The Air France - KLM Merger Story

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After evaluating the benefits, Air France's management decided to immediately go ahead with the merger talks with KLM. In its first public announcement of the proposed merger, Spinetta said there were only three obstacles and that every other issue was sorted out. He said, "There are only three things that could make us fall apart.

The first would, of course, be for KLM shareholders not to subscribe to the offering. The second and third would be for the European and American authorities not to give us the green light." After getting approval from the authorities, Air France announced the public exchange offer for all equity shares of KLM (Refer Exhibit IV for French public offer regulations). The success of the public offer was important. Air France not only had to secure majority equity in KLM, but had to acquire 95% of the shares so that it could get KLM shares de-listed from the Euronext Amsterdam stock exchange. KLM shareholders were offered 11 shares of Air France and 10 Air France warrants for every set of 10 ordinary shares held by them...

Notwithstanding the synergies identified by Air France and KLM, a few analysts raised doubts about the long term success of the merger. They pointed out several factors that could derail the merger, citing cultural differences as the major one.

Experts said the French corporate culture was more prone towards authoritarianism and corporates had a very strong hierarchy. This was not the case in Dutch companies. The Dutch considered the French as lazy with a showy behavior, especially in the way they communicated. On the other hand, the French felt the Dutch were too rigid on every single term and condition and were tough to negotiate with. Apart from culture, there were major differences in terms of organizational structure, management style and mentality. Eric Blanc, who headed the Franco-Dutch Chamber of Commerce in Amsterdam warned, "The Dutch and the French psyche simply do not work in exactly the same way." However, to streamline the merger process of two culturally distinct companies, KLM hired an intercultural consultant...

After the success of the public offer in May 2004, Spinetta started efforts to achieve the identified synergies. Since both companies had few overlapping destinations, it was possible for them to offer more destinations and flights (Refer Exhibit VI for the combined network of Air France-KLM). For destinations served by both airlines, customers were offered services at a lower price. For example, a customer who wanted to go to Hong Kong from Madrid and return to Madrid, could travel with KLM via Amsterdam-Schiphol and return with Air France via Paris-CDG, or vice versa...

Exhibit I: Organizational Structure of Air France-Klm
Exhibit II: Statistics of Passenger Load for Top Ten Carriers (2001)
Exhibit III: The Sky Team Network
Exhibit IV: French Public Tender Offer Regulations
Exhibit V: Air France Stock Price Chart
Exhibit VI: Air France - KLM Combined Network
Exhibit VII: Air France - Consolidated Statements Of Income

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