Scholarly article on topic 'Geography of Mergers and Acquisitions in the Container Shipping Industry'

Geography of Mergers and Acquisitions in the Container Shipping Industry Academic research paper on "Social and economic geography"

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{"Shipping Industry" / "Mergers and Acquisitions" / "Geographic Distance" / "Information Cost" / "Synergy Effect"}

Abstract of research paper on Social and economic geography, author of scientific article — Hee-jung Yeo

Abstract The paper examines the geographic dimension between acquiring and target firms to take into account the information cost which decreases synergy effects generated by M&As in the container shipping industry. The paper finds that the geographical distance has a negative impact on takeover flows. M&A activities were more intense among firms located closely each other. The paper provides evidence that the firm size raises the relative acquiring probability for inter-regional and cross-border M&As. While the existing literature suggests that financially underperforming firms are more likely to be targeted by a firm, the paper argues that the smaller and unquoted public firms are more vulnerable to M&As.

Academic research paper on topic "Geography of Mergers and Acquisitions in the Container Shipping Industry"

ÎTIit ÄBiatt S mi mal aï Shipping ailî» CuytittCB • Volume 29 Number 3 December 2013 pp. 291 -314 •

Geography of Mergers and Acquisitions in the Container Shipping Industry

Hee-jung YEO

The paper examines the geographic dimension between acquiring and target firms to take into account the information cost which decreases synergy effects generated by M&As in the container shipping industry. The paper finds that the geographical distance has a negative impact on takeover flows. M&A activities were more intense among firms located closely each other. The paper provides evidence that the firm size raises the relative acquiring probability for inter-regional and cross-border M&As. While the existing literature suggests that financially underperforming firms are more likely to be targeted by a firm, the paper argues that the smaller and unquoted public firms are more vulnerable to M&As.

Key Words : Shipping Industry, Mergers and Acquisitions, Geographic Distance, Information Cost, Synergy Effect

Copyright © 2013, The Korean Association of Shipping and Logistics, Inc. Production and hosting by Elsevier B.V. All rights Reserved. Peer review under responsibility of the Korean Association of Shipping and Logistics, Inc.

The author greatly appreciates anonymous referees for their helpful comments and suggestions to improve the manuscript.

^Assistant Professor, Department of International Commerce, Keimyung University, Korea, Email : heejungyeo@kmu.ac.kr

I. Introduction

Many scholars have examined mergers and acquisitions (M&As) from different perspectives. This includes the financial and economic implications, operating-wise implications1-*, and the motives and the underlying environmental circumstances leading to M&As2). Researches with regard to their motives are primarily focused on the empirical verification of theories, such as synergy effects, cost efficiency, managerial discretion or hubris3).

As the container shipping industry is characterized by the capital intensity, shipping companies intend to rationalize their business activities, to create economies of scale in order to minimize financial risks4). Studies examining implications of mergers and acquisitions in shipping industry is relatively limited5). In ocean liner shipping, the announcement of merger and acquisitions has a direct positive impact on the stock price of the companies6-1. This finding is supported by Samitas and Kenourgios (2007) who investigated mergers and acquisitions in the tramp shipping industry and found that mergers and acquisitions increased shipping firms' stock prices and financial value.

Camerlynck and Ooghe (2002) test the hypothesis that acquiring firms are superior to target firms who are underperformers in terms of profit, solvency, liquidity, performance and failure risk. They found that larger targets had higher short and long term failure risk compared to smaller targets. They suggest that the acquirers are interested in acquisition candidates, which complement them regarding sales and growth. The candidate firms should possess high growth and investment opportunities. Merikas, Polemis, and Triantafyllou (2011) argue that the acquirers appear to implement a takeover in order to solve their own resource imbalance.

When two identical sized firms, located in different areas, present nearly similar synergy effects or cost efficiency after an M&A, which firm should the acquiring shipping firm choose for a target to maximize the

1) Carbone and Stone(2005), pp.495-510.

2) Fussillo(2009), pp.209-226; Brooks and Ritchie(2006), pp.7-22.

3) Krishnan et al.(2007), pp.709-732; Lane et al.(1998), pp.555-578.

4) Merikas et al.(2011), pp.9-22.

5) Andreous et al. (2012), pp.1221-1234.

6) Panayides and Gong(2002), pp.55-80.

firm value? The utilization of the potential synergies of distant M&As may be obstructed by a communication gap between the target and the acquirer7-1. Distance weakens the quality of the information on the target firm. Information about a target company is asymmetrically distributed over the potential acquirers according to their locations. Information cost increases when acquirers make bids on a target far from their location. The information disadvantage can be overcome when acquirers increase the monitoring level.

Due to the asymmetric information about the target's value, firms which are located near each other tend to merge8). If the acquiring firm has the capacity to evaluate the value of the target firm, the geographic distance does not matter so much. The firm size can play an important role for evaluating the value of the target as well as for monitoring the target. Large firms have more resources inside the organization to overcome the information asymmetry generated by the geographic distance.

However, there are few studies which provide an empirical evidence of choice via acquiring firms for their targets by considering the geographic distance in the shipping industry. This paper explores the influence of information cost during M&As, which have an objective to achieve synergy effects through cost efficiency. Further, it examines horizontal M&As, that is, mergers of firms in the same industry serving the same markets in parallel.

The study is organized as follows. The next section provides an overview of the shipping industry and the related literature. Section III formulates the propositions. Section IV presents the empirical study and the results. Finally, concluding remarks are presented in section V.

II. Container Shipping Industry

1. Characteristics of Container Shipping Industry

Liberalization of trade, technology standardization, increased efficiency of ports and shipping services have made it easier to buy and sell goods,

7) Lehto(2006), pp.1-20.

8) Lehto(2006), pp.1-20.

raw materials and components all over the world. Containerization, which is an international standardization, played an important role in the container shipping industry. Without these factors, globalized intermodal networks would not be possible. The container ship fleet is operated by liner shipping companies. These companies may not own the vessels, but they operate them in order to provide regular containerized shipping services. The top ten liner companies operated 50.2% of the container ship fleet in 20109) and 51.6% in 201210).

The container shipping industry has been hit hard by the economic crisis like other industries. The downturn in trade has directly led to a rapid decline in demand for transport and related services. During the decline in demand, the major operators tended to reduce their chartered-in tonnage by returning vessels to their owners. However, the supply side's response to the decrease of demand is never immediate. In spite of the economic crisis, new deliveries in 2009 grew by 42% over 2008 as a result of ships having been ordered prior to the drop in demand. The resulting oversupply of tonnage then led to a surge in the demolitions of older tonnage by more than 300%n). At the beginning of 2010, the world merchant fleet reached 1,276 million deadweight tons, an increase of 7% over 2009.

The oversupply of containers carrying capacity has led to a significant drop in container freight rates, which is decreased by one third between the end of 2008 and the end of 200912). The low freight and charter rates, combined with the downturn in trade volumes, have led to historical financial losses for shipping firms. Maersk Line, the world's largest container shipping company, had a loss of $568 million in 2006 and $198 million in 2007. In an effort to turn around the firm's recent poor performance, Maersk had to cut nearly 10% of its current workforce13). Still, Maersk Line reported a loss of $2.1 billion in 2009. With respect to other large shipping firms, Hanjin Line lost $1.1 billion during 2009, Neptune Orient Line lost $741 million, and similar losses were recorded across the industry14). This financial performance was worse off in 2011,

9) UNCTAD(2010)

10) UNCTAD(2012)

11) UNCTAD(2010)

12) Hoffmann(2010), pp.121-130..

13) UNCTAD(2008)

14) Hoffmann(2010), pp.121-130.

because most carriers incurred financial losses15). The top 20 shipping companies recorded a combined loss over $5 billion in 2011. A loss of $1.7 billion was reported by COSCO, CSAV reported a loss of $1.2 billion, CMA CGM $30 million, Hanjin $730 million, and NOL $478 million16).

The changes in the market share of the world's top 20 container shipping firms from 2007 are presented in <Table 1>. It is found that the top 20 liner companies have remained almost unchanged since 2009. The table confirms that container shipping industry is a concentrated sector. The market share of the top 20 liner shipping companies continues to grow from the late 2000s, reaching almost 70% of the world throughputs.

<Table 1> shows that the global market share of the top three world leading lines, Maersk Line, MSC and CMA-CGM has grown from 26.5 to 28% in terms of TEU capacity during the year 2007. However, the growth in 2007 is far from being equally shared by the three leading groups. The market share of Maersk Line stood at 13.4% in 2006 and has fallen to 11.2% in 2011, reflecting the difficulties that the company experienced after it acquired the P&O Nedlloyd.

The highest growth in 2010 was recorded by Chilean carrier CSAV, followed by PIL from Singapore and Israel's Zim. Maersk Line from Denmark continues to be the top ocean carrier, although the second and third carriers, MSC and CMA-CGM, grew three to four times faster during 2010, narrowing the gap. In terms of vessel numbers, the MSC was effectively ahead of Maersk17).

In sum, since the start of the current crisis, profits have not only been low, but mostly negative18). Nevertheless, the top 20 firms have been able to maintain their independence. Over the last couple of years, there have been no mergers or acquisitions among them. It may be difficult to raise funds for a large acquisition, because acquiring a firm with a huge debt is a risk that induces a financial distress. The competition laws of their respective countries may prohibit the integration of the two large entities for fear of becoming a market dominator as well.

With the fact that the structure of the supply side adjustment to the variation of demand is inelastic, shipping firms are continuously forced to

15) UNCTAD(2012)

16) UNCTAD(2012)

17) UNCTAD(2011)

18) Hoffmann(2010), pp.121-130.

reduce costs or increase productivity in order to preserve market share and/or power19).

2. Efforts toward Cost Efficiency

One reason for M&As includes the deregulation of ocean shipping in dustry and the abolishment of the liner conference system20). The liner shipping industry has experienced a considerable technological progress, which completely changed ocean transportation network. The shipbuilding technology has produced enormous container ship which may be too expensive for small shipping firms or an individual big firm to deploy in a viable service string. Without increasing freight demand, the widespread adoption of these containerships raises the level of excess capacity. The excess capacity poses a threat to these firms profitability21). However, if shipping companies do not adopt such few shipbuilding technologies, they will then become the takeover targets.

In Europe, The EU Commission abolished the exemption from competition rules for liner shipping companies operating as conferences (IP/06/1249) as of 12 October 2008. All EU and non-EU carriers which take part in conferences operating on trades to and from the EU have to end their conference activities, in particular price fixing and capacity regulation22). By contrast, according to the EU Commission, liner carriers will continue to be allowed to take part in consortia.

The European Commission completed its review of the regulatory system for liner shipping industry in 2005 and published a formal proposal to repeal Regulation No. 4056/86, which provides a block- exemption to sea carriers from some rules of competition law23) Following the entry into force of Regulation No. 479/92, which empowered the Commission to grant block exemptions in respect of certain categories of agreements, decisions and concerted practices between liner shipping companies, the Commission adopted Regulation No. 870/95 to establish the conditions under which such exemptions would be granted; that Regulation was later replaced by Regulation No. 823/2000.

19) Fusillo(2009), pp.209-226.

20) Andreou, Louva and Panayides(2012), pp.1221-1234.

21) Fusillo(2009), pp.209-226.

22) EU Commission(2008)

23) UNCTAD(2006)

Block Exemption Regulation No. 823/2000 allows shipping lines to engage in operational co-operation for the purpose of providing a joint liner service, but not to fix prices. A consortium should possess on each market in which it operates a market share of fewer than 30% calculated by reference to the volume of goods carried when it operates within a conference, or under 35% when it operates outside a conference.

Japan plans to harmonize its laws with the EU's regulation requirement at each trading route in order to enhance the competition level. The Singapore Competition Commission issued a 5-year extension on block exemption order from competition law for consortium, conference and discussion agreements in year 2010.

Containerization and technological progress in liner shipping firms raise the minimum efficient scale of operations that individual firms may not be able to achieve without horizontal integration24-1. First, most of the major carriers have created global alliances and have become members of some of them. The international alliances can offer the same benefits as mergers and also help reduce the variable costs. Panayides and Gong (2002) note that a consolidation had been taking place in all sectors of shipping; tanker, dry bulk, the reefer trades and third-party ship management sectors. They conclude that alliances have not been workable because of problems of allocation of responsibilities and instability. Midoro and Pitto (2000) argue that the structure of strategic alliances in liner shipping is inherently inadequate to deliver the expected results which undermine their stability. This is due to the complexity and intra-alliance competition.

Challenges associated with alliances are as follows: entering new markets as a sole operator is still an attractive option, and slot purchases or swaps are useful when shipping firms want to gain access to a route without forming a collaborative relation251. An M&A is useful only if other means, such as transaction on assets or cooperative schemes, prove to be useless261. The challenges of these alliances lead to pursue economies of scale and retain market power through horizontal or vertical integration.

In fact, after the exemption from anti-competition law, numerous M&As have been engaged among

24) Fusillo(2009), pp.209-226.

25) Mitsuhashi and Greve(2009), pp.975-995.

26) Lehto(2006), pp.1-20.

<Table 1> Market share of the top 20 liner shipping companies

no. Identity Continent Market share, (LEUs, %)

2007 2007 2008 2008 2009 2009 2010 2010 2011 2011

1 Maersk Line Europe 1573551 13.426 1638898 12.948 1740936 12.065 1746639 11.682 1820816 11.2

2 MSC Europe 1019725 8.700 1201121 9.489 1510720 10.47 1507843 10.085 1762169 10.84

3 CMA-CGM Europe 517213 4.413 701223 5.539 864893 5.994 944690 6.318 1069847 6.582

4 Hapag Lloyd Europe 454526 3.878 491954 3.886 496724 3.442 470171 3.144 560197 3.447

5 COSCON Asia 390354 3.330 426814 3.372 491580 3.406 495936 3.316 565728 3.481

6 CSCL Asia 387168 3.303 418818 3.308 431582 2.991 457126 3.057 460906 2.836

7 Evergreen Asia 377334 3.219 620610 4.903 629615 4.363 592732 3.964 593829 3.653

8 APL Asia 342461 2.922 394804 3.119 431582 2.991 524710 3.509 591736 3.641

9 Hanjin Asia 337378 2.878 321917 2.543 365605 2.533 400033 2.675 447332 2.752

10 NYK Asia 283109 2.415 331083 2.615 358094 2.481 359608 2.405 352915 2.171

Subtotal 5682819 48.49 6576867 51.73 7389663 50.74 7499488 50.16 8225475 50.61

11 MOL Asia 281967 2.405 325030 2.567 387107 2.682 348353 2.329 362998 2.233

12 OOCL Asia 275057 2.346 351542 2.777 364384 2.525 290350 1.941 374714 2.305

13 K Line Asia 267988 2.286 293321 2.317 309496 2.144 325280 2.175 347989 2.141

14 Yang Ming Asia 240433 2.051 276016 2.180 317473 2.200 317304 2.122 322723 1.986

15 Zim Middle East 203228 1.734 243069 1.920 251717 1.744 215726 1.442 281532 1.732

16 Hamburg Sud Europe 159039 1.357 196632 1.553 256513 1.777 283897 1.898 335449 2.064

17 HMM Asia 157208 1.341 194350 1.535 258648 1.792 259941 1.738 285183 1.755

18 PIL Asia 123084 1.050 140135 1.107 147985 1.025 173989 1.163 238241 1.466

19 CSAV S. America 117873 1.005 108927 0.860 147985 1.025 195884 1.310 382786 2.355

20* Wan Hai Asia 113532 0.968 125393 0.990 141957 0.983 176578 1.181 178599 1.099

World total 11720000 65.04 12657725 69.54 14429080 68.64 14951771 67.46 16253988 69.74

£ s a.

Source: Review of maritime transport, UNCTAD, each year, * UASC is the 20th for 2009-2010,

the largest firms. A.P. Moller, which had 10.7% of the world market share in 2005, announced a $2.9 billion takeover of P&O Nedlloyd in 2005. From this transaction A.P. Moller took the top position gaining 16% of the world's total containership carrying capacity. Hapag Lloyd acquired Canadian CP Ships Group for $2.0 billion. CMA-CGM Group offered a $0.6 billion bid to purchase Bollore's shipping interest Delmas-OTAL-Setramar-Sudcargos. The UK/Netherlands' P&O Nedlloyd withdrew from more than a dozen conferences and consortia and reorganized its services for the carriers involved in the transactions, including the reduction of agencies and the shifting of terminals in several regions28).

The changes in the industry, such as the introduction of competition and the technology progress, will raise the likelihood of ocean carriers' M&As. The high fixed to the variable cost ratio resulting in many ocean carriers pursuing horizontal M&As.

III. Proposition Formulation

With respect to investors, or shareholders of the firm, a foreign investment is riskier because it has a larger variance around the expected return29). Therefore, risk-averse investors prefer domestic investments for any given level of the expected return. They argue that the amount of investments abroad is empirically observed to be much less than the optimal diversification investment portfolio. In a situation in which there are potential bidders for a target, it is likely that an uninformed bidder in a distant location will not buy the target.

Distance has a negative effect on the takeover flows between pairs of regions because the search costs could be greater for potential acquisition firms that are located far away from the acquirer30). Thus, the costs of controlling and managing a distant company are likely to be greater than for those for firms located nearby. Naturally, firms desire to minimize the conflict caused by the distance affecting the corporate control of the subsidiaries.

However, mergers involving cross-border transactions can be expensive in terms of time and effort required to meet the legal and regulatory

28) UNCTAD(2006)

29) Bockerman and Lehto(2006), pp.847-860.

30) Aschcroft, Coppins and Raeside(1994), pp.163-175.

hurdles and in many cases the mergers does not meet the financial objective 31 ). Post-merger problems are fixing corporate cultures, communication gap and the different perception of firm objectives. These factors present a significant managerial effort to a successful M&A.

Cross-border and short distance M&As will be supported if the target or an acquiring firm possesses an asset whose common utilization increases efficiency and profit. However, the common use of a shared asset may have geographical limits 32 ). The asset concerns intangible assets in network industries and service industries.

Distant M&As are more risky because they are based on more imprecise information compared to the close M&As. Ellison and Glaeser (1997) found that domestic mergers are an important factor, which affects the concentration of the economic activity within industries. Closely located acquirers and targets share the same language in communication with tacit messages. The transmission of tacit knowledge needs face-to-face contact, which requires spatial proximity. There are a number of studies which find that knowledge and technology flows are dampened by the geographical distance33). A firm's possibilities to absorb knowledge from regions that are located far away are difficult. Hence, it becomes more difficult for acquiring firms to evaluate the value of a target when it is in a distant location.

A distant monitor is imprecise and leads to a home bias in M&As34). The geographic proximity between acquiring and potential target firms improves monitoring or decreases the monitoring costs; therefore, it has a substantial positive impact on the scale of the inter-regional merger flow35). Thus, it is hypothesized as follows:

Proposition 1: The M&A intensity is likely to be negatively associated with the geographical distance of the targets.

The firm size plays a key role in terms of the amount of transactions. Firms are likely to acquire small firms36). Financing a small transaction gives less burden and responsibility for the top management team. It is more difficult to raise funds by issuing debts for a larger acquisition.

31) Fusillo(2009), pp.209-226.

32) Lehto(2006), pp.1-20.

33) Bockerman and Lehto(2006), pp.847-860; Greunz(2003), pp.657-680.

34) Lehto(2006), pp.1-20.

35) Green(1990)

36) Gorton, Kahl and Rosen(2009), pp.1291-1329.

Adding a lot of debt can substantially increase the chance of financial distress, and managers of financially distressed firms are more likely to lose their jobs37).

Firm size also plays an important role in selecting a global target. When the actual geographical distance enlarges, the firm's ability to monitor other firms located far away should be strengthened. The larger the size of the firm, the more expertise it has to make accurate monitors regarding the target firm as well as to make distant cross-border M&As possible38).

Larger firms are more likely, ceteris paribus, to be involved in longdistance takeovers. Large acquirers have access to greater financial and search facilities compared to their smaller counterparts. Moreover, large firms have the resources necessary to monitor and evaluate the target firms located far from the acquiring firm. They are more likely to be aware of the value of potential acquisitions39).

Firm size is expected to raise the relative acquiring probability for interregional and cross-border M&As. Thus, it is hypothesized that,

Proposition 2: The firm size of acquirers will be positively related to the geographic distance of their acquired target.

IV. Empirical Study

The shipping industry experienced technological progress and regulatory changes for both small and large firms. The paper analyzes shipping firms as well as the location of target firms. In the empirical study, the paper examines the behavior of shipping firms regarding the consolidation strategy.

1. Data Collection

The sample for this study consists of 120 observations of M&As. The study investigates mergers and acquisitions that have occurred during the 2006 and 2007 fiscal years in the shipping industry. The sample for this study is 120 takeover bids announced for the maritime transportation

37) Gorton, Kahl and Rosen(2009), pp.1291-1329.

38) Lehto(2006), pp.1-20.

39) Aschcroft, Coppins and Raeside(1994), pp.163-175.

industry in the period from January 1, 2006 to December 31, 2007, from the Datastream database. It is identified that 62 firms for 2006 and 58 for 2007 have completed mergers and acquisitions. Some of firms are multiple acquirers. Pooled data have been used in the empirical analysis. The financial and account data required for the empirical analysis are gathered from annual reports.

2. Variable Definitions

T0P20 refers to firms which belong to the first 20 largest shipping companies. TSIZE means the turnover of the target firm. Those two variables are used to measure the size of target firm. SHRAQ represents the proportion of equity obtained by an acquiring firm during the M&A. OWDSHR is the owned shares by the acquiring firm after the transaction. TRANSAC refers to the value of M&As in USD. TASSET is the amount of total assets of the target firm. ASIZE means the size of the acquirer and is measured by the total assets. TEBIT is the EBIT of the target firm. The measures of target performance are included in the analysis in order to evaluate whether the target firm's profitability has an influence on M&As and to proxy for management inefficiency. MKTK measures the market capitalization of acquiring firms in USD. Data on geographic distance were obtained from the distance between the capital city of the acquiring firm and the respective capital cities for the target firm, noted in km40).

3. Descriptive Statistics

<Table 1> shows the characteristics of the acquiring and target firms along with the size of the transactions. The value of the variable OWDSHR ranges from zero to one hundred percent. The percentage of equity held by the acquiring firms after transaction reached about 77% on average. This proportion is not far from the amount of share acquired during the acquisition. This implies that acquiring firms prefer to obtain more than majority of target firms' equity and to control the acquired firms. The mean value of transactions is 110 million U.S. dollars. This contrasts to the 2 billion US dollar deal among the top 20 liner shipping firms. It is found that certain

40) www.chemical-ecology.net/iava/capitals.htm, U.S. Dept. of Agriculture

targets have negative assets, which imply that these firms are more indebted than what they possess. It is also interesting to find that certain target firms reported a negative profit during the M&A period.

<Table 2> Descriptive statistics

Min. Max. Mean S.D.

TOP 20, dummy 0 1 .08 .26

MKTK, million USD 0 165000 8891.07 37805.08

SHRAQ, % 4 100 77.47 31.07

OWDSHR, % .00 100.00 79.753 31.190

TRANSAC, million USD .00 2757.14 223.593 521.579

TSIZE, logarithm -4.61 10.75 5.044 2.659

TSALE, logarithm 2.08 10.37 4.696 1.757

TEBIT, million USD -16.45 9699.40 388.103 1861.595

4. Univariate Analysis

M&A intensity and geographical distance

In the first phase of the empirical study, proposition 1 was examined, which tests the validity of the occurrence of M&As and the geographic distance of the target firms. Figure 1 shows domestic and cross-border M&As occurred during 2006 and 2007.

Each acquisition has been categorized into domestic and international transactions. In the case of cross-border M&As, it is analyzed in order to see whether these transactions are between firms in the same continent. <Table 3> presents a frequency table related to the types of acquisitions and changes of such M&As by year. It was found that the domestic acquisitions were a dominant form of acquisition, because 72 out of 120 shipping firms acquired domestic companies.

However, when the acquirer decides to invest in foreign countries, they prefer to choose firms located in continents other than their own. Firms acquire targets whose location is not situated in the same continent as the acquirer in more than 56.25% of international M&As. It is observed that while the acquisition of domestic liner shipping firms is decreasing, the international acquisitions between different continents are increasing.

<Figure 1> Geography of M&As in shipping industry

The target firms are identified by nationality, and then classified by continent. <Table 4> presents the distribution of continents by target and acquiring firms to which they belong. We can observe that the majority of acquiring firms are from European countries followed by Asian and North American countries. For acquisitions, we also find that the mostly targeted firms are from Europe followed by

<Table 3> Types of acquisitions

2006, % 2007, % Mean

Domestic 67.7 51.7 60.0

International

- same continent 19.4 15.5 17.5

- different continent 12.9 32.8 22.5

Total 100

Asia. This finding implies that the European shipping market is quite dynamic. European shipping firms are likely to acquire and become targets, simultaneously of the corporate M&A markets.

<Table 4> Distribution of target and acquiring firms

Targets Acquirers

% Cumulative % % Cumulative %

EU 46.6 46.6 52.1 52.1

ASIA 34.7 81.4 31.9 84.0

N. AMERICA 13.6 94.9 12.6 96.6

S. AMERICA 1.7 96.6 0.8 97.5

MID. EAST 2.5 99.2 2.5 100.0

OTHER 0.8 100.0

Total 100.0 100.0

5. Multivariate Analysis

Firm size and the geographical distance of targets

This section tests Proposition 2 developed in the literature review. A cross-sectional analysis has been performed. First, OLS regressions are conducted, which include the constants in the models. Then, the constants are omitted in the analysis, because the values of the constants are all negative. As the dependent variable is the physical distance of either domestic or cross-border M&As, the negative values cannot exist. The results of the empirical tests are reported in <Table 5> without the constant values in the models.

The aim of this analysis is to identify the determinants of the location of M&As by focusing on the characteristics of transactions and target firms. <Table 5> reports the estimates of the relation between explained and explanatory variables. All of the regression models are statistically significant. The models explain around 30% of the geographic distance of M&As.

The results show that the variable TOP20 is positively related to the distance of target firms and is statistically significant at the 1% level in all models. The 'TOP20' is the most statistically significant variable. The difference in the distance between the top 20 largest and smallest firms ranges from about 4,800 km to 5,500km according to the models. It means that the target firms for the largest acquirers are located about 5,000km farther than that of the smaller acquirers. Thus, proposition 2, which states that the firm size of acquirers is positively associated with the geographic distance of the target, is verified. This finding is consistent with the result of Lehto (2006), who finds that the firm size, measured by the turnover, increases the probability of cross-border M&As at the expense of domestic M&As.

It is found that the proportion of equity acquired increases when the target firms are located far from the acquiring firms. Further, the value of transactions is found to be increasing with the geographical distance of the targets. This implies that difficulties of integration and M&As of shipping companies lead to holding a large amount of equity of target firms for the purpose of control by the acquiring firms. It makes the acquiring firms to anticipate that some future mergers will create values, with larger targets being more attractive. With the fact that the EBIT of the targets are negative for the inter-continent M&As, it assumes that the objective of the M&As is also to discipline inefficient management. However, 'TEBIT' is not statistically significant. The 'YEAR' variable is statistically significant in all models.

<Table 5> Coefficients of OLS regression models

Model 1 Model 2 Model 3 Model 4 Model 5

TOP20, dummy 4843.697*** (3.106) 3331.290** (2.054) 5540.336*** (3.531) 5018.024*** (3.178) 4867.259*** (3.125)

SHRAQ, % 17.455** (2.586) 20.367* (2.049) 16.929** (2.505)

TRANSAC, million USD 1.005 (.890) 3.089** (2.160) 2.268 (1.528) 2.045 (1.401)

ASIZE, million USD .117*** (2.698)

TSIZE, million USD 225.353* (1.834)

TEBIT, million USD -.779 (1.271) -.913 (1.494) -.675 (1.123)

YEAR, dummy 1559.269** (2.018) 1622.627** (2.049) 2607.502*** (3.811) 1816.392** (2.262) 1631.092** (2.106)

F stat. 14.852*** 13.731*** 13.039*** 11.316*** 12.160***

R2 corrected .316 .347 .286 .301 .317

Dependent variable is the geographic distance between an acquiring firm and a target. Values of R2 corrected are provided because the constant variables are missing. The value of R2 cannot be interpreted the same manner as its value generated by the OLS regression analyses. Betas are not standardized. T-values are in parentheses with absolute values.

*, **, *** indicate that the parameter estimates are statistically significant at the 10%, 5%, 1% significance level

V. Conclusion

This study deals with the motive of horizontal M&As in the container shipping industry. The paper examines the geographic distance between acquiring and target firms to take into account the information cost which decreases synergy effects generated by M&As. Two Propositions are suggested to test the existence of information cost and the synergy effects expected by the ocean carriers.

The paper shows that the geographical closeness is a characteristic of great importance for M&As in the container shipping industry. The motivation for the short distance is based on the information cost. Closely located acquirers and targets decrease the misunderstandings in communication with tacit messages. The paper finds that the geographical distance has a negative impact on takeover flows. M&A activities were more intense among firms located closely each other due to the increase of information cost with distance. This implies that carriers seriously take into account the information cost when acquiring a target company. By contrast, combinations among small carriers are more likely, too small, to achieve such economies of scale and instead are motivated by the elimination of a competitor41-1. In effect, it was found that the vast majority of combinations were acquisitions as opposed to mergers.

The paper provides evidence that the large the firm size, the higher the probability for inter-regional and cross-border M&As. The larger the acquiring firm, the more expertise it has to monitor the target firm and also to make cross-border M&As possible421. In the empirical study, it is found that the size of target firms matter in terms of the likelihood to be acquired. Large targets are preferred for inter-continental M&As. The proportion of equity and the value of transaction increases with the geographical distance of the targets. Larger targets are more attractive due to economies of scale. This finding verifies partially that the primary motivation of M&As is to achieve synergy effects.

The existing literature suggests that financially underperforming firms are more likely to be targeted by a firm. The paper argues that the takeover process results from the ongoing concentration of corporate control in the container shipping industry. The smaller and unquoted public firms are

41) Fusillo(2009), pp.209-226.

42) Lehto(2006), pp.1-20.

more vulnerable to M&As. It is highly probable that these small and unquoted public shipping companies are mostly likely to be targeted by their nearby potential acquirers*

* Date of Contribution ; March 1, 2013 Date of Acceptance ; December 1, 2013

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Annex : List of Acquirers

2006 2007

1 Allcargo Global Logistics Ltd SC North Star Shipping Srl

2 Grimaldi Group Freight Mgmt Hldgs Bhd

3 Navios Maritime Holdings Inc ACM Shipping Group PLC

4 Vladivostokskiy Morskoy CMA CGM SA

5 James Fisher & Sons PLC Coastal Contracts Bhd

6 Kristian Gerhard Jebsen Clipper Group A/S

7 Kuehne Nagel AG Intl AG Kaylee Maritime Ltd

8 Helogistics Holding GmbH Gondrand AG

9 Geodis SA Global Carriers Bhd

10 Havila Shipping ASA Global Carriers Bhd

11 Europe Container Terminals BV Friedrich Zufall GmbH & Co KG

12 Agunsa Europa SA Econocaribe Consolidators Inc

13 Eimskipafelag Islands ehf Nordhavn Holding ApS

14 Ocean Mainport Ltd Thoresen Thai Agencies PLC

15 Nippon Yusen Kabushiki Kaisha Dubai Drydocks World LLC

16 Eidesvik Shipping AS Canal Barge Co Inc

17 NYK Logistics(France)SAS DHL Corp

18 Overseas Shipholding Group Inc NTS

19 Clarksons PLC Asean Maritime Corp

20 Eitzen Chemical ASA Sagawa Express Singapore Pte

21 DF/S //S Complete Logistics Svcs Bhd

22 Pacific Intl Lines(Pte)Ltd Hubline Bhd

23 Harbour-Link Lines Sdn Bhd IJS Global Holding Inc

24 Harbour-Link Lines Sdn Bhd NTS

25 Harbour-Link Lines Sdn Bhd Nippon Yusen Kabushiki Kaisha

26 Harbour-Link Lines Sdn Bhd F W Neukirch(GmbH & Co)KG

27 Yusen Air & Sea Service Co Ltd NYK Reefers Ltd

28 Wirtgen Beteiligung DSV Air & Sea Holding A/S

29 Foss Maritime Co Harbour-Link Lines Sdn Bhd

30 Scotts Mccolls Group Hornbeck Offshore Services Inc

31 UTi Worldwide Inc Eitzen Maritime Services ASA

32 Delphis NV Eitzen Maritime Services ASA

33 Blue Star Maritime SA Inchcape Shipping Services Ltd

34 India Shipping Cardiff Marine Inc

35 Harbour-Link Group Bhd VSI

36 Harbour-Link Group Bhd Cie Belge DAffretements

37 Clarksons PLC Freight Mgmt Hldgs Bhd

38 Harbour-Link Group Bhd Gulf Agency Co Ltd

39 Sovkomflot Eitzen Maritime Services ASA

40 MISC Bhd MEDCEM

41 Broekman Group Havila Shipping ASA

42 Camillo Eitzen & Co ASA Coastal Contracts Bhd

43 Daiun Co Ltd Sealift Ltd

44 Palmali Shipping Wilhelmsen Lines Shipowning AS

45 Wilson ASA Solstad Rederi AS

46 Bong Shin Co Ltd Namsos Trafikkselskap Asa

47 Transmediterranea SA CMA CGM SA

48 Hamburg Sudamerikanische Ceva Logistics

49 Dixie Offshore Transp Co SEACOR Holdings Inc

50 Geest North Sea Line CMA CGM SA

51 UTi Worldwide Inc American Commercial Lines LLC

52 Svithoid Tankers AB Aries Energy Corp

53 SBS Logistics Ltd BHP Billiton Ltd

54 Mitsui OSK Lines Ltd Hubline Bhd

55 Tatsumi Shokai Corp LJAV SA

56 Cie Belge D'Affretements Harbour-Link Lines Sdn Bhd

57 Fluviomar International SA CWT Globelink Pte Ltd

58 Radiant Logistics Inc Kirby Corp

59 Rettig Ab Bore Oy

60 General Maritime Corp

61 Kawasaki Kisen Kaisha Ltd

62 Broekman Group