthansa Group Austrian Airlines will easier protect its position on the market if the recession hits the economy in 2009 because smaller carriers which are non supported by a strong corporate parent will struggle with insufficient resources and declining passenger numbers. As it will soon become apparent, Austrian Airlines stockholders, especially Republic of Austria, will sign a great deal if effect proceeds.Keeping independence among the group, operating under its distinguishing identity while improve quality and profitability of its services sounds almost incredible for the company which could declare bankruptcy if it weren? t for its strategic partner. Considering current situation both sides could profit from the transaction. Moreover , the integration in the Lufthansa Group will provide Austrian Airlines with access to new passenger flows and enable them to more effectively build up international stigma assuredness and be Austrian ambassador all over the world which will strengthen their business model.Lufthansa? s worldwide presence, their size, lobbying power and relationship with gasoline sellers will be of great help to Austrian Airlines. In the light of the bleak economic prospect for 2009 Austrian Airlines can focus on their core business knowing that Lufthansa watches their back. This strategy could work well as Austrian Airlines received numerous awards in 2008 including the so-called Oscars of the industry and a first place ranking as the best airline in Europe according to a survey carried out by Capital magazine. Austrian Airlines have a reliability rate of over 99. % and is among top five most punctual carriers in Europe and could improve Lufthansa? s business model too by sharing their expertise.A fully restructured Austrian Airlines will be forced to become a thriving member of the Lufthansa Group once the company is aware that the Republic of Austria will not back them up if anything goes down the drain. Concerning a history of mutual cooperation between Lufthansa and Austrian Airlines executives in charge need to be particularly careful to void accusations of conflicting expediency as these may arise due to close ties between two companies.Since there were 11 other bidders at the start and Lufthansa was chosen in the end both parties need to be adequately communicate about all facts relevant to this transaction so that they can clearly explain why is this transaction undisputedly the best possible solution for both sides. Considering that Lufthansa is taking over a company which made huge losses in the past years and whose balance sheet reveals equity ratio of just 11% (which is appalling even for a bank) strategic rationale needs to be explained clearly and before long together with all future advantages because otherwise someone could think acquisition is completely irrational.Even aft(prenominal) the restructuring guardianship Austrian Airlines will remain highly indebted and Lufthansa? s executives have to justify their think by outlining benefits. Transaction Overview After signing initial stipulations (CALOI) which provide a foundation for any further steps, Framework Agreement is often cited in the central Voluntary Public Offer. Basic arrangements between parties should be outlined in the earn of intent and then once more pin downd in the Framework Agreement.The underlying Voluntary Public Takeover offer stipulates conditions precedent which are to be fulfilled before remnant. From that reason they all represent potential deal-breakers since there is a possibility that some of them will not be fulfilled. According to Framework Agreement an extraordinary shareholders meeting will be called just before the closing of the Share Purcha se Agreement so that recapitalization can be authorized, new supervisory board decreed and articles of association amended.In order to mitigate any negative impact of nurture leakage on the transaction Lufthansa and Austrian Airlines had signed a confidentiality understanding. Both parties are obliged to use confidential information just for the purposes of the ongoing transaction and will not disclose any information to the third parties in order not to bring any company in an unfavorable position. Letter of intent is a second important document signed which outlines Lufthansa? conceptions and give an overview of the basic transaction, purchase price, determines break-up fee and division of costs incurred as well as court under which jurisdiction any disputes will be solved. For Lufthansa it is of innate importance to include an exclusive dealing clause so that Austrian Airlines obliges to negotiate just with Lufthansa and no one else at the time. Since Lufthansa plans to tak e over a company in an extremely bad shape it would be inappropriate of Austrian Airlines not to bring in all their energy and focus to close the deal.Letter of intention needs to include details about a stake purchase and subsequent mandatory public offer. The details of the purchase price (maximum 4,49 per share) should also be include i. e. the price salaried for the 41,56 % of shares held by Osterreichische Industrieholding AG which includes the details on the earn-out option (under which conditions will Lufthansa pay an amount of up to 162 million depending on Austrian Airlines? future economic performance and on the outperformance of the Lufthansa? s share price).It should also stipulate the conditions of the offer given to a minor shareholders so that Lufthansa holds at least 75% of the permanent vote shares (without consideration of the treasury shares) in Austrian Airlines after the end of the initial acceptance period. Lufhansa? s intention to fully take over Austrian Ai rlines should be clearly pointed out particularly their wish to lead 90% of all shares so that they can launch a squeeze-out. The important conditions precedent should be included in the Letter of Intent.Approval by the competent antitrust authorities in the European Union and other countries should be right away designated as conditio sine qua non. Approval of the restructuring aid is also deemed as extremely important and it should be stipulated in the Letter of Intent as 500 million granted by the state of Austria and the European Union are absolutely necessary to compensate for the negative shareholder value of Austrian Airlines and make Lufthansa willing to take them over. Recapitalization will also further dilute the free float shareholders making it easier for Lufthansa to launch a squeeze-out procedure.Letter of intent should also arrange who bears the break-up cost in the case of a regulatory disapproval. This is seen as one of the major risk since Lufthansa and Austrian Airlines partly operate the same lines and consolidation would lead to a further concentration of power. Considering negative financial results of the Austrian Airlines letter of intent should already include frame of the future executive structure while definitive agreement should include exact top-management structure in the Austrian Airlines which will facilitate integration in the Lufthansa group and turn around the profitability.Since Shareholders Agreement of Austrian Airlines syndicate had already dealt with issue it might be a bit cumbersome renegotiating it. Letter of intent should also state that Lufthansa has no intention whatsoever to dissect Austrian Airlines i. e. that brand, headquarters and route network favoring Austrian national interests will be kept. Lufthansa should try to avoid the matter of employment until the very end (final agreement) so that they are not bound by pre-signed clauses once they negotiate the final contract because restructuring of the Austri an Airlines is necessary by all means.Considering that Lufthansa is the biggest European airline company it the approval of antitrust authorities will not come smoothly. Second condition precedent, approval of 500 million is not deemed as problematic as this pay-out coincides with Austrian national interests to preserve a national carrier which serves its interest. (Besides it wouldn? t make almost any sense for the European Union to grant the acquisition but rejects the aid. ) Acquiring Austrian Airlines will only increase Lufthansa? s size and market power. retentivity such a dominant position could incite abusing it e. g. by charging unfair prices or refusing to innovate. This horizontal agreement will put competition in an unfavorable position but on the other playscript Lufthansa can argue that consolidation in the European airline industry is inevitable. However, only consolidation will ensure survival of the European airlines in the long run, fragmented market structure leav es them susceptible to each bankruptcy or takeover by Asian od American airlines who are fortunately by law not allowed to be major shareholders.Since regulation is the real obstacle to consolidation alliances in Europe prevail. Unfavorable circumstance is also the fact that at the time of this pending transaction Lufthansa bought a big chunk of Brussels Air. The regulators will certainly not like that. Like in any deal representations and warranties play an important role as they typically make up the largest part of the share purchase agreement. They have an informational, protective and supportive role in the transaction . Austrian Airline? epresentations and warranties, coupled with the Lufthansas due diligence, enable Lufthansa to learn as much as possible about the business earlier to signing the definitive acquisition agreement. Second, they are protective. This is crucial for Lufthansa who acquires highly indebted company which value without restructuring aid is negative. The sellers representations and warranties provide mechanism for the Lufthansa to step back or possibly to renegotiate the scathe of acquisition.The second major feature of merger the agreement is the inclusion of various pre-closing covenants, or promises to do something or not do something during the period between the signing of the acquisition agreement and the closing. Generally, covenants should be absolute and Lufthansa? s goal is that none material changes take place until the closing and that business condition does not incense in any respect because if such events took place it would mean that they overpaid.The reasoning behind the indemnification is the same. i should emphasize the importance of reps and warranties relating to financial statements (compliance with accounting standards) , taxes and employees (manager contracts, severance terms and compensations) and no pending litigations which breech would for sure threaten the envisaged transaction. The role of all a bove named provisions is risk minimization and these provision should also act as an incentive for a fair dealing.