The main commercial driving force behind M&A is that the activity enhances value. Whether this is value for the shareholders through profitability; via offering instant growth rather than waiting for organic growth; or by helping the company diversify into geographies or market segments where it did not have a presence or knowledge.
M&A can also offer economies of scale and allow a company to price efficiently as compared with its competitors. When companies merge, they are empowered to become cost-effective as a result of the combination of their resources.
What is more, mergers offer companies the chance to gain market share and/or to diversify into new complementary business lines. This is particularly true in the shipping sector. For example, with APL now part of CMA CGM following the latter’s acquisition of NOL in 2016, it increased CMA CGM’s market share in the shipping sector to close to 12 per cent, enhanced its already strong portfolio and added to the global services that it could offer.
The integration of Maersk and Hamburg Süd is another quoted example of how M&A has strengthened its global positions and achieved tangible cost savings.
DHT Holdings’s acquisition of Samco Shipholding in 2014 brought to the table a fully integrated ship owning company with in-house technical management because the transaction included Samco’s ownership in Goodwood Ship Management. This acquisition complemented DHT’s business by offering a full service business.
Another advantage of scaling up via M&A is that a larger company generally enjoys better options when raising capital. This debt or equity financing is easier to come by for a bigger and well-capitalised company. Statistics have also shown that companies with over a billion dollars of market capitalisation are able to be priced with lower margins from their financiers than companies with less than a billion dollars of market capitalisation. In addition, a bigger company will invariably attract a bigger pool of investors to it, thereby increasing liquidity within the company. A liquid company can in turn help with any security value maintenance provisions it has to comply with.
Another attraction of M&A is that it gives the company flexibility when structuring its financing. For example, the M&A may be structured through cash and shares, such as how Scorpio Tankers closed the merger with Navig8 Product Tankers and DHT’s acquisition of 11 VLCCs from BW Group, as compared to a pure asset sale.