The Urge to Merge: Why and Why Not?

So United and Continental Airlines are going to defy decades of accumulating evidence about mergers and acquisitions, and their own histories, and combine to become the world’s biggest airline.  While profitability has been elusive in aviation, United in particular has posted some stunning losses over the years and seems particularly challenged when it comes to making money.  Continental has done somewhat better, but both airlines are at or near the bottom when it comes to customer service and formal complaints from passengers.  

So, why the urge to merge?  Improved customer service?  Hardly, as airline passengers rarely benefit from such deals, and the most recent mega-merger between Delta and Northwest seems at best to be neutral for passengers.  Enhanced profitability?  Unlikely, based on past mergers in and out of aviation.  “Synergy,” or the much-talked-about notion that together they can do more than either can do apart?  A hallucination, since each airline is already massive with substantial domestic and international coverage, and it is difficult to see just how combining allows them to fly more places or do new things.

A possible clue to the origins of mergeritis might be found in the picture appearing today in various newspapers showing, as such pictures always do, the smiling CEO’s of United and Continental shaking hands over the deal.  I am reminded of a similar raft of pictures following the announcement that Time Warner and Turner Broadcasting were merging in 1996.  Then, instead of Jeff Smisek and Glenn Tilton, we had Ted Turner and Gerald Levin sharing smiles and the stage.  Later, the marriage soured as both companies not only failed to realize synergy, but each lost value from the deal.  One wonders whether a similar fate awaits today’s happy couple.  

Back to the picture: maybe there is a clue in the notion that these images are essentially testosterone-laden homages to being “biggest” (certainly part of the United/Continental storyline), or to winning (it is hard to miss the undercurrent in the New York Times story that Continental will be running the combined companies).  Could mergers be driven more by the ego of chief executives than by the needs of the business?  Seems likely, even if it is difficult to measure.

But, here’s the bigger question: how come mergers happen so infrequently in sectors where they might actually do some good.  Independent education comes to mind as one such sector.  There’s an enormous built-in redundancy to the independent school model, and it has nothing to do with teaching and learning, the things that ostensibly matter most.  Rather, the redundancy is in terms of business and accounting offices, athletic facilities, ancillary services and so forth.  It makes for inefficiency to have a 185-student K-6 school a block or two from a 140-student K-6.  Neither is probably operating at a sizing sweet spot for sustaining non-classroom costs.

The barrier to merger in education seems to be a fear, sometimes rational and sometimes not, that one school will be “taken over” and thereby lose something unique and valuable about its culture.  Maybe so, but we cling to our uniqueness at an increasing cost, something Freud called the narcissism of small differences.  To be sure, independent schools command (or hope to command) greater brand loyalty than airlines.  So, maybe we can figure out a way to retain what makes one brand unique from another while merging what doesn’t.  That might turn out to be a value-adding merger, unlike those we see in the corporate world.