Finance

Most of the companies operating at their growth or maturity business cycles aim towards expanding the company. Expansion of a businesss operations can be carried out by a strategy based on internal organic growth (investments in new assets, product lines etc. by a companys cash reserve) or it can be achieved through buying other companies in the market, thus acquiring, ready- made assets and operations, The latter method is riskier but is widely practiced by corporate organizations.

Southwest Airlines are the largest low cost American airlines in the world with its operations spanning over a whopping 69 destinations in 35 states (Southwest Airlines Fact Sheet, 2010). Considering the large scale of the companys operations, it is uncertain whether a merger with another company would add value to Southwest Airlines, however, when deciding upon a company to merge with, the following factors should be considered

The target company should be trading at a price that is lower than its expected value at the time of acquisition. This implies that the company is undervalued and its price doesnt fully reflect the value of the company.

If the target company is in the same business, there should be opportunities to exploit economies of scale by merging with the company.

Other factors include tax savings, a capital structure that increases the debt capacity of the combined business, access to key technology, cash resources and control of the company.

One of the most viable options for Southwest Airlines to merge with would be JetBlue Airways as JetBlue Airways is a profitable company with a futuristic approach. Initially starting out by mimicking Southwest Airlines approach of operating at a low-cost model, it branched out its strategy to incorporate intangible assets, such as customer satisfaction through differentiation by offering complimentary on-flight services, such as Wi-Fi connectivity, television, radio etc. The Airline flies to 60 destinations in 11 countries, implying that there cost advantages to be gained through a merger. At the same time, Southwest Airlines will benefit from the growing prospects of JetBlue Airways and there will be enhanced revenue opportunities to exploit arising from new products and marketing strategies. The combined entity will also lean towards informational efficiency, making the cost of obtaining new information significantly lower. Other likely benefits appear to be increased market power for both companies and a substantial increase in geographical outreach (JetBlue Airways, 2010).

The takeover can be financed through cash from retained earnings, loan proceeds from a bank, issue of a band or issue of share or preferably a combination of two or more sources. Another option includes the issuing of convertible loan stock. The most feasible way to finance the takeover of JetBlue Airways would be through a combination of cash from retained earnings and a share-exchange consideration. Depending on the cash reserves and the current liquidity needs of Southwest Airlines, the cash can form a part of the total consideration.

The main benefits of using cash from retained earnings is that the cost of obtaining the funds is very low and there is no administrative lag in complying with the liquidity needs, as in bank loans. However, if the consideration exceeds the cash reserve of a company by a huge amount, a cash offer is often not recommended. In this case, a share-exchange consideration would be considered most appropriate. However, the following factors should be considered

Dilution of EPS  EPS will fall as earnings attributable to existing shareholders would decrease.
Using loan stock would incur tax advantages to the firm, whereas issue of shares will not
The control of the company can change hands in the wake of a large issue of shares
Financing a takeover through a stock issue means that huge amounts of capital can be raised without incurring additional interest costs, as in the case of a loan. If a fixed number of share is decided as a method of compensation, all the price risk is borne by the target company, as any fluctuations in the price would directly impact upon the final consideration being received by JetBlue Airways.

Hawaiian Airlines is also one of the options for merger with Southwest Airlines, considering its large scale operations and profitability in the business. Taking over Hawaiian Airlines would also lead to increased market power and enhanced revenue opportunities for Southwest Airlines. Another company to be considered for a takeover bid is AirTran Airways as it is the worlds largest Boeing 717-200 operator and will surely expand the scope of operations of Southwest Airlines when merged leading to economies of scale and scope (AirTran Airways -  Corporate Information, 2010).

However, JetBlue Airways is still preferable as a target company because of its forward-looking approach and inclination towards customer satisfaction and environmental friendly approach that will lend credibility and increase the reputational capital of the combined business entity apart from giving cost and revenue advantages.