Merging of United Airlines

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  • Topic: United Airlines, Stock, Continental Airlines
  • Pages : 19 (6678 words )
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  • Published : October 9, 2011
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FINA1003C

Merging of United Airlines and Continental Airlines

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Cho, In Hye (Joanne) [2010524274] Cho, Mee Ji [2010524339] Chung, In Kwon [2010562173] Ferraro, Emma [2010521088] Ghale, Pema [2010500967]

Executive summary
The United Continental Holdings Inc. (NYSE: UAL) became fully established on October 1st, 2010. Generally, the main rule concerning the acquisition of one firm by another is if the resulting collaboration generates positive net present value for shareholders; evidently, this is not guaranteed due to several complex procedures in the process of acquisition. The ContinentalUnited Merger was carried out through horizontal acquisition, and it’s progression over the 3year project life is what we have evaluated. In order to analyze how stock prices had been affected, the 5-year history of UAL was initially examined, and from this we derived how the merger affected current stockholders’ shares. Evidently, according to the CAPM extracted from the market risk, the returns are expected not to be of great value. The net present value was then analyzed by initially calculating the expected return, which provided us with a negative net present value. However, due to limitations of this particular approach, we assume that the project will yield higher returns over the 3-years. Therefore, other than the statistical approach, the regression model was used to account for the relationship between time and stock prices; which provided us with a positive net present value with the assumption that expected rate of return is constant throughout the 3 years. UAL’s cost of equity was extracted through calculations for the WACC, and the Du Point Identity allowed us to further investigate the company’s negative equity and ROE; putting emphasis on the significance of using accounting data for accurate predictions, rather than financial data. Finally, the reasons of the merger concerning expectations for incremental cash flows, as well as its resulting competitive advantages and market power due to cost reductions and shared expertise are elaborated. Objections and problems caused by the SEC, as well as opposing shareholders are also evaluated, and we can thus derive the extent to which they can remain competitive in the aviation industry. We therefore justified that, considering their expansion and strategically laid-out routes, the company is seemingly a promising long-term investment.

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Table of Contents
Introduction ................................................................................................................................................... 4 Stocks, dividends policy and risk analysis .................................................................................................... 4 Stock History ............................................................................................................................................ 4 United Airlines (UAL) 5-Year Trend ....................................................................................................... 4 Continental Airlines (CAL) 5-Year Trend ................................................................................................ 5 United Continental Holdings 1-Year Trend .............................................................................................. 5 How does the merger affect current stockholder’s shares? ....................................................................... 6 Risk ........................................................................................................................................................... 6 Capital structure and investment decision evaluation ................................................................................... 7 Capital Structure...
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