Jet, set, merge

Jet Airways' acquisition of Air Sahara for Rs 1,450 crore has thrown up several issues, questioning the soundness of the deal. These include whether Jet overpaid for the acquisition and if the lag of over a year in closing the deal has cost the acquirer dear. The deal's strategic logic, the scale of the integration challenges and the apparent contradiction between the two parties over the enterprise value of Air Sahara also raised questions over the merit of the deal. Often, when so many doubts crop up, a buyer baulks. So why did Jet go ahead?

To start with, despite the many difficulties and high-pitched acrimony during the negotiations, there was a continued desire by both parties to cut a deal. For Jet, a key attraction was gaining market share and improving the leadership position at a time when both were under fierce attack from the new players. With this, in one stroke, Jet has consolidated its market position, putting it way ahead of Air Deccan and the third player, Indian Airlines. The access to Air Sahara's code share arrangements and international routes only makes the deal more attractive. Add to this the fact that the government is not giving anybody fresh permission to fly on the lucrative Mumbai-Delhi sector and here the Sahara licences will go to Jet on a platter. What has also given Jet some respite from the incessant questions of analysts is the thumbs up from the stock market.

For Sahara, an early closure of the deal made eminent sense as the Roy family had clearly lost interest in continuing with the airline business. Finally, the deal has reportedly given the Roy family continued control of the Air Sahara brand name, something that it was keen to retain, so that there is minimal confusion in the minds of consumers and the public at large about the overall Sahara brand equity and ownership. In short, there were many intangible factors that made this deal attractive to both players.

But beyond the obvious benefits, how the emerging challenges are tackled will prove whether the Jet-Sahara deal will stand the test of time. The immediate task will be to revive the enterprise value, corporate confidence and employee morale of the acquired airline, which had dipped in the last one year when negotiations between the two companies had broken down. The second challenge will be in getting the new positioning and brand strategy right. Right now, both airlines run as full-cost airlines. Early reports suggest that in the months to come, while Jet Airways will be positioned as a premium, full-cost airline, the acquired airline will have the "value-airline" tag, placed somewhere between a low-cost carrier and a premium airline.

One way to make this strategy work will be to ensure that the demarcation is crystal-clear, so that one does not cannibalise the other. The transition should be quick and seamless so that existing customers from both airlines are not lost to competition but remain within the group. Finally, cultural integration issues have sounded the death-knell of many mergers and acquisitions and how Jet manages these will be crucial to its future success. So while the ink dries on the new deal, successfully management of these issues will determine whether Jet has acquired a winner or is left holding a lemon.