On another merger Monday, Alaska Airlines announced that it is acquiring Virgin America for around $4 billion in total, despite Virgin founder Richard Branson’s reservations.
Assuming regulators allow the deals to go through, these companies are poised to be the fifth-largest airline in the US.
But companies don’t buy each other just to increase their footprints. They do it to increase value for shareholders.
One way managers do this is by cutting costs through “synergies.” That word should make every Virgin America and Alaska Air employee a little nervous.
In the press release announcing the acquisition, Alaska Air announced (emphasis ours):
“Under the terms of the agreement, Alaska Air Group will acquire Virgin America for $57.00 per share in cash, representing a total equity value of $2.6 billion. The combined company expects to achieve $225 million annually in total net synergies at full integration.”
What are these “synergies”?
Synergy is what you get when you eliminate redundancies to cut costs. It usually means the closing and combining of stores, warehouses, and offices: If the two pre-merger companies each had their own warehouse in a city, the post-merger company might only need one of those warehouses, and can save money by shutting down the other.
The reason synergies should scare employees is that these closures often come with job cuts.
Here’s a very rough, back of the envelope calculation that should be taken with a grain of salt illustrating the effect synergies could have on employees at these two companies. Assuming half of those potential synergies — $125 million at the airline companies — come from reduced headcount and each worker costs the company $75,000, we could see more than 1,600 employees being let go at the airlines.
The companies haven’t announced or quantified any reductions in headcount just yet. But those announcements are probably coming.