The Persistence of Organizational Knowledge across Merger and Acquisition Events: An Examination of the U.S. Airline Industry Peter M. Madsen Brigham Young University INFORMS, San Diego, CA,

Motivating Question INFORMS, San Diego, CA, Peter M. Madsen What effect do mergers and acquisitions have on the stock of experientially-derived knowledge possessed by involved organizations?

M&A and Organizational Knowledge INFORMS, San Diego, CA, Peter M. Madsen Prior work: – Experientially-derived knowledge enhances organizational effectiveness (learning curve) – M&A events disrupt organizational functioning Barkema & Schijven 2008; Walsh 1988; Weber & Camerer 2003 – Effect of M&A on knowledge? Knowledge acquisition motivation (Capron & Mitchell 1998; Higgins & Rodriguez 2006; Hoskisson & Busenitz 2002; ) Knowledge complementarity enhances post-event performance (Hitt et al. 2001; King et al. 2008)

Hypotheses INFORMS, San Diego, CA, Peter M. Madsen Direct performance effect – H1: Ongoing M&A events reduce organizational performance – H2: Recently completed M&A events reduce organizational performance Knowledge effect – H3: Ongoing M&A events enhance the value of previously developed organizational knowledge (positively moderate the relationship between knowledge stocks and performance) – H4: Recently completed M&A events reduce the value of previously developed organizational knowledge (negatively moderate the relationship between knowledge stocks and performance)

Sample INFORMS, San Diego, CA, Peter M. Madsen All US airlines accounting for at least 1% of domestic passenger air travel AirTran Airways Corporation Alaska Airlines Inc. Aloha Airlines America West Airlines Inc. American Airlines Inc. American Eagle Airlines Inc. ATA Airlines d/b/a ATA Atlantic Southeast Airlines Comair Inc. Continental Air Lines Inc. Delta Air Lines Inc. Expressjet Airlines Inc. Frontier Airlines Inc. Hawaiian Airlines Inc. Independence Air JetBlue Airways Mesa Airlines Inc. Northwest Airlines Inc. Pinnacle Airlines Inc. Skywest Airlines Inc. Southwest Airlines Co. Trans World Airways LLC United Air Lines Inc. US Airways Inc.

Sample INFORMS, San Diego, CA, Peter M. Madsen 3 M&A Events (operational only) – American acquisition of Trans World – America West, US Airways Merger – Delta, Northwest Merger

Method INFORMS, San Diego, CA, Peter M. Madsen Unit of analysis: airline-flight-segment-month OLS regression Traditional learning curve model: Y = a*X b Dependent variables – Fraction of flights: delayed (15, 30 & 60 minutes; diverted; cancelled) Independent variables – M&A ongoing (operational integration not completed) – M&A recently completed (within 3 yr) – Flight segment experience (total # of flights between a given city pair over previous 5 years) – Aircraft experience (total # of flights over previous 5 years) Controls

Results: Controls 15 min. Delay 30 min. Delay 60 min. DelayDivertedCancelled Control Variables Flight Segment Distance (1000's miles) *** *** *** (0.0010)(0.0006)(0.0004)(0.0001)(0.0002) Fraction Delayed Origin1.3797***1.1689***0.8238***0.0113***0.2921*** (0.0252)(0.0149)(0.0088)(0.0024)(0.0042) Fraction Delayed Destination1.0311***1.0101***0.8571***0.3493***0.1726*** (0.0204)(0.0121)(0.0071)(0.0019)(0.0034) Assets (Logged) *** *** ***0.0022*** *** (0.0007)(0.0004)(0.0002)(0.0001) ROA (t-1) *0.0262*** *** -(0.0106)(0.0108)(0.0064)(0.0017)(0.0030) Current Ratio (t-1) ***0.0027***0.0058***0.0060***0.0008*** (0.0009)(0.0006)(0.0003)(0.0001)(0.0002) Debt-to-Equity Ratio (t-1) *** (0.0000) Flight Expenses/Operating Rev. (t-1) *** *** *** *** (0.0081)(0.0048)(0.0028)(0.0008)(0.0014) Chapter 11 Bankruptcy Protection *** *** *** *** *** (0.0027)(0.0016)(0.0009)(0.0002)(0.0004) Fixed Month Effectsincluded Fixed Year Effectsincluded

Results: IVs 15 min. Delay 30 min. Delay 60 min. DelayDivertedCancelled Independent Variables Flight Segment Experience (Logged) *** *** *** *** * (0.0003)(0.0002)(0.0001)(0.0000) Aircraft Experience (Logged) *** *** ***0.0006*** *** (0.0005)(0.0003)(0.0002)(0.0001) Current M&A Reorganization0.1875***0.0948***0.0413***0.0012***0.0075*** (0.0039)(0.0023)(0.0014)(0.0004)(0.0007) Completed M&A within 3 yrs *** *** *** *** (0.0036)(0.0021)(0.0013)(0.0003)(0.0006) Interactions Flight Segment Exp. x Current M&A *** *** ***0.0036*** *** (0.0015)(0.0009)(0.0005)(0.0001)(0.0003) Flight Segment Exp. x Completed M&A0.0049**0.0058***0.0058***0.0052*** (0.0016)(0.0010)(0.0006)(0.0002)(0.0003) Aircraft Exp. x Current M&A *** *** *** *** *** (0.0034)(0.0020)(0.0012)(0.0003)(0.0012) Aircraft Exp. x Completed M&A0.0070*0.0071***0.0060*** ***0.0021*** (0.0028)(0.0017)(0.0010)(0.0003)(0.0005)

Conclusion INFORMS, San Diego, CA, Peter M. Madsen Ongoing M&As disrupt organizational functioning, but heighten attention to previously-obtained knowledge The value of previously-obtained knowledge decreases following the completion of M&A events