Decision making in Jet Sahara Acquisition

MOT 1450

Application of Rounds Model to Reflect upon the Decision Making Process of Acquisition of Air Sahara by Jet Airways

Pratap Thapa 4181441 Word Count: 2914 (except references)

2nd July 2012

A Reflection on Decision Making Process o f Acquisition of Air Sahara by Jet Airways

Introduction In 2006, Jet Airways attempted the biggest takeover of the aviation sector in India by signing an agreement to acquire Air Sahara for $510 million (IBN, 2006) (The Economic Times, 2006).As the acquisition involved two of the country’s largest airlines; it had potential implications on the whole aviation industry. The deal was opposed with concerns of raising monopoly by government and competitors. Additionally, valuation of debt ridden Sahara airlines became problematic as consensus could not be reached regarding the worth of the company. This problem is of wicked nature as characterized by Rittel & Webber (Rittel & Webber, 1973) in the sense that the acquisition problem was essentially unique, and the solutions to be adopted were one-shot operations. Similarly, there was no immediate and ultimate test of the decision concerning valuation or monopoly and the decision maker, Jet, Sahara and government had no right to be wrong as the decision significantly impacted individual companies as well as the aviation industry. Subsequently, the Indian Aviation Board refused to give regulatory approval for the acquisition (The Economic Times, 2006) and Jet Airways decided to back out of the deal arguing that the price was too high (IBN, 2006). Air Sahara argued the agreement should be honoured and demanded compensation from Jet Airways. Both airlines went on to file number of legal cases against each other which caused delay in acquisition process and extra costs were incurred for both companies. After a prolonged speculation, in 2007, a new deal was struck at $346 million, much lower than the earlier agreed upon deal. This time around there was significantly less opposition from external stakeholders as well. This immediately raises curiosity to look at the factors that raised trouble in the beginning and how these factors changed during the process and enabled the successful deal in second time. Thus, this paper addresses the following research question: What factors influenced the decision-making process of acquisition of Air Sahara by Jet Airways and how did the factors change in two different negotiations?

To answer the research question, the rounds model will be applied to study the decision making process. In the first section of the paper, the rounds model is introduced. In the second section, the case of acquisition of Air Sahara by Jet Airways (referred to as the case hereafter) is described and the various crucial decisions are time lined. In the third section, the case is analyzed applying the rounds model. In the final section of the paper, the conclusion is drawn to answer the research questions and some recommendations are provided to improve the decision making process.

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Introduction to Rounds Model In this section the rounds model is introduced and justification about why rounds model is selected to study the case is provided. The rounds model explains the decision making process as an interaction between different actors in several rounds (Teisman, 2000). In this model, the decision making process is characterized by impasses and breakthroughs. The rounds model assumes that “… solutions/policy and problems are relevant to a policy process, insofar as they are presented by an actor during this process” (Teisman,

2000). The Rounds model focuses on different actors, objectives and solutions, their dynamics and interaction to understand the decision making process. Several actors are involved in the decision making process “eac h with its own individual and institutional self-interest and its own normative

preferences, and each with its own capabilities or action resources that may be employed to affect the outcome” (Scharpf, 1997). Hence, to gain insight the focus should be on interaction between

purposeful actors in the decision making process. The decision making process in rounds model is illustrated in figure 1.

Figure 1Decision making concept depicted by rounds model (Source: (Teisman, 2000) )

In the given case of acquisition of Air Sahara by Jet airways, there is no one defined central actor with decision making. Decision making process in such shared-power situations hardly ever follows a

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rigidly structured sequence from developing problem definitions and solutions to adopting and implementing, thus the sequential approach of phase model is not used to analyze the case. (Teisman, 2000). Furthermore, significantly different decisions were made in different rounds of negotiation, thus it is inferred that the rounds model will provide better insight into the decision making process compared to other models of decision making.

Description of the Evolution of the Decision Making Process In early 2005, Sahara Group initiated discussion regarding options and strategies to save its ailing airlines business. Various options were laid out in front of the management board such as injecting private equity to the airlines, IPO, strategic alliance or selling the airlines to other parties. After rounds of talks with Ernst and Young, the appointed management consultant, Sahara Group decided to sell its airlines business and called for interested parties for negotiation. Jet Airways, Kingfisher Airlines and American Airlines showed interest to buy Air Sahara (Indianews, 2006). Sahara declined offers from other parties on price grounds and began negotiation with Jet Airways (Uppuluri, Nair, Oke, & Anand, 2005). It was agreed that Jet will only purchase assets of the Sahara and not its withstanding liabilities (Minocha & Singh, 2006). In January 2006, a deal was struck, and Jet Airways agreed to buyout Air Sahara for $510 million which was significantly lower than the amount proposed by Sahara of between $750 and $1000 million (Indianews, 2006) (The Economic Times, 2006). An escrow account valid for 65 days was then set up with the ICICI bank to facilitate the deal. The deal was scheduled to finalize in March 2006 after getting the necessary approvals, but Jet Airways took control of the Air Sahara management immediately. Several approvals from different departments like the Aircraft Acquisition Committee (AAC), Monopolies and Restrictive Trade Practices Commission (MRTPC), Indian Aviation Board (IAB), and Government were necessary for the agreement to be executed (Uppuluri et al., 2005). The deal was expected to go through smoothly, however opposition began from members of the Indian parliament raising monopoly concerns (Minocha & Singh, 2006). Competing Airlines, Kingfisher Airways, Go Air, IndiGo and Air Deccan formed an alliance Indian Airlines Operators’ Association

(IAOA) to officially oppose the acquisition decision. Competitors and opponents of the merger say “…a combined Jet Airways-Sahara carrier will control more than half of India’s domestic flights,

giving it the ability to fix fares on important routes” (Krishnamoorthy, 2006). Similarly, the gover nment of India opposed transfer of Sahara’s landing and parking rights to the Jet. The government pointed out that entitlement to airport infrastructure was awarded to an entity, but if

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the entity (Sahara) ceased to exist, entitlements couldn’t be transfer red to Jet Airways (Minocha &

Singh, 2006). Another opposition came from the employees of Jet Airways fearing cut down in jobs and facilities after the acquisition. The employee claimed that Sahara is over-staffed and was not run with the same professionalism as Jet, hence it would create clash of cultures and force Jet Airways to cut down the number of pilots (Kaushalam, 2006). Taking into account the market analysts’ criticism about high price of acquisition, Jet proposed to

renegotiate the valuation of Air Sahara e specially after government’s hesitation to transfer Sahara’s entitlements. Additionally, reports suggested that on inspection, Jet had found the quality of Sahara assets below expectations and opposed the valuation done by Ernst and Young (Uppuluri et al., 2005). All the opposition meant that the deal could not be completed in the earlier agreed upon 65 days and the escrow account was extended for another 3 months. MRTPC forwarded the monopoly issue to Director General Investigations and Registrations (DGIR). Although the deal looked troublesome from the competition law of India, DGIR cleared the deal saying the acquisition will not create a monopoly given the high growth rate of the whole aviation sector of India and declining market share of both participating airlines (Krishnamoorthy, 2006). However, Indian Aviation Board refused to give the regulatory approval for the merger. Jet Airways finally walked out of the deal in June 2006, after operating Sahara for about three months, pointing out valuation of the company as the main reason and also argued delay from the government for necessary security clearance as the secondary reason (IBN, 2006) . “Sahara, on the other hand, maintained that all the major conditions, including necessary Government clearances had been met” (Uppuluri, Nair, Oke, & Anand, 2005)

Each of the private carriers took recourse to legal action. Both the companies went to different courts to prohibit the other party from withdrawing $ 87 million from the escrow account (Uppuluri, Nair, Oke, & Anand, 2005). An arbitration panel was set up to deal with the case under Bombay high court jurisdiction. Amidst the legal battle, two companies began several rounds of off-court closed door negotiation and in an interesting turn of things, a new deal was signed between the parties in July 2007. As per the new deal, Jet Airways agreed to buy out Sahara for $346 million, which is about 40 per cent less than the earlier deal of January 2006. Jet Airways would pay the amount in four interest-free installments over four years. Despite the new acquisition deal, the two airlines are still fighting the earlier case in the court. New problems have occurred as Jet Airways is said to have defaulted on the installment payments.

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2005 2006

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Sahara group announced to sell its ailing airlines, Air Sahara Several Airlines including KInfisher Airlines and Jet Airways negotiate with Air Sahara

On January 18, Jet and Sahara sign an all-cash $510 million acquisition deal

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Disagreement between the two companies regarding valuation of Air Sahara Opposition from governement amd competitors regarding monoploy

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2006 2006

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One June 21, the acquisition deal collapses after Jet Airways backed from the deal

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Air Sahara and Jet Airways both approaches court to seize escrow account Court suggests companies to settle the issue off-court

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2007 2007 2012

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On June 18, Jet Airways finally acquires Air Sahara for $346 million

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The legal battle continues and worsens as Jet defaults to pay the agreed upon installment

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Figure 2 Timeline of Crucial Decisions

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Description and Analysis of the Actors Involved The following table provides the description of interests of the various actors involved and the power each of them hold to influence the decision making process. The power position is classified as production, blocking or diffused as introduced in the book Management in Networks. (Bruijn & Heuvelhof, 2008)

Table 1 Description of Actors I nvolved in the Decision Making Process

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Application of Rounds Model to the Decision Making Process In this section the decision making process involved in the acquisition of Sahara is analyzed by applying the rounds’ model. The description of the decision making process is taken from the previous

section and is kept brief in this section. In applying the rounds model to the given decision making process attention is paid to the streams of decisions taken by several actors. Several groups of actors can be distinguished in the process, which are illustrated in table 1. Four different rounds are distinguished. The first round began when Sahara Group decided to involve Ernst and Young to decide on various options to save Air Sahara. The round ended when acquisition deal was signed between Sahara and Jet Airways. Sahara group acted to maximize its profits and decided selling the airlines was the best option (Uppuluri et al., 2005). Jet showed interest in Sahara because market share of Jet was rapidly declining to 33% in 2006 from 45% in 2003 (The Economic Times, 2006) with competition from low cost airlines and the buyout would give it a dominant position in the market. Sahara chose Jet over others based on the higher price Jet was ready to pay. The decision making process was thought to be completed with signing of agreement. But with entrance of other actors such as government, authorities, competitors, employees and analysts, the second round of decision making process began. The decision making process experienced several oppositions from the actors involved in this round and ended with collapse of the acquisition deal. Each of the actors opposed the deal from their perspectives, the government and authorities in order to create and maintain fair and competitive business environment, the competitors to maintain their own competitive position, and employees to protect their jobs. The analysts also played a key role in shaping the perceptions of the actors involved. Jet was pressing Sahara to lower the valuation and had the opportunity to do so because it knew Sahara had no better options and would like to have the deal even at a lower price. A major decision in this round was change in government position from opposing the acquisition to supporting it. The change in government decision is a prime example of issue framing, as they framed the acquisition as good for the growing aviation sector and rejected the claims of monopoly arguing that the market share for both the involved airlines was already declining. After collapse of the deal, with the companies seeking legal action against each other, the fourth round began. This round involved informal negotiations in addition to the legal procedure and ended with signing of the new deal. In this round a significant breakthrough was achieved in terms of decision making, and is interesting to analyze how the earlier opposition to the deal was turned subtle. The key opposition was from alliance of competing airlines (IAOA), but the power of the alliance reduced greatly as Air Deccan opted out of the alliance. Air Deccan claimed that the alliance had lost its value as it was only trying to oppose Jet Airways without having a firm ground. The alliance was then too weak to influence the decision making process. Similarly the opposition from employees was managed by declaring that no jobs will be cut after the acquisition.

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The fifth round of decision making is continuing till present. Although the acquisition process itself has already been completed, the decision making process is continuing due to continuation of previous legal procedures and emergence of additional legal issues as Jet Airways defaulted to pay the agreed upon installment. Several additional issues have come along as Jet Airways fired 1000 employees in 2008 in contrast to the earlier promise. The outcome of this round depends upon the legal decisions by the court. Although the decision may not have significant affect on the acquisition itself, it might have financial implications for Jet Airways.

Conclusion The aim of the paper is to identify the factors that influenced the decision making process and analyze how the factors changed in two different negotiations. It can be observed that after the first agreement was signed, the degree of freedom of the actors involved did not narrow, instead it widened and also new actors entered during the implementation phase that brought new negotiations. The analysis shows that each of the actors was acting in its own self-interest. The subsequent change in decision exemplifies how decision making process and outcome can change significantly as the power and politics of actors change. Limited alternatives to Sahara and reduction in power of IAOA by Air Deccan coming out of alliance, played key role in successful agreement the second time. Furthermore, actors specifically Jet Airways, display strategic behavior. As Jet Airways was aware that Sahara had no better option to go for and would agree to the deal at a lower valuation, they cancelled the deal in the first time. The situation can be compared as Hobson’s

choice

(Bruijn & Heuvelhof, 2008) for Sahara. The concern about Jet

having dominant market share was framed differently as being good for the Indian aviation industry. The opponents were convinced that growth in overall aviation sector would prevent Jet Airways from getting monopolistic market position. From this case of Indian Aviation Board changing it’s decision it can be concluded that the policies are not fixed and are always negotiable. A distinct feature of the case which may be attributed to the cultural factor is that the opposition from employees which would have been given a higher priority in the western world was overlooked to an extent and the acquisition deal did come through despite having opposition from employees.

Recommendations The conflict and resulting delay in acquisition of Air Sahara by Jet Airways impacted the brand reputation and had financial consequences for both the companies. In this section, some recommendations are provided as how such a conflict could have been avoided and the decision making process could have been smoother.

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From the case, it is observed that Sahara incurred maximum loss from the broken deal in terms of brand reputation and lower signing amount in the second deal. Sahara could have prevented this by adopting the strategy of multiple sourcing (Bruijn & Heuvelhof, 2008) by keeping other options open during the deal. Sahara should have postponed the signing of the first deal and should have kept its discussion with other airlines other than Jet open. While doing so, Sahara should however keep in mind, as Bruijn and Heuvelhof argue, not to play chess in two boards at the same time (Bruijn & Heuvelhof, 2008), meaning they should keep their negotiations with other parties open to Jet. On the other hand, Sahara could also have prevented Jet breaking the agreement by closing the deal in the first time itself and keeping a penalty if it broke the deal. Secondly, both the airlines should have involved all the relevant actors like the competitors, employees and the authorities in the decision making process from the beginning. This would help minimize the opposition afterwards as well as help enrich the decision making process and ultimately improve the quality of the decision made (Bruijn & Heuvelhof, 2008). The final recommendation is for Jet Airways to respect the procedure of decision making and complete the process properly. Although it turned out financially beneficial for Jet to have broken the agreement in this case, it hampered its trust which might hurt them in future decision making with same actors (Bruijn & Heuvelhof, 2008).

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References 1. Bruijn, H. D., & Heuvelhof, E. t. (2008). Management in Networks: On Multi- actor Decision Making. New York: Routledge. 2. Bryson, J., & Crosby, B. (1992). Leadership for the common good, tackling Public Problems in a Shared-Power World. San-Fransisco: Josey-Bass Publishers. 3. IBN. (2006, 06 22). Jet-Sahara merger deal grounded . Retrieved 05 10, 2012, from Ibnlive.in.com: http://ibnlive.in.com/news/jetsahara-merger-dealgrounded/13565-7.html 4. Indianews. (2006). Retrieved 04 23, 2012, from www.indianews.com: http://www.indiaenews.com/pdf/12180.pdf 5. Kaushalam, K. (2006, 02 12). Jet Set Go . Retrieved 05 26, 2012, from The India Today: http://archives.digitaltoday.in/businesstoday/20060212/features1.html 6. Krishnamoorthy, A. (2006, 04 26). India Will Allow Jet Takeover of Sahara Opponents Fear Combination . Retrieved 6 27, 2012, from Redorbit.com: http://www.redorbit.com/news/business/459141/india_will_allow_jet_takeo ver_of_sahara_opponents_fear_combination/ 7. Minocha, D., & Singh, P. (2006). The Jet-Sahara Merger. Pune: Symbiosis Institute of Business Management. 8. Rittel, H. W., & Webber, M. M. (1973). Dilemmas in General Theory of Planning. Policy Sciences , 155-169. 9. Scharpf, F. (1997). Games Real Actors Play: Actor-centered institutionalism in policy research. Boulder: Westview Press. 10. Teisman, G. R. (2000). Models For Research into Decision-MakingProcesses: On Phases, Streams and Decision-Making Rounds . Public Adminsitration, Vol. 78, No. 4 , 937-956. 11. The Economic Times. ( 2006, May 24). Retrieved 4 24, 2012, from The Economic Times: http://articles.economictimes.indiatimes.com/2006-0524/news/27422810_1_jet-sahara-civil-aviation-air-sahara 12.Uppuluri, A., Nair, A., Oke, H., & Anand, H. (2005). Legal Battle between Jet Airways and Air Sahara. Gaziabad, India: Institute of Management Technology .

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Decision making in Jet Sahara Acquisition

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