Don’t invest in mergers of Continental and United (or any others)

The big news is the current merger of United [stckqut]uaua[/stckqut] and Continental [stckqut]cal[/stckqut] (yes, I know that there is plenty of other big news such as nuclear non-proliferation, Republican and Democrat politically maneuvering, and the current American Idol contest but I don't talk about those things on this site).

Those that have listened to my advice in the past know that I do not believe in the wondrous predictions of mergers. Have you ever heard the leaders of the companies involved in mergers declaring,"This is really bad for our company and our shareholders but we are going to do it anyway because it is more fun than just running our own company profitably." I can't find anyone saying it but they probably should as it is likely more close to the truth than anything they said in their various public releases.

For the most part, mergers are really hard to do well. They are even harder to do when the purchased company is bigger than 10% of the purchasing entity. In that case, it really isn't a merger - it is an acquisition. Acquisitions can work (Oracle [stckqut]orcl[/stckqut] has been doing pretty well at those lately) but the history of short-term success of mergers has not been very good. A Confident Investor would be wise to keep money in other investments for a year or two after a merger until the surviving entity learns how to deal with its new combined problems.

In the case of United Airlines and Continental Airlines, I am completely confused. How can the combination of two Poor companies result in a company that might be at least Fair? I doubt that it will happen any time soon! I have better places to invest my money and most of them are the Good companies that sit in my Watch List to the right of this site. If I was foolish enough to own stock in either of these companies, I would certainly vote NO on the merger.

A few selected quotes from Portfolio.com:

Here's one talking to Reuters: The merger would be good, oft-quoted Bob Mann explained, because "consolidation provides pricing power and the opportunity for pricing power for the entire industry." Various iterations of the same themes—fewer airlines meant fewer airline seats, thus more ability for the remaining carriers to charge higher fares—appeared in stories moved by the Associated Press, Dow Jones, Bloomberg, and all the other disseminators of the same old same old.The problem is that the conventional wisdom is wrong—and it has been spectacularly wrong for a generation.

*****

As a CNN business reporter claimed in her early-morning coverage of the merger, the airline industry has lost an average of $16 million a day since deregulation began.

*****

The five remaining legacy lines—Delta, American, United, Continental, and US Airways—control just 70 percent of the market today. Since they represent the DNA of virtually every carrier that existed in 1978, that means they've lost about a point of market share each year since. None have been cumulatively profitable since 1978, and all of them except American Airlines have been bankrupt, several more than once.

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