Southwest's acquisition of AirTran: an analysis of short-term stock performance

Abstract

This paper examines the short-term stock performance of Southwest Airlines and AirTran Airways using time series data consisting of daily and cumulative abnormal returns ± 60 trading days around the merger announcement and merger completion dates. The impact of Southwest’s announcement to acquire AirTran is positive. The daily abnormal returns of Southwest and AirTran, using the S&P 500 as index, are highly significant on the merger announcement date. The impact of the merger completion is mixed, however. Southwest’s share price drifted lower up to the merger date, underperforming the S&P 500, while the share price of AirTran generally drifted higher in a very narrow range. Southwest and AirTran, nevertheless, outperformed the AMEX Airline Index, suggesting that the higher fuel prices at the time of the merger may have influenced investor reaction to the merger, resulting in lower share prices of major airlines. The beta of Southwest improved after the merger announcement and completion of the merger, suggesting shareholder confidence in the merger and in Southwest’s financial performance, at least in the short-term.