Takeovers and Mergers - Cost Synergies in Action at BMI

This is desperately bad news for the employees and local community involved, but it serves as a good example for students to understand the nature of cost synergies in a takeover or merger. This local newspaper report covers the announcement of hundreds of job losses at the headquarters of BMI, which has recently been acquired by British Airways from Lufthansa.

For AQA students preparing for their BUSS4 exam in June 2012, the BA / BMI takeover is a superb source of good evidence for their Section A essay. The deal is controversial. It has attracted strong opposition from Virgin Atlantic which has lodged an appeal to the European Commission on competition grounds.

Amongst the points that students might take from the news article are:

1,200 redundancies at BMI as a direct result of the takeover

Most of the job losses at BMI’s HQ - elimination of duplicated services/roles is a key source of cost synergies. You don’t need two HQs if the two businesses are to be fully integrated

The need (and legal requirement) for the acquirer to consult with certain stakeholder groups (with trade unions and employees) as part of the redundancy process

The adverse effect on the local community

BMI’s heavy losses (£3m per week) - how many of these job losses might have happened anyway under Lufthansa if it had decided to continue operating BMI? Might the alternative to a sale have been closure?

The stated rationale for the cost synergies from Keith Williams, BA chief executive:

“BMI is heavily loss-making and is not a viable business as it stands today. Our proposals would secure around 1,500 jobs that would otherwise have been lost.”

“As we look to restructure the business and restore profitability, job losses are deeply regrettable but inevitable.”