SHIPPING FINANCE

INTRODUCTION

Perhaps, every organization wants to initiate a management system and strategy that could maintain the organization’s capability, strength and competitiveness. It is important that the organization is always open for changes that it might encounter in order to cope and adapt to the latest development that are happening within and outside their environment. The possibility to bestow a competitive advantage is not intrinsic in all resources (Wernerfelt 1989), yet, to a certain extent, in simply those that satisfy a thorough collection of situations (Barney 1991; Peteraf 1993). Meanwhile, the volatility of the economy today precipitated two recurring issues: the intense competition between inter-company market war and the unstable financial market. For most companies, the decision is simple: to participate in a merger and acquisition process. This pursuit proves to be one of the potent solutions in keeping a company in a competitive shape.

In this regard, this paper examines the merge of two shipping companies - Carlos Antonios Ltd and Wolfgang Helmitrus Ltd. Carlos Antonios Ltd is a family shipping company, which is located in Berne, Switzerland. It was formed in 1953 by two brothers Patrick and Edmond Antonios. The capitalization of the company arose when their father died and left the two sons extensive property in Switzerland and Austria. This was sold and the money raised enabled the two brothers to form a company, Carlos Antonios Ltd, which traded in Rhine cruises.

THE SCENARIO

Today the company remains profitable with a fleet of ten ships. Most of the vessels based in Koln. The market is very competitive and profit margins are falling annually. The current chairman, Maurice Antonios believes the customer base is too small to have a long “term profitable future. He has been in contact with a Merchant Bank to form a merger with another Rhine Cruise operator. The Merchant Bank have suggested a Company based in the Netherlands called Wolfgang Helmitrus Ltd.

Wolfgang Helmitrus was formed in 1965 by a German - Wolfgang Helmitrus. He was a former industrialist and moved into the leisure cruise Rhine market in 1965 with four new cruise Rhine vessels. The vessels were under construction at Brenerhaven and the buyer was unable to maintain payments, Hence Wolfgang Helmitrus took over the contract and accepted delivery of four new cruise vessels. The company was based in Rotterdam, which had a strong market base. Today the company has twelve cruises with an age range from 6 to 12 years old. The company is no longer profitable and is highly geared with Bank and government loans. It also requires a lot of an investment in terms of I.T and modernization of the older cruise liners.

The capitalization of the company is 35% family, 25% bank syndicate of three German banks, and 40% bonds which are owned by Pension Funds, private investors and a venture capitalist based in New York. Hence the company has lost control of the business, as the Board of Directors is comprised of four personnel with the three banks holing each directorship and the chairman, Wolfgang Helmitrus Ltd. The banks are keen to sell the business or find a merger. You have been appointed as a manager in a Merchant Bank based in London with an office in Berne to proceed with a merger of the two shipping companies.

Merging

Owners seek to merge companies for several reasons including combining breakeven or profitable companies to become more profitable, combining competitors for succession planning or combining for synergistic reasons. For these reasons, Carlos Antonios Ltd and Wolfgang Helmitrus Ltd should be given consideration to merge.

There is a growing concentration of ownership and capacity in container shipping. By 2001 the top 20 container lines accounted for 83 per cent of vessel capacity. Alliances and mergers are an important part of the trend, but it is being reinforced by the dynamic internal growth of some lines. Maersk has become the industry leader through its merger with SeaLand, but the parent firm, the privately owned A.P. Moller of Denmark, has been very aggressive in expanding services and capacity. COSCO, the Chinese carrier, has similarly embarked on a growth strategy. At present it appears that this concentration is likely to continue as a result of over-capacity and market uncertainty. The impact of the concentration of capacity on competition will become a very important question in the future (Pinder & Slack, 2004).

Carlos Antonios Ltd and Wolfgang Helmitrus Ltd should therefore merge and the following sections will discuss the plans and the methodology on the merger and detailed commentary of each stage of the merger. There are principally two types of mergers. One is an acquisition where the acquired company is merged into the existing operation, and the second is a true merger where two companies merge together and the two previous owners become the new owners of the merged entity.

When a merger takes place between two or more companies, the dominant one absorbs the smaller units and they disappear as separate entities. If company A makes an offer to company B to purchase its assets and liabilities and the offer is accepted, company B ceases to exist as a separate organization, and company A is then a larger concern. In the case of Carlos Antonios Ltd and Wolfgang Helmitrus Ltd, the merging should be a joining of two companies. Instead of the hostile takeover, Carlos Antonios Ltd and Wolfgang Helmitrus Ltd should strive to succeed through the merge acquisition. The merging of two companies together can be extremely profitable and rewarding; however, there are many important factors to consider. The single most important factor is the compatibility of the two owners. Since it is not possible for a company to have two leaders, they must agree on what roles each will have going forward. Mergers work best when owners possess different areas of expertise such as sales, production, administration or a special skill required by the company. The two companies - Carlos Antonios Ltd and Wolfgang Helmitrus Ltd – should therefore discuss first their different areas of expertise.

The management may sometimes face difficulties in communication with the employees at the beginning. The most important thing to remember during the merge of the two organizations is that communication should be a top priority. Thus, management have to make sure that we begin communicating in a two-way matter. Care must be taken to involve, encourage, and support these individuals through the early adjustment phases. It has been said so often that it is now more trite than true: any change effort will fail without senior management's support and commitment. Unfortunately, however, this statement is only partially true. Senior management's support and commitment are “table stakes”; they may keep you in the game, but they won't win you the prize. A merger integration today requires active change leadership. The alternative is failure (Galpin & Herndon, 2000).

The Plan

A unique business phenomenon that is slowly becoming commonplace is consolidation between firms wanting to attain strategic value for their respective organisations. Industry-wide consolidation has now grown so pervasive that it in fact has spawned its own lingo, with such terms as bolt-on, roll-up, tuck-under, and carve-out describing various types of transactions. In M&A announcements, it will be frequently claimed that the deal is a true 'merger of equals' that creates superior access to resources and provides a strong global platform to accelerate growth, and will, in all certainty, create significant value for shareholders and represents an outstanding opportunity for customers and employees alike. A number of companies have deemed that through M&A, they will be able to achieve this. Wall (2000) observed that while examples of failed mergers far outnumber examples of successful ones, there are some companies that have learned how to integrate acquisitions well. Since the aim of the company is to create value for its shareholders, the company has to create a competitive advantage to exploit its inconsistencies in the markets in which it operates – both its trading environment and its financial environment.

With regards to merging effects, adaptation capabilities and changes of companies with respect to their leaders should be considered which is in our case we have Carlos Antonios Ltd and Wolfgang Helmitrus Ltd.

Projects	Strategies
1. Reengineering of the budgeting and business planning process.
a. goal setting and overall corporate strategies	Clear roles and responsibilities, Cross-pollination (sharing of knowledge and ideas), Alignment with regional strategies
b. resource allocation between HQ and regions and across regions	Timelines
c. meetings to review plans and progress to make changes as necessary	Cross-pollination (sharing of knowledge and ideas), Demonstrated results
d. metrics to use for consistent communication of business results	Excellent teamwork and leadership, Dynamic processes (not bureaucratic)
2. Implementation of a new performance management and career planning system.	Single source for decisions and opinions
3. Restructuring of service operations at HQ into client-focus teams.	Competitive advantage, Proactive learning how to mange through a matrix organization
4. Improving the relations between R&D and HQ service operations.	Team leader accountability

The above table clearly identifies the project plan to be handled with the course of strategies in order to meet the goals of merging. For reengineering of the budgeting and business planning process, it is very important to identify the goal setting and overall corporate strategies of these two merging companies i.e. Carlos Antonios Ltd and Wolfgang Helmitrus Ltd. From this, there should be clear roles and responsibilities to be considered. Cross-pollination (sharing of knowledge and ideas) among members is also important and alignment with regional strategies must also be apparent. The teams need to demonstrate they understand the needs of the regions and are flexible to address them. The alignment should exists between the business plans of the HQ teams and the regions and the teams should understand the reality of what goes on in the business environment. They should have a clear agreement on plans for services and understand the relationship of their shipping services to the needs and objectives.

Conversely, timelines for resource allocation between HQ and regions and across regions should be clearly identified. Actually, timelines respond to timely input to region on regional plans and fast response to queries. Similar to goal setting, cross pollination and demonstration of results should be apparent in order to address the needs in meetings to review plans and progress to make changes as necessary. As part of demonstrations of results, agreements must be kept and plans that are set should be implemented or achieved. Tangible results and benefits must be seen, and teams must keep to their budgets, and if not, regions understand why.

Apparently, excellent teamwork and leadership and dynamic processes (not bureaucratic) are tools for consistent communication of business results. This means that excellent communication among service, technical, and finance must be seen and excellent communication and cooperation with regional personal and HQ teams—HQ models correct leadership and teamwork behaviors must be consistent.

To implement a new performance management and career planning system, single source for decisions and opinions must be identified. Basically, competitive advantage and proactive learning how to mange through a matrix organization can be use to restructure the marketing and sales operations at HQ into product based teams. Meaning to say, leveraging of resources available in all areas and access of expertise outside of function or team should also be considered. On the other hand, it is team leaders’ accountability to the relationship between R&D and HQ service operations.

Financial Planning

1. Countries of Operation

As part of financial planning in merging, countries of operation should be considered. The merging companies Carlos Antonios Ltd and Wolfgang Helmitrus Ltd has operations in the major areas of Germany, Switzerland and Netherlands, as well as a presence in the markets of America, Europe and Asia.

2. Effect of Changes in International Trade to Shipping Business

Diversified across products, markets and regions, the merging Carlos Antonios Ltd and Wolfgang Helmitrus Ltd asset base provides relatively stable cash flows regardless of variations and risks in areas such as commodity prices, currency exchange rates and geopolitical conditions. From these changes, the following table illustrates proposed capital structure in order to sustain the changes in business.

Table 1

Proposed Capital Structure

The illustrated structure shows the possible options of the merging companies. However, aside from this, their export activities was affected by the foreign exchange rate movements resulted to the rise to a wider range of deferred tax assets and liabilities and an increase in the volatility of deferred tax balances.

INTERNATIONAL FINANCIAL MARKETS

1. Foreign Exchange Market Utilization

The foreign exchange market is used by these companies as the medium in where it facilitates trading with other multinational shipping corporations. Also, since they seek for foreign exchange to purchase the materials and acquire the services that they need, the foreign exchange market is the playing field of such activities.

2. Eurocurrency Market Utilization

Since these shipping companies makes bank deposits in the various countries that they operate in, it makes use of the Eurocurrency because the latter are the deposits residing in banks that are located outside the borders of the country that issues the currency the deposit is denominated in. For instance, a bank where they put in their money has a deposit denominated in Eurocurrency deposit.

EXCHANGE RATE DETERMINATION

1. Currencies Utilized in Conducting International Business

The currencies in which Carlos Antonios Ltd and Wolfgang Helmitrus Ltd uses to conduct its businesses are: Australian dollars, Pounds Sterling, US dollars, South African rand, Euro, Chinese Yuan, Brazilian real, the Chilean peso and Colombian peso, among dozen others.

2. Last Year’s Changes in the Currencies

The US dollar is the main currency used by Carlos Antonios Ltd and Wolfgang Helmitrus Ltd to conduct most of its businesses. The said foreign currency has witnessed some notable swings versus major currencies in recent times. For instance, over most of 2005, it expanded 13% against the Euro and nearly 18% vs. the yen, while between March and May 2006, it sharply decreased in value against the mentioned currencies, losing almost 10% of its value. Also, the UK Pounds Sterling saw a 12.05% and a 15.11% positive movement as against the US dollars and Japanese yen, respectively, during the last year.

Suggested Valuation Measures

Free cash flow is the basis for measuring the company’s ability to meet the capital requirements. This is the amount of money that was left over by the company after paying all the cash expenses and the investment in operation required by the firm. Free cash flow equation would be adding the depreciation to the net income and then subtracting capital expenditures.

Let’s take the cash flow statement of coca cola from 1996-1999. The value of the Coca Cola’s net cash provided by their operating activities from 1996-1999 are as follows: (values presented are in million dollars and are in chronological order from 1996-1999) 3463, 4033, 3433 and 3833 while their purchase of property, plant and equipment from 1996-1990 are: 990, 1093, 863, 1069. And the total cash flows are: (from 1996-1999) 2473, 2940, 2570 and 2,764. In the four year operations of Coca Cola from 1996-1999 it yielded a $10.7 billion dollar net income in which the highest cash flow happened in the year 1997.

Earning basis or the earning valuation, this valuation is the commonly use technique in valuing the company. And since we are dealing to the merging of shipping business, valuation is important. After the company has paid its entire bill, the money left is the earnings also called as income or net profit. In order to evaluate the income consistently, most company used earnings per share (EPS) in measuring the net profit. EPS could be achieved by just dividing the amount of the earnings by the quantity of shares it presently has outstanding. For example, company A has $2M shares and the company has a total earnings of two million dollars in a year, the total EPS trailing is $2.00 (trailing means quarterly evaluating of report). However companies are employing more on the Price/Earnings (P/E) ratio to evaluate the company’s earnings in relation to its price. For example, Company A is presently dealing with a $20 per share then the P/E is $10. the equation was: $20(share price) divided by $2 (EPS shown on the 1^st example)= $10 P/E.

Asset basis is an approach usually used by buy-sell agreements for the reasons that the numbers here are more conveniently attainable than doing earning forecast. The asset’s value according to Banks, E (2001) that the ability of the assets to build up or to increase is the reflection of the success of the business because in order to generate the company’s income the assets must be valued.

The value of stock could be valued through the dividends valuation in which the value of stock is defined through discounting the expected dividends that will be paid on the stocks. The basic dividend model is MV(ex div)=d/r where MV is equated to market of the share previous dividend, r is for the shareholders’ cost capital and d is for expected annual dividend per share in the future (Banks, E 2001).

Under the dividend valuation is the Dividend Discount Model (DDM). In this approach, the value of the stock is the current value of the anticipated dividends, discounted at its cost of equity capital. This a process for valuing the price of the stock through the use of dividends and discounting them back to its present value (Banks, E 2001). If the result of DDM is higher than the current shares then the value being obtained is undervalue. The equation in DDM is value of stock is equaled to the dividend per share divided by the discounted rate minus the dividend growth rate (Banks, E 2001).

All these valuations are effective; the use of these valuations would definitely depend on the company as to what would be their focus. The important point here is that in merging and acquisition it is necessary to conduct valuations in order to forecast the company’s potential and to prepare for the future growth. Conducting this kind of technique would allow the company to avoid or lessen the expected obstacle that the firm may encounter along the way since merging and acquisition entails a thorough analysis and planning to attain and to survive the risky environment of business.

Benefits of Merging

Practically, the combining efforts of two companies were expected to reap many benefits. In this case, merger and takeover includes several benefits particularly in addressing common yet challenging issues on the business operations. Some of these benefits include the importance the said process in terms of competition, financial management, innovation, and other related factors.

The recent burst of takeover activity has been viewed as a distinctly new wave that is driven by strategic, synergistic factors. Merger and takeover is an effective solution and way to combat the widening competition any specific business or industry (Market Research 2000). The merger boosts any company by providing the needs to attain tremendous growth and positioned its products and services as dominating forces in the particular area of operation. It is all in cost-saving expectations that create important expenditure and selling synergies. According to Beckenstein, (1979, p. 118) there are reasons for mergers including different kinds of efficiency improvement such as replacement of inefficient management product, financial, and tax synergies. Other possible reasons are gain of monopoly power, valuation discrepancies caused by information asymmetry as well as a number of agency motives such as growth maximization, free cash flow, and employment risk reduction. Accordingly, most companies executing acquisitions have done a reasonably good job sizing up the economic and financial characteristics of the takeover. More specifically, merger allow newly merged companies to enter new product and geographical markets this will show acquiring the sources of revenue, as well as new customers; it will also acquire new technologies in support of the prior objective; will reduce costs through economies of scale and scope; increase in the operational efficiency; avoid becoming a target for acquisition or unwelcome merger; and will extend local exchange carriers or embrace for long distance carriers the temporary economic power of major regional or national local exchange carriers to finance expansion.

Similarly, merger and takeover permits the sharing of sale warehousing, distributing, and other logistical services. It reinforces ongoing sales and profit growth rates, thus, maximizing the resources of both companies involved. Strategic alliances like M&A has helped pressure some firms to link with others. It has also meant many new players looking for ways to follow their customers. Further, it helps to mitigate external environmental uncertainties and potentially avert price wars. The degree of strategic alliances may range from a simple licensing agreement, to joint marketing effort, to establishing consortium, to combining resources for joint ventures, to the ultimate form of mergers and acquisitions. Companies may be interested in alliances to capitalize on different expertise, build strategic synergies, mitigate risks, speed up a venture with combined resources, and develop scope economies (Chan-Olmsted 1998, p. 38). Mergers or acquisition enables the surviving entity to combine assets and activities, substantially lower costs, and become a strong competitor; increase scale economies, and spread the cost of R&D over volume; and integration of physical assets is vital in achieving the economic objectives of the combination (Freidheim 1998, p. 29). Additionally, M&A redefine corporate boundaries, corporate growth, capabilities, and consolidation.

In merging two companies, there are many consequences that should be looked upon to. It is up to the companies if the merging will create a new response from the market. They’ll be the one to make their new company a success of a failure. There are so many ways for two companies to merge, and one of which is takeover. Takeover of one company to another is one business gets ownership without cooperation from the other (Anonymous 2005). Often the corporation that continues to function makes an outright purchase of the property and stock of the others; exchange of bonds, options, and other agreements are also employed by the corporations involved (Anonymous 2005).

Furthermore, there are three criteria of core competencies which can also be considered as the strength of the merger. These core competencies include superior customer value, business similar in way related to core competency and difficult to imitate or find substitutes for. It seems that the creation of Morrison through merger has achieved to a certain extend the above criteria in a way that it did provide something different. Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units. The merger between Morrison and Safeway has already created satisfactory result by corporate restructuring and portfolio management. In particular, result of the merger ranges in finance, human resource, project management, and procurement. The company estimates that this effort saved significant amount of corporate financial resources.

In addition, one of the strengths of the merger is its ability to strengthen the competitiveness of the merged company. Strategic alliances through mergers present an especially attractive avenue for the financial industry since the multinationals will be able to integrate different communications segments quickly, capture a developed customer base, consolidate smaller niches, remove a rival and prevent competition from doing so, and accelerate the implementation of new technologies with combined resources. Merger became the dominant methods of consolidation and the primary objective was to control assets (assets during those days were the newly invented machinery and equipment, and plants and productive capacity since the economic driver was scale and efficiency of production), and the best way to control assets was to own them (Freidheim 1998). Merger can create or enhance strategic assets as well as distinctive capabilities. Furthermore, Kay (1993) stated that merging with other businesses can sustain exclusivity, or maintain the value of a competitive advantage, if they inhibit entry.

Conclusion

As information overwhelmingly suggests, organizations know the root causes of failed mergers, but they have not succeeded in doing much to manage the issues that are involved in successfully merging deal. Even in companies where there has been painful personal experience of deals gone wrong, it is the rare executive who has led an organization to create anything more than a rudimentary plan for integration. Sadly, in spite of overwhelming evidence of the importance of effective post-merger integration, organizations and executives continue to fail. Value can relate either to the underlying business, or to the value created for the investors; a successful company needs to match the two, and to ensure that its share prices reflects the fundamental value of its businesses. The financing behind M&A deals are sounder and secure than ever before. Companies continue to use their stock as currency giving the seller potential upside in the combined entity. This motivates both parties to work together on a post-closing basis to truly enhance stakeholder value. In addition, third-party financing is more readily available. The number of financing sources has continued to grow giving middle market companies more access to capital than in the past. These new avenues that are opened up to the companies of today are helpful in facilitating more successful merger and acquisition deals. Coupled with the large number of merging deals who have failed to be taken as a warning, contemporary organizations that plan to improve the delivery of value to stakeholders have more help in their outside environment than ever before, making M&A deals less susceptible to being a failed venture. However, the success of the merger between Carlos Antonios Ltd and Wolfgang Helmitrus Ltd would depend to a large extent to the managers and employees of the two companies. As long as they can harmoniously cooperate with each other and follow the recommended strategies, then the merger will succeed.

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