McKinsey: Shipping M&A Destroying Shareholder Value
Container shipping company mergers and acquisitions have destroyed $110 billion of shareholder value in the past 21 years, according to a recently published report by McKinsey & Co.
The report pins the problem on the continuous overcapacity that continues to hinder the sector.
In terms of return on invested capital, bulk shipping was the only transport sector with a worse performance than liner shipping’s average of less than 2%.
Market leader Maersk Line’s return on invested capital (ROIC) last year was 2.9% on sales of US $23.8 billion.
This slid to just 1.8% in the fourth quarter as the carrier’s services came under renewed rate pressure.
The previous year, 2016, saw Maersk Line produce a negative 1.9% ROIC for its shareholders from $20.7 billion of revenue.
Read a report by McKinsey and Company that predicts what will influence container shipping 50 years from now
McKinsey & Co’s report has warned that the overcapacity problem is set to continue into the next decade.
It stated: “With overcapacity, container lines often accept any cargo, even if it barely covers marginal cost; after all, carrying something extra on today’s ship is usually better that carrying air.”
It also says that the negative environment in the liner shipping sector had prompted “unprecedented consolidation”.
McKinsey noted that the combined fleet capacity of the top five carriers is set to jump from 35% to 67% after the takeover of OOCL by Cosco.
Further, ten of the top 20 carriers in 2013 no longer existed as standalone companies.
McKinsey has also cautioned that container line mergers “come with a risk of revenue loss”, citing problems with customer overlap in terms of volume and price, fears around integration and “actual service failure driving customers away”.
By way of example, McKinsey shows Maersk’s revenue a year after it’s 2005 acquisition of P&O Nedlloyd and Hapag-Lloyd’s purchase of CP Ships.
In the case of Maersk, earnings before interest & taxes (EBIT) revenue dilution from the combined operating revenue plummeted by 14.7%, and Hapag-Lloyd and CP’s revenue shrank by 8.2%.
The report stated: “Lines need to decide on their strategy as well as their potential role in the consolidation, and they must build on the experience of others to ensure successful integration while avoiding the mistakes of the past.”