Mergers & Acquisitions: Spreading Risk, Doubling Down

Spreading Risk, Doubling Down he chart below says it all: 2004 was a record year for mergers and acquisitions in the shipping industry – cash was abundant, earnings were strong, the capital markets were open and interest rates were low. In other words, the market conditions were ideal for making deals, although we won’t know the real impact on shareholders for some time.

There were three distinct motivations that drove the explosive M&A deal volume of 2004. First off, there was an incredible amount of liquidity available. Both private and public companies have been generating huge amounts of cash from operations since the market began its upward climb in late 2002, and many have been keen on using that cash to grow or renew their fleets. In addition to internally generated funds, the debt and equity markets were wide open for shipping issuers all year long, with the exception of a brief blip in the bond market in May. The fact that asset values were at historical highs didn’t stop buyers from taking a punt. Ships were still generating enough cash that vessel acquisitions were accretive to earnings, and therefore took public company share prices higher. For the private companies, strong cash flows, with or without short-medium term charter cover, were enough to amortize debt quickly and bring loan balances down to reasonable, even attractive, levels. Add to that the fact that shipyards are ostensibly “full” and the fundamental outlook in most markets, other than large container ships, is pretty good, and it follows naturally that ship shoppers were not in short supply.

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