The Persistence of Organizational Knowledge across Merger and

Acquisition Events: An Examination of the U.S. Airline Industry

Peter M. MadsenBrigham Young University

INFORMS, San Diego, CA, 10-13-2009

Motivating Question

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• What effect do mergers and acquisitions have on the stock of experientially-derived knowledge possessed by involved organizations?

M&A and Organizational Knowledge

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• Prior work:– Experientially-derived knowledge enhances organizational

effectiveness (learning curve)– M&A events disrupt organizational functioning

• Barkema & Schijven 2008; Walsh 1988; Weber & Camerer 2003

– Effect of M&A on knowledge?• Knowledge acquisition motivation (Capron & Mitchell 1998;

Higgins & Rodriguez 2006; Hoskisson & Busenitz 2002; )• Knowledge complementarity enhances post-event performance

(Hitt et al. 2001; King et al. 2008)

Hypotheses

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• Direct performance effect– H1: Ongoing M&A events reduce organizational performance – H2: Recently completed M&A events reduce organizational

performance

• Knowledge effect– H3: Ongoing M&A events enhance the value of previously developed

organizational knowledge (positively moderate the relationship between knowledge stocks and performance)

– H4: Recently completed M&A events reduce the value of previously developed organizational knowledge (negatively moderate the relationship between knowledge stocks and performance)

Sample

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• All US airlines accounting for at least 1% of domestic passenger air travel 1990-2009

• AirTran Airways Corporation• Alaska Airlines Inc.• Aloha Airlines• America West Airlines Inc.• American Airlines Inc.• American Eagle Airlines Inc.• ATA Airlines d/b/a ATA• Atlantic Southeast Airlines• Comair Inc.• Continental Air Lines Inc.• Delta Air Lines Inc.• Expressjet Airlines Inc.• Frontier Airlines Inc.• Hawaiian Airlines Inc.• Independence Air• JetBlue Airways• Mesa Airlines Inc.• Northwest Airlines Inc.• Pinnacle Airlines Inc.• Skywest Airlines Inc.• Southwest Airlines Co.• Trans World Airways LLC• United Air Lines Inc.• US Airways Inc.

Sample

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• 3 M&A Events (operational only)– American acquisition of Trans World

– America West, US Airways Merger

– Delta, Northwest Merger

Method

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• Unit of analysis: airline-flight-segment-month• OLS regression• Traditional learning curve model: Y = a*Xb

• Dependent variables– Fraction of flights: delayed (15, 30 & 60 minutes; diverted;

cancelled)• Independent variables

– M&A ongoing (operational integration not completed)– M&A recently completed (within 3 yr)– Flight segment experience (total # of flights between a given city

pair over previous 5 years)– Aircraft experience (total # of flights over previous 5 years)

• Controls

Results: Controls15 min. Delay

30 min. Delay

60 min. Delay Diverted Cancelled

Control Variables

Flight Segment Distance (1000's miles) -0.0006 -0.0085 *** -0.0103 *** -0.0004 -0.0082 ***

(0.0010) (0.0006) (0.0004) (0.0001) (0.0002)

Fraction Delayed Origin 1.3797*** 1.1689*** 0.8238*** 0.0113*** 0.2921***

(0.0252) (0.0149) (0.0088) (0.0024) (0.0042)

Fraction Delayed Destination 1.0311 *** 1.0101*** 0.8571*** 0.3493*** 0.1726***

(0.0204) (0.0121) (0.0071) (0.0019) (0.0034)

Assets (Logged) -0.0066 *** -0.0034 *** -0.0008 *** 0.0022*** -0.0010 ***

(0.0007) (0.0004) (0.0002) (0.0001) (0.0001)

ROA (t-1) -0.0106 -0.0113 -0.0148 * 0.0262*** -0.0476 ***

-(0.0106) (0.0108) (0.0064) (0.0017) (0.0030)

Current Ratio (t-1) -0.0009 *** 0.0027*** 0.0058*** 0.0060*** 0.0008***

(0.0009) (0.0006) (0.0003) (0.0001) (0.0002)

Debt-to-Equity Ratio (t-1) 0.0000 0.0000 0.0000 0.0000 0.0000***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Flight Expenses/Operating Rev. (t-1) -0.0699 *** -0.0459 *** -0.0208 *** 0.0006 -0.0081 ***

(0.0081) (0.0048) (0.0028) (0.0008) (0.0014)

Chapter 11 Bankruptcy Protection -0.0095 *** -0.0119 *** -0.0112 *** -0.0042 *** -0.0040 ***

(0.0027) (0.0016) (0.0009) (0.0002) (0.0004)

Fixed Month Effects included included included included included

Fixed Year Effects included included included included included

Results: IVs15 min. Delay

30 min. Delay

60 min. Delay Diverted Cancelled

Independent Variables

Flight Segment Experience (Logged) -0.0148 *** -0.0148 *** -0.0083 *** -0.0056 *** -0.0001 *

(0.0003) (0.0002) (0.0001) (0.0000) (0.0000)

Aircraft Experience (Logged) -0.0083 *** -0.0050 *** -0.0034 *** 0.0006*** -0.0018 ***

(0.0005) (0.0003) (0.0002) (0.0001) (0.0001)

Current M&A Reorganization 0.1875*** 0.0948*** 0.0413*** 0.0012*** 0.0075***

(0.0039) (0.0023) (0.0014) (0.0004) (0.0007)

Completed M&A within 3 yrs. -0.0171 *** -0.0098 *** -0.0047 *** -0.0027 *** -0.0011

(0.0036) (0.0021) (0.0013) (0.0003) (0.0006)

Interactions

Flight Segment Exp. x Current M&A -0.2874 *** -0.1586 *** -0.0762 *** 0.0036*** -0.0157 ***

(0.0015) (0.0009) (0.0005) (0.0001) (0.0003)

Flight Segment Exp. x Completed M&A 0.0049** 0.0058*** 0.0058*** 0.0052*** 0.0000

(0.0016) (0.0010) (0.0006) (0.0002) (0.0003)

Aircraft Exp. x Current M&A -0.0684 *** -0.0396 *** -0.0186 *** -0.0024 *** -0.0186 ***

(0.0034) (0.0020) (0.0012) (0.0003) (0.0012)

Aircraft Exp. x Completed M&A 0.0070* 0.0071*** 0.0060*** -0.0018 *** 0.0021***

(0.0028) (0.0017) (0.0010) (0.0003) (0.0005)

Conclusion

INFORMS, San Diego, CA, 10-13-2009 Peter M. Madsen

• Ongoing M&As disrupt organizational functioning, but heighten attention to previously-obtained knowledge

• The value of previously-obtained knowledge decreases following the completion of M&A events