ICYMI, news broke earlier this week that Alaska Airlines would be acquiring Virgin Americas to the tune of a cool $2.6 BILLION.
The $2.6BN came in the form of a $57 bid-offer on all of Virgin’s outstanding shares. The $57 stock price represents a 47% premium over what Virgin’s stock was currently trading at. FYI: Outstanding shares are all of a company’s stock that’s currently owned by shareholders on the stock market. FYI 2: a 47% premium basically means that if Virgin’s current stock price is $100, Alaska is paying $147 for every single one of those $100 shares. A company will pay a premium in order to convince another company to be acquired OR in order to top an existing bid by another rival. Speaking of which……
News of the acquisition came as pretty surprising news. Alaska, a relatively regional airline that is transforming into a full-scale national airline, beat out JetBlue. JetBlue, a much bigger airline than Alaska, had been in talks to purchase Virgin Americas for over half a year. Alaska basically swooped-in at the end of 2015 and highjacked the bidding process. It’s one thing to lose a bidding war to a smaller player in your industry. It’s wholllleeee other story if you lose a bidding war to a company that you were rumored to be trying to acquire yourself. That’s right: many people in the industry believed that JetBlue had been targeting Alaska during 2015.
Word. Now that we’ve got the background shit out of the way, here’s 2 reasons why this acquisition was pretty fascinating.
#1: This is a great strategic move for Alaska Air. The acquisition will surely create a significant number of synergies. But synergies aside, the purchase of Virgin makes a ton of sense in terms of what each company focuses on. As you can see in chart below, both Alaska and Virgin are highly-rated among travelers. Both airlines have a specific and systematic approach to being extremely accommodating to its customers. From minimal switching costs to in-air accommodations, both airlines make a distinct effort to make sure “the customer is always right”. A merger of these 2 cultures absolutely makes sense and will make the transition into 1 larger company smooth and efficient.
#2: The acquisition of Virgin Americas could be interpreted as not only a growth move, but also a DEFENSIVE move. As we already mentioned, Alaska has been a potential target of many major airlines over the past couple of years. Alaska Air has been reluctant to sell itself and potentially lose its identity. By growing in size through an acquisition, Alaska is making it less likely that a bigger player will have enough capital on hand to make a takeover. Alaska snagged another mid-size player that has the same priorities it has and will now operate on a much larger scale.
And you know it boy.