Mergers and Acquisition | Assignment

Mergers and Acquisition

Introduction
In this paper, the acquisition of Malaysian airlines by Etihad airways has been analyzed. The
other name of Malaysian airlines was Malaysian airline system (MAS). The airline was founded
in the year 1947 and the operation was commenced on 1st October 1972. The operating flight of
Malaysian airlines was from Kuala Lumpur which is an international Airport. The secondary
hubs were in kutching and kota kinabulu. In 2010, the flag carrier of Malaysia was traveling to
almost 103 destinations across the world (alternativesairline.com, 2020). The equity value of
Malaysian Airlines in March, 2010 was 1316 million dollars. After this news, most of the airlines
were considering the acquisition of MAS. Malaysian airlines were controlled and owned by the
government of Malaysia. The world Airline in 2010 has awarded the MAS for rendering high-
quality services to its passengers and also increases the revenue of the aviation sector. The
shareholding of the government was 69.34 percent. An Etihad airline that has its headquarters in
Abu Dhabi was established in July 2003 (Etihad Global, 2020). Almost 1000 flights are operated
by the airlines. The airways carry passengers to Asia, Africa, Middle East, America, Australia,
and Europe. Standard chartered bank guided the management of Etihad to take a 20-25% stake of
Malaysian Airlines. The main purpose of the report is to analyze that the decision made by the
Etihad was beneficial for the airways or not. In 2009, the mission statement of the Malaysian
Airline was to “serve with quality aviation gateways”, reduce the cost of services, and to provide
a return above the expectations of the stakeholders.

The main issues that are to be considered are:
A) How both the Malaysian airlines and Etihad airlines are similar and whether it will
be advantageous to acquire the stake of the MAS.
B) How are the purchase consideration (fair value) of the target firm (MAS) has been
derived
C) What benefits would be gained by Etihad after the cross border acquisition with
Malaysian airlines
The Similarity between Etihad and MAS
The operation of MAS is only limited to only 5 destinations in Europe but the Etihad airways
serve more than seventeenth (17th) destinations. In Africa and America, there are no destinations
of MAS and only two destinations are served by Malaysian airlines in the middle east that is
Jeddah and Dubai(CAPA – Centre for aviation, 2014). MAS in 2013, was planning to enter into
a partnership with other countries also so that they can expand their aviation business and also
can improve the performance of the flight from Kuala Lumpur to Dubai. MAS were certain that
the local traffic was not reliable for Dubai and was also not viable. The other option for MAS
was Abu Dhabi and that’s the reason they want to tie up with the airlines of Etihad. The Abu
Dhabi hub of Etihad operates in 15 destinations that were within Kuala Lumpur to Abu Dhabi
and in the Middle East. The current codeshare of Etihad to Malaysian airlines is limited only to
Muscat, Kuwait, and Bahrain. The trade between the Middle East and Asia will be enhanced.
Fair value computation method
It is the value of total liabilities and assets of any company which is listed on the books of the
company. According to Szücs and Ulbert (2017, p-51), fair value is the potential price of any

service rendered or goods sold by the organization. It is that value that will be paid by the owners
of Etihad to acquire 25% stake of another firm. If there is no active market then the calculation
or determination of the fair value would be difficult for the accountant. In this type of situation,
the accountant prefers to take present value factors to compute the worth of the target company
(Cannon and Bedard, 2016, p-81). If the financial reputation and creditworthiness of the target
company are not good then the investors and lenders will not invest and lend to the target
company as there will be a risk of recovering their money. Due diligence which is an
investigation by the auditor or some other specialist must be conducted by the acquirer company
on the target company. The due diligence inspector will determine the total cost that will be
incurred by the acquirer before incorporating the acquiree company into the amalgamated
company. information related to seller business, its products, customers, strategies of doing
business, its lenders, suppliers are all gathered during the process of due diligence. A thorough
investigation of the seller is done in this process. Creditworthiness of the target company should
also be scrutinized so that the ability to recover the debt of the creditors can be evaluated.
The fair value of the MAS could be determined by applying the fair valuation method. Free cash
flows which are computed by multiplying the cash flows with the discounting factors could be
the Fair value. Return on investment (ROI) ratios could be used as an essential indicator to
examine the efficiency of the expected return. According to Ahmed et al., 2018, p-196), the EPS
of any company is computed by dividing the profits available the equity holders by the number
of shares. The earning per share before acquisition and after acquisition could be analyzed so that
the effect of merger could be seen.
Etihad would not be allowed to recognize the benefits of synergies due to additional costs that
will be incurred on the training of new employees or staff. Moreover, learning curve describes

that new employees take time to adjust themselves to new situation. After the payment of the
purchase consideration to MAS if the amount results in goodwill then it signifies that Etihad has
paid extras amount to purchase the stake and if it results in capital reserve then it means that
assets and liabilities have been acquired at an amount less than the book value of the target
company.
Strategic advantages
The Etihad airlines would be able to reduce the direct and indirect cost by implementing new
methods of Malaysian airlines and also by implementing the technology of MAS. The handling
services, cargo, and frequent fliers of MAS will also be added by the administration department
of Etihad. The agreement of code sharing will also be profitable for the Etihad airlines as they
would be operating for the Etihad as a hub. The marketing cost will also be reduced by entering
into a new market. The other benefits are that the major portions of the holding of Malaysian
airlines are held by the Malaysian government so Etihad will get full government support.
Portfolio risk will be reduced as the MAS are diversified in various market segments. Route such
as Malaysia to Thailand is the most favorable brand for passengers. The organizational structure
of the MAS is very simple and strong. The attractive airline scheme helps to expand the revenue
of medical tourism. The CSR responsibilities will be increased as the MAS are very active in
CSR activities. By doing bilateral agreement the aviation market will be highly regulated. The
mergers will also result in operating and financial synergy. Various advantages of the diversified
firm (MAS) can be explored by Etihad. The financial synergy such as debt capacity, profitability,
revenue, and cost of capital will be improved to a huge extent. The cost will be decreased
through the assistance of streamline operation

The other advantages of financial synergy:
 Ability to pay the debt will be increase
 High amount of cash flows will be generated
 The capital cost will be reduced
 Benefit of taxes
 If there is positive synergy then the result will be successful (Kiesel et al., 2017, p-781).
 Sometimes due to the high cost incurred by the acquirer on developing the target
company, the synergy would be negative (Manuela Jr. et al., 2016, p-138).
 If there are low financing costs and the capital structure then Etihad will acquire the
business by paying a high amount of premium to the MAS.
 According to Ogada et al., 2016, p-51), operating synergy arises when the combine’s
value of the new firm is higher than the value of separate firms and which led to
achieving a high rate of growth and also the operating income increases.
Benefits arise from operating synergies are:
 Due to lower competition and increases in the market share, Etihad will enjoy higher
margin as well as a greater margin of pricing power (Uhlenbruck et al., 2017, p-40)
 Product lines and marketing skills will improve after the combination
 Market will be expanding and the growth level will also get increased.
 The economies of scale will be highly network-based.