How did this deal happen?
The seeds were planted quite some time ago—in 2006 or 2007—when Glenn [Tilton, United (UAUA) chief executive officer], who has been vocal about consolidation, initiated conversations with a handful of airline CEOs. It was clear then that United and Continental (CAL) were extremely complementary...and you could easily envision a merger of equals. We negotiated the entire transaction for United, and then on the eve of announcement, [Continental CEO] Larry Kellner and his board pulled out. In 2009, we entered into detailed discussions with US Airways (LCC), and word of that leaked out several weeks ago. Jeff Smisek, who is Kellner's successor, then called Glenn and said, "Would you be amenable to sitting down again?" and they did. The United board was quite worried that Continental would [back out a second time]. But the deal executed last Sunday night was virtually the same transaction we negotiated two years ago.
So one deal blows up in 2008 because Continental got cold feet. Then you're off to make another one with US Airways. At the same time, are you looking for other partners?
Yes, because when you're working on mergers of this magnitude you have to have a Plan B. It's not that we didn't want to do the US Air deal; we were highly engaged, and we were going to do it. And had everything stayed confidential and so on, we probably would have done it.
Why is this merger good for the employees of the two companies? Why is it good for airline customers? Why is big better?
Big by itself isn't better, but big in this case will be better, assuming the management teams execute. The synergies that this combined company will be able to achieve, in both revenue and costs, will give it much better access to credit and equity markets. Airlines are constantly on the ropes—and in some cases in and out of bankruptcy—because their balance sheets are far too leveraged for their business. You've heard Jamie Dimon talk about a "fortress balance sheet." That's what an airline needs. I mean, your cost of fuel is out of your control; weather's out of your control; you've got these big, expensive machines that you have to constantly buy and replace. And unfortunately in our world, there are terrorist threats. It's a very, very difficult business to run because of the volatility. So you need a big, strong, high-investment-grade balance sheet, and that's what this company's going to get. Why is it going to be good for employees and customers? Because this new company will be able to ride through the toughest storms.
Do you see antitrust implications on the horizon for this deal?
You know a lot of these deals have not been tested under this new Administration. On the one hand, you might say, "Well, jeez, Delta (DAL)-Northwest passed through." But it's not clear what this Administration is going to say. Right now, the NBC-Comcast transaction is being reviewed. And then, of course, the Continental-United deal will be reviewed. Everyone is hopeful that these transactions will get passed. But you don't know until you know.
You also worked on the GE (GE)/NBC-Comcast (CMCSA) deal. Is this the start of a new M&A wave? What's going on?
It's a handful of things. No. 1, CEO confidence is now becoming restored. Most CEOs feel that we're turning a corner in the economy. No. 2, the credit markets and the equity markets are wide open. Technically very strong, very sound, plenty of capital. No. 3, the cost of capital is still extremely low. You know, we sold $4 billion worth of bonds for the new NBC last week, and the average cost was 5.11 percent per annum.
And companies are sitting on cash.
Exactly right. That was going to be my last point. Right now in the U.S., there's a trillion dollars on corporate balance sheets, which if you adjust for time is the most that's been on balance sheets since 1952. That money is earning almost zero. And I think one of the features of this wave of M&A activity will be very large transactions. That's my instinct. We'll see if that's true. But NBC was a $30 billion transaction.
We'll see deals exceeding that?
I think so. I really do. All the traditional signs are in place for a very large merger boom.
In what sectors?
One sector where there hasn't been a lot of M&A but there is so much cash and new opportunities is tech. I wouldn't be surprised to see transactions anywhere from $5 billion all the way up to $40 billion in that space.
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