The Swissair Disaster

Announcement Effects of a Failed Acquisition Strategy

Mark Friesen

Institute for Systemic Management and Public Governance

Research Center for Tourism and Transport

University of St. Gallen

*Corresponding author

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Abstract

In this study we analyze the wealth effects of M&A transactions testing a sample of 52 acqui-

sitions by the Swiss flag carrier Swissair between 1995 and 2001. During this period, Swissair

followed an aggressive acquisition strategy that led the former leading European airline final-

ly into bankruptcy. We therefore measure the stock price reactions around the announcement

days when Swissair publicly declared its interest to acquire. Looking at the overall an-

nouncement effects, we find small positive abnormal returns for the event days that turn nega-

tive when the event windows become larger. This holds true for acquisitions of airlines, air-

line-related businesses as well as for unrelated businesses, and stands in clear contrast to the

results of other studies that analyze M&A transactions in the US airline industry. Therefore,

we conclude that the stock market did obviously realize the shortcomings of Swissair’s acqui-

sition strategy a lot earlier than its own management.

In this study we present empirical evidence for the value creation of cross-border merger ac-

tivities in Switzerland. We regard the Swiss market for corporate control to be unique for at

least three reasons: First, the Swiss corporate governance system guarantees high investor

protection with regards to international comparisons (Hofstetter, 2002). Stronger shareholder

protection reduces the agency cost of managerial discretion over the use of internal funds.

Moreover, Cocca and Volkart (2002) report in a seminal study on the Swiss financial markets

that direct equity ownership in Switzerland is among the highest in the world. Therefore, we

do not expect the valuation of M&A transactions to be distorted by large “corporate govern-

ance discounts”.

Second, although limited in geographic and demographic scope, Switzerland is one of the

major financial centers in the world, hosting two of the ten largest banks and financial institu-

tions while managing about one third of the number of private assets globally held (Dimson

et al. 2001). We expect the market participants in Switzerland to have gained profound

knowledge in the field of corporate valuation.

Third, the Swiss economy traditionally displays a high degree of international exposure, es-

pecially towards the rest of Europe. As the deregulation and promotion of national markets

towards a single European market is one of the key goals set up in the Lisbon summit as a

precondition for the desired world leadership by the European Union, Switzerland, although

it is likely to remain legally and economically separated in the near future, seeks to strengthen

its political and economic relationship with the European Union. A number of trade barriers

have been dismantled by the European Union as well as by many non-European members of

the WTO. This has resulted in increasing cross-border M&A transactions, which display the

highest share of overall merger activities among the European countries (Karkowski et al.

2001). This high international exposure of the Swiss economy seems promising to generate

new insights into the field of value effects of cross-border mergers looking at a sample of

Swiss cross-border mergers from the 1990s.

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In the literature, the case of cross-border mergers has gained rising attention as the proportion

of international M&A transactions to total merger activity has risen significantly during the

last twenty years. The question raised by this phenomenon is whether cross-border M&A

transactions have significantly different value effects. To a large extent, the international ori-

entation of corporations is based on the belief that gains can accrue through scale and scope

economies, cost reduction, increased market power and reduced earnings volatility (e.g. Seth

et al. 2002). Whether or not cross-border M&A transactions actually meet the expected per-

formance gains has been the focus of some previous studies.

While there is strong support for the hypothesis that target firms experience significantly

higher wealth gains in comparison to pure domestic acquisitions when they are acquired by

foreign bidders (Danbolt, 1999), the effects on bidder values that evolve from international

acquisitions remain somewhat unclear. However, most empirical research available on cross-

border mergers focuses on the US. Empirical evidence with regard to European M&A trans-

actions enabling to test the US findings for a different institutional environment is still lack-

ing. By testing the merger activities in the Swiss economy we present evidence from a Euro-

pean country´s perspective.

While there are a few studies about the leading European countries such as Germany, the UK

or Italy, to the best of our knowledge, there is no recent empirical study that analyzes the

Swiss M&A market. Looking at one of the most internationally-oriented European economies

with highly-developed capital markets, there is good reason to expect Swiss firms to possess

extraordinary experience in international capital markets. We hypothesize that Swiss corpora-

tions which buy or merge more intensively abroad than their European peers, might have

developed a more profound expertise in pursuing international M&A transactions over time.

The Swiss capital market participants might also evaluate the potential additional gains re-

sulting from merger activities more competently than other countries. Summing up, this

should result in more precise expectations about the value effects.

The paper proceeds as follows. Section 2 briefly illustrates the history of Swissair and the

various M&A strategies it applied throughout the 1990s. Section 3 reviews the extensive re-

search on mergers and acquisitions with a special focus on the wealth effects induced by

cross-border transactions. In section 4 we describe our data sample as well as the applied

methodology. Section 5 discusses and interprets the empirical findings of our analyses. Sec-

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carrier built up a network of cooperations in the fields of maintenance, purchasing and reser-

vation systems. Upon changing its name into SAirGroup Holding AG in 1997, Philippe

Bruggisser was announced CEO of the new holding entity. Under his reign, Swissair devel-

oped an aggressive acquisition strategy in order to become the fourth-largest air carrier in

Europe.

Based on the assumption of a severe consolidation of the European airline market as observed

in the U.S. twenty years earlier, Swissair tried to compete against the other three airline sys-

tems that were led by British Airways, Deutsche Lufthansa and Air France by forming airline

alliances covered by minor shareholdings in its partner airlines. In achieving a tight network

on European and the Atlantic routes, Swissair tried to overcome the strategic drawbacks of

the refusal of joining the European Economic Area by the Swiss population in late 1992.

Moreover, the relatively small Swiss home market with only 7.2 million citizens, though with

the highest per capita income in Europe, put Swissair under further pressure to act. Due to the

poor performance in productivity and unit costs, the Swiss flag carrier felt the urgent need to

alter its strategic position and create new traffic to feed its hub Zurich and its medium- and

Besides these company-specific drivers of Swissair’s strategy, the macroeconomic environ-

ment offered interesting possibilities for the Swiss national carrier to expand its scope. The

deregulation in Europe kicked off in 1987 with the passing of three packages determining the

liberalization process in the European airline market until 1993. Although finally liberalized,

the likely loss of slots and airline concessions prevented the European airline M&A market

from being fully efficient. Therefore, only participations of up to 49.9% were considered. The

high competition for American destinations between European carriers as well as a trend of

privatizations of major flag carriers offered Swissair an opportunity to overcome its strategic

disadvantages.

Forced by the emergence of strategic alliances in Europe (Star Alliance around Deutsche Luf-

thansa, Oneworld around British Airways, Skyteam around Air France and Wings around

KLM), Swissair thus established the Global Excellence Alliance with its partners Delta Air

Lines and Singapore Airlines, the European Quality Alliances with Austrian Airlines, SAS

and Finnair as well as the Atlantic Excellence Alliance with Austrian Airlines, Sabena and

Delta Air Lines. Thus, the Swiss flag carrier established the tightest network of all European

carriers with 49 alliances founded between 1989 and 1999. A milestone in the consolidation

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consulting firm proposed acquisitions of the flag carriers in Belgium, Austria, Hungary,

Finland, Ireland and expressly not in Germany, France, UK or Italy. After already having

bought 69% of the Swiss competitor Crossair and 49% of Sabena, the Belgium carrier, Swis-

sair performed ten airline acquisitions under the “Hunter” strategy with less than 50% in each

individual shareholding. In 1998, Air Littoral, Air Europe, Volare Group and LTU were ac-

quired. In the following year Swissair bought participations in AOM Minerve, LOT, South

African Airways followed by the acquisitions of TAP and Air Liberté in the year 2000. All

airline participations were combined in the so-called Qualiflyer or European Leisure Group

with Swissair as the leading airline in these alliances.

It becomes obvious that the implementation of the “Hunter” strategy was not in accordance

with its original proposal. Except for the acquisition of the Polish flag carrier LOT, all other

acquisitions performed by Swissair in the years 1998 to 2000 were not consistent with the

“Hunter” strategy. Especially the acquisition of 49.9% of the German leisure carrier LTU for

SFR1.bn was mentioned in an Ernst & Young special audit report as being the gravest viola-

tion of the original strategy. For all airline acquisitions, Swissair almost paid SFR6.0bn. The

report further states that the goals of reducing Swissair’s cost structure by enhancing its criti-

cal mass could have also been achieved without major shareholdings because the Swiss flag

carrier controlled its participations to a high degree in scale and scope.

Instead of lowering the risk by diversification, Swissair in fact increased its risk exposure.

Except for LOT and South African Airlines, all other airline participations incurred losses in

the year of their acquisition and had no dominant position in their home market. Hence, a

dilution of Swissair’s former highly-regarded brand was only one among other setbacks of

the failure of the idea of becoming a fourth power in the European airline market. The fact

that nearly all acquisitions were financed with a high leverage, put/call-options were issued

for further shares as well as guarantees and warranties to cover future losses were agreed

upon, highlight above all the inability of Swissair’s management. Besides the CEO Philippe

Bruggisser and the lack of qualified management capacity, the airline-inexperienced board of

directors as the highest control body is believed to be responsible for the Swissair disaster.

III. Literature Review

Corporate decisions such as acquisitions and divestitures play an important role in determin-

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Second, the returns to the acquiring firms´ shareholders tend to be negative or close to zero.

Andrade et al. (2001) examine about 4,300 US transactions from 1973 to 2001 with a three-

day event window following the transaction announcement and report negative abnormal

returns of –0.7%. These results have been underlined by more recent studies such as

Hackbarth and Morellec (2008) who find negative and significant bidder cumulative abnor-

mal returns (CAR) of -0.5% for 1,086 takeovers between 1985 and 2002 as well as Betton et

al. (2007) with significant abnormal returns of -1.2% for 10,806 mergers from 1973 to 2002.

Since many of these studies focus on the US markets, there is a need for further evidence on

the wealth effects for European acquirers that help to strengthen the robustness of the empiri-

cal studies published so far. In their investigation of the Swiss market for corporate control

and particularly the announcement effects on acquirer firms, Lowinski, Schiereck, and

Thomas (2004) find that bidder shareholders earn significant positive abnormal returns for a

short time period around a merger announcement date. However, these positive CAR disap-

pear when the observation period is extended. For the event window [-20;+20], they find a

negative CAR of –0.29%. As a possible explanation Lowinski et al. (2004) identify that these

abnormal returns for long event periods are mainly influenced by professional investors

whereas private investors primarily account for stock price reactions around the announce-

ment date.

In addition, Lowinski et al. (2004) find out that for observation periods of at least ten days

prior to and after the merger announcement, national transactions outperform cross-border

transactions, and this yields positive CAR. For shorter intervals, the relationship is reversed.

On the announcement day they report, consistent with previous research, positive CAR of

0.69% for cross-border mergers and a negative CAR of –0.16% for national transactions.

Besides a more theoretical study of Swiss mergers by Buehler et al. (2006), this is, to the best

of our knowledge, the only comprehensive study of M&A activity in Switzerland conducted

so far. There are some idiosyncratic motivations for an analysis of the Swiss capital markets.

While the lion’s share of merger activity in the EU countries remains domestic, this finding

does not hold for Switzerland. During the last decade, the share of international merger ac-

tivities has increased dramatically. We observe a majority of Swiss successful bids taking

place in an international environment. Within the international merger activities, firms from

the European countries are the counterparties for Swiss cross-border transactions in most cas-

es. In fact, Switzerland ranks second place (behind the US) as the most important buyer in the

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there is strong support for the hypothesis that target firms experience significantly higher

wealth gains in comparison to pure domestic acquisitions when they are acquired by foreign

bidders (Danbolt, 1999), the effects on the bidder returns that result from international mer-

gers remain somewhat unclear. Eckbo and Thorburn (2000) study a sample of 1,846 acquisi-

tions of Canadian corporations by domestic and US-based bidding firms. They detect positive

abnormal returns for domestic bidders within the announcement period, but no abnormal re-

turns for US-based acquirers.

Moeller and Schlingemann (2005) find that acquirers from a sample of 4,430 US bidder

transactions experience announcement returns that are, on average, one percentage point low-

er for cross-border deals compared to domestic M&A. This negative cross-border effect is

further verified by Mentz and Schiereck (2008) in a study of worldwide M&A transactions in

the automotive supply industry. Other studies such as Kim and Mathur (2008) and Olibe et al.

(2008) investigate further aspects of geographical diversification and find a correlation be-

tween cross-border M&A and both a decrease in enterprise values as well as higher systema-

tic risk exposure of diversified companies.

A more comprehensive overview of cross-border M&A analyses is given by Shimizu et al.

(2004). Collins et al. (2009) test a more theoretical model of cross-border M&A and show

empirically that previous domestic M&A experience significantly increases the probability of

firms conducting subsequent cross-border deals. However, very few studies examine interna-

tional acquisitions of European corporations. Corhay and Rad (2000) find no significant share

price reactions to the announcement of cross-border acquisitions that have been conducted by

Dutch firms. Goergen and Renneboog (2004) find significant positive bidder announcement

returns for a sample of European acquisitions, although domestic transactions also generate

significantly higher abnormal returns upon their announcement than cross-border deals.

As the empirical research overall suggests, one would expect positive abnormal returns to

targets as it is the case for pure domestic mergers. However, to date, the bidder gains that

result from cross-border mergers remain puzzling and often insignificant, which motivates us

to shed more light on this area. As for research on capital market reactions of airline M&A

activity, only little empirical evidence can be found. Most studies in this field focus on the

effects of the airline deregulation in the US after 1978 on consumer welfare, market power,

airline fares and stock prices. Some studies such as Merkert and Morrell (2012) and Németh

and Niemeier (2012) give comprehensive overviews of airline M&A activity, but rather focus

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IV. Data and Methodology

Our study is based on acquisitions which were undertaken by Swissair having been an-

nounced under the chairmanship of Philippe Bruggisser between May 1995 and January

2001. During this period, Swissair followed an aggressive expansion and acquisition strategy.

In order to identify the relevant transactions, we rely on the Thomson SDC International

Mergers and Acquisitions database and Bloomberg. To verify the data and to resolve differ-

ences in the sources, additional press research has been performed. The SDC International

Mergers and Acquisitions database is considered as the leading source. In a next step, we

eliminate all transactions that do not meet the following criteria:

(1) The acquiring corporation was Swissair or one of its subsidiaries

(2) After the transaction, Swissair controlled at least 5 % of the target’s voting rights

(3) The transaction volume exceeded US$1m

(4) The transaction was completed

In total, 52 transactions meet these criteria. Transaction data, information about the corpora-

tions involved and stock market-related data are retrieved from Bloomberg and the SDC In-