Original Article

Structural factors underlying mergers and

acquisitions in liner shipping

Mike Fusillo

The Louis Berger Group, Inc., New York, NY

A b s t r a c t The virtual disappearance of liner shipping conferences from US markets

and their elimination in European trades create a significant risk that in place of these
collusive price-setting groups, the industry could become increasingly consolidated. The
absence of the conference pricing cushion could end up giving an advantage to large,
cost-efficient carriers who will drive smaller players from the market. During this compe-
titive process, shippers could see lower freight rates and better service but as the industry
consolidates towards oligopoly, there is the risk that shippers will be faced with fewer
alternatives to move their goods, lower service quality and significantly higher prices. The
impact on merchandise trade could be substantial. This paper is intended to reveal basic
structural characteristics of the liner shipping industry that could point to more accurate
predictions of future consolidation activity. In particular, a series of mergers and acquisi-
tions in the industry will be examined against the backdrop of industry structure and
regulatory constraints. Ultimately, a Poisson model is formulated and estimated to extract
and quantify the structural factors that increase the likelihood of horizontal merger and
acquisition activity.

Maritime Economics & Logistics (2009) 11, 209–226. doi:10.1057/mel.2009.3

Keywords: liner shipping; mergers; acquisitions; industry structure; consolidation;

oligopoly

Introduction

Merger and acquisition activity tends to occur in waves for a multitude of

reasons.1 In general, firms seek mergers and acquisitions to capture economies
of scale in production, increase management efficiencies and exploit synergies
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between rival operations and markets. In the literature, mergers tend to be

classified under two headings: behavioural, which are combinations based
on market miss-valuation of firms, and neoclassical, which explain that the
initial spark that ignites a merger wave can be traced to shocks to various
elements of industry structure, specifically the industry’s demand curve,
production technology and regulatory environment.2 More recently, the ‘eat-or-
be-eaten’ theory of mergers combines elements of neoclassical and behavioural
theories.3 In the eat-or-be-eaten hypothesis, mergers are defensive and will tend
to occur when ‘ y an expected industry shock that makes some mergers
profitable in some future states of the world induces a pre-emptive wave of
mergers y ’.4 even if the mergers are initially unprofitable. The theory holds
that these mergers are defensive acquisitions and claims to explain both the
stylised facts of mergers and why they occur in waves. Combining neoclassical
and behavioural factors, Bernile et al (2006) suggest that in concentrated
industries, strategic considerations are an important motivator of mergers
during periods of above- or below-trend demand growth.
There are two stylised facts associated with mergers: the first and most
relevant for this paper is that mergers tend to be more frequent in industries that
have undergone a shock. Second, abnormal returns to acquirers tend to be
negative.
In the neoclassical school, mergers are seen as a natural adjustment to new
economic realities. For example, a shock to demand in one market may require
a diversion of productive resources to different product or geographic markets.
Merger or acquisition may be the vehicle to provide entry into these new
markets. Second, a shock to production technology may raise the minimum
efficient scale of operations that individual firms may not be able to achieve
without horizontal integration. In addition, a technological shock may so
radically change the means of production that if firms do not expeditiously
adopt such technology, they become takeover targets. Third, a change in the
regulatory environment, such as the removal of restrictions on entry constitutes
a shock that may induce an interest in mergers as a defensive response to
potential entrants. Deregulation, in some cases has been revealed to be the
primary influence over merger activity in US markets since the 1980s.5
In the literature, one finds several other factors overlooked by neoclassical
theorists that underpin merger activity. These include strategic considerations
such as attempts to create monopolies or oligopolies in part by generating
economies of scale, removing incompetent management, and diversification
into other product or geographic markets. More often than not, mergers create
persistent share-holder value, particularly for the acquired firm.
There is empirical support for the neoclassical view on mergers. Andrade
and Stafford (2004) provide a brief overview and themselves find evidence that
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 Structural factors underlying mergers and acquisitions in liner shipping

firm-specific shocks can precipitate merger and acquisition activity. None of the
empirical work to-date, however, strictly addresses the liner shipping industry.
This paper is an application of the neoclassical theory of mergers to US liner
shipping markets. The objective is to isolate and quantify the neoclassical
factors believed to precipitate merger activity in the liner shipping industry,
particularly in light of the recent European Union (EU) liner shipping industry
reforms. The paper begins with a summary and overview of recent merger
activity in liner shipping, proceeds to a presentation of some relevant statistics
and then describes the development and estimation of a count data model of
merger activity among liner shipping firms serving US trade lanes. The paper
ends with a discussion of the results of the model and draws some conclusions.

Mergers and Acquisitions in Liner Shipping

Over the past decade, the deep-sea liner shipping industry has experienced all
three shocks identified by neoclassical economists as precipitating horizontal
integration. First, the Ocean Shipping Reform Act of 1998 (OSRA) so weakened
the traditional conference system in US markets that to preserve competitive-
ness, carriers were forced into a race to reduce unit costs or seek alternate
means of preserving market share and market power. To do so, most of the
major carriers sought membership in global alliances, which offer the benefits
of merger without the substantial and possibly sunk investment costs. Others,
recognising the limits of such arrangements decided to pursue economies of
scale and retain market power through horizontal integration. Second, con-
tainership technology has produced enormous vessels that in some cases may
be too expensive for single firms to deploy in a viable service string. These
larger vessels when deployed properly offer significantly reduced unit costs and
could generate such a technology imbalance that carriers, which do not operate
them may become vulnerable to failure. This is especially true with
undifferentiated and homogenous output such as ocean container transport.
Absent a concurrent rise in demand, the widespread and rapid adoption
of these ships raises the level of excess capacity particularly, as existing
containerships are long-lived assets and are therefore either left in place or
cascaded to smaller markets. In either case, unless rationalised, possibly
through supplier consolidation, excess capacity poses a threat to industry
profitability. Finally, demand for merchandise trade remains seasonal and
subject to the uncertainties of the international economy. Demand shocks can
still derail profitability in the liner trades as was witnessed after the Asian
financial crisis of 1997 the post-9/11 recession and more recently, the global
credit crisis of 2008.
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 Fusillo

Given these developments, it has come as no surprise to industry analysts

that merger and acquisition activity in liner shipping has increased rapidly since
1995. The Federal Maritime Commission (2001) counts seven principal mergers
and 30 acquisitions in the period between 1995 and 2001. And because the EU
has eliminated the liner conference system from its liner trade markets in favour
of unfettered competition, neoclassical wisdom would indicate an accelerated
push towards supplier consolidation leading to an increasingly oligopolistic
market structure on a global scale.
The years beginning in 1996, witnessed a number of both high profile and
smaller mergers and acquisitions among liner shipping firms. None of this
activity was unexpected. Most industry watchers were aware that the OSRA of
1998 would reduce the incentive for conference participation and would ulti-
mately motivate carriers to pursue unit cost savings and economies of scale by
seeking horizontal integration with rival carriers either through merger and
acquisition or cooperative agreements. Although there were only marginal
levels of activity in the 1991–1996 period, mergers and acquisitions accelerated
in 1997–2000. During this period, strategic alliances also took form pre-
dominantly as a means to share fixed operating costs, and as a response to the
weakening appeal of conference membership. Merger and acquisition activity
subsided from 2000–2004 but as carriers began to discover the limitations of
strategic alliances, it regained momentum in the middle of the current decade
with three high profile combinations in 2005.

10

8
OSRA Passed
Number of Combinations

0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Figure 1: Count of merger and acquisition activity during 1993–2007.

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 Structural factors underlying mergers and acquisitions in liner shipping

Figure 1 plots the progression of merger and acquisition activity in US trade

lanes since 1993. It clearly shows that the count of carrier combinations, ex-
clusive of strategic alliances, accelerated in the 2 years preceding OSRA and
peaked just after its enactment. Combinations fell to zero in 2004 but appear to
have regained upwards momentum in 2005.

Characteristics and Motivation

Firms merge with or acquire one another for a variety of reasons. The pursuit of
economies of scale is a critical factor, particularly when demand is rising. In the
model of Lambrecht (2004), firms which face internal capacity limitations
such as in network industries, face decreasing returns to variable inputs
but increasing returns when firms merge. This result leads to projections of
increased merger activity during periods when demand is growing. Although it
runs counter to the belief that liner shipping firms are more interested in
reducing excess capacity than exploiting potential scale economies through
service rationalisation, it is worth exploring empirically as is done later in
this paper.
In addition to the pursuit of economies of scale and market power, mergers
may serve as a means of gaining market entry to extend or diversify one’s
product line. Mergers may expand the base of customers and provide a more
solid overall corporate business base. Agency factors such as the utility func-
tions of individual managers may play an important role in the decision as well.
But mergers, particularly those involving cross-border operations can be
expensive in terms of time and effort required to meet legal and regulatory
hurdles and in many cases, and in keeping with the second stylised fact of
merger analysis, the merger does not meet the financial objective. Problems
mixing corporate cultures, including different perceptions of firm objectives
may present significant management effort to overcome. A particularly large
merger may also induce shippers to diversify suppliers fearing that an over-
reliance on one large carrier puts their shipments at risk.
Table 1 displays a list of firm combinations that occurred among carriers
serving US trade lanes during the period between 1993 and 2007. The firms are
classified as global, serving global liner markets, multi-market, serving at least
two markets but without a truly global presence and regional, serving a parti-
cular or niche market. Casual observance of this data does not appear to in-
dicate any strong commonalities with respect to markets served. Combinations
have occurred within the global carrier market, as in the case of Maersk-Sea-
land, Maersk-P&O Nedlloyd and NOL–APL, but could just as likely occur in the
niche or north-south trades. Therefore, it is reasonable to conclude that there
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 Fusillo

Table 1: Carrier combination types and market presence

Year/ Firm 1 Firm 2 Merger/ Acquiring Acquired

Quarter Acquisition carrier carrier

1993/Q3 CP Ships Canada Maritime Acquisition Multi-market Regional

1995/Q1 CP Ships Cast Acquisition Multi-market Regional
1995/Q2 Navieras Pyramid Acquisition Regional Regional
1996/Q3 CMA CGM Acquisition Global Global
1997/Q1 P&O-Nedlloyd P&O Containers Merger Global Global
Hanjin DSR Senator Lines Acquisition Global Global
CP Ships Lykes Lines Acquisition Multi-market Multi-market
1997/Q4 CP Ships Contship Acquisition Multi-market Multi-market
NOL APL Acquisition Global Global
1998/Q1 P&O-Nedlloyd Bluestar Lines Acquisition Global Regional
1998/Q2 CP Ships Ivaran Lines Acquisition Multi-market Regional
1998/Q3 Hamburg Sud Alianca Container Line Acquisition Multi-market Regional
Hamburg Sud Southseas Container Line Acquisition Multi-market Regional
Evergreen Lloyd Triestino Acquisition Global Multi-market
1998/Q4 CP Ships ANZDL Acquisition Multi-market Regional
1999/Q1 CSAV Libra Acquisition Regional Regional
1999/Q2 Maersk Safmarine, Acquisition Global Regional
CSAV Montemar Acquisition Regional Regional
1999/Q3 Hamburg Sud South Pacific Container Line Acquisition Multi-market Regional
TMM Tecomar Acquisition Regional Regional
Hamburg Sud Transroll Acquisition Multi-market Regional
Wallenius Wilhelmson Merger Global Global
1999/Q4 The Rickmers Group Rickmers Lines Acquisition Regional Regional
Maersk Sealand Acquisition Global Multi-market
2000/Q1 CP Ships TMM Merger Multi-market Regional
Hamburg Sud CAT Acquisition Multi-market Regional
2000/Q3 CP Ships CCAL Acquisition Multi-market Regional
P&O Nedlloyd Farrell Acquisition Global Regional
CSAV Norasia Acquisition Regional Multi-market
2001/Q4 Tropical Shipping Kent Lines Acquisition Regional Regional
2002/Q2 Sea Star Navieras Acquisition Regionial Regional
2002/Q3 CP Ships Italian Line Acquisition Multi-market Multi-market
Maersk-Sealand Torm Lines Acquisition Global Regional
2002/Q4 Tropical Shipping Tecmarine Acquisition Regional Regional
Hamburg Sud Ellermen Acquisition Multi-market Regional
2003/Q1 Hamburg Sud Kien Hung Lines Acquisition Multi-market Regional
TecMarine Seaboard Acquisition Regional Regional
2003/Q2 CMA-CGM ANL Container Lines Acquisition Global Regional
2005/Q3 Hapag Lloyd CP Ships Acquisition Global Multi-market
Maersk-Sealand P&O Nedlloyd Acquisition Global Global
CMA-CGM Delmas Acquisition Global Global
2006/Q1 Hamburg Sud Fesco Acquisition Multi-market Regional
2007/Q1 CMA-CGM US Lines Acquisition Global Regional

are not any particular geographic markets or characteristics of such markets

where mergers are more or less attractive. This is a critical distinction for the
empirical model that follows later in this paper. It weakens the need to control
for observed or unobserved geographic market characteristics that could affect
the outcome of the model.
In some cases, such as several acquisitions made by CP Ships, and P&O
Nedlloyd’s acquisition of Blue Star Lines, mergers appear to be motivated by a
strategy for market entry and growth. In other cases, it seems more likely that
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 Structural factors underlying mergers and acquisitions in liner shipping

mergers are undertaken to eliminate a competitor. Although it is reasonable to

argue that the primary motivation behind carrier combinations among large
carriers is economies of scale and the pursuit of market power in a changing
regulatory environment, combinations among carriers serving north-south
markets are more likely, too small, to achieve such economies and instead are
motivated by the elimination of a competitor.
Table 1 also shows that the overwhelming majority of combinations were
acquisitions as opposed to mergers, and a large share of them was accounted
for by CP Ships, for which acquisitions formed the strategy for growth.
Two-thirds of the acquired firms were regional carriers, 15 per cent were multi-
market and the remaining carriers could be classified as having a global
presence. Of the acquirers, 44 per cent were multi-market carriers, 18 per cent
were regional carriers and 38 per cent were global. Among the global carriers,
almost half (47 per cent) acquired or merged with another global carrier.
Only 20 per cent acquired a multi-market carrier and one-third acquired a
regional carrier.
The above statistics hint that global carriers tended to be interested more in
economies of scale than in eliminating a competitor or market entry. Only two
of the 17 multi-market carriers involved in a merger or acquisition combined
with other multi-market carriers, 15 (88 per cent) acquired or merged with
regional carriers. Although the objective of rationalised capacity may be a
relevant factor in these combinations, it could be just as likely that they
characterise a strategy for growth. Of the regional acquirers, six of the seven
combinations were with other regional carriers and one was a regional
acquiring a multi-market carrier (CSAV-Norasia). These combinations may be
growth oriented but also may have been pursued to eliminate a competitor or
simply to assume the assets of a failing firm.

The Model

It is not possible to ascertain the precise motivation behind each carrier

combination. Financial considerations include cash flow and the balance sheet,
access to capital, market valuation, market share and commitments to share-
holders if the firm is publicly traded. In addition, the decision to acquire or be
acquired may incorporate agency effects such as management competence and
ambition, neither of which is readily tangible.
The model in this paper is motivated, however, by the neoclassical
theory that structural market conditions are important factors underlying
merger and acquisition activity. Although there is no attempt to incorporate
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 Fusillo

financial or agency effects it is understood that such influences may be

substantial.
The objective of the model is to reveal structural conditions that at least
partially motivate recent merger activity among liner shipping firms serving US
trade markets. The dependent variable is a quarterly count of mergers and/or
acquisitions from the first quarter of 1991 to the third quarter of 2006. As the
data counts the number of occurrences, and in many quarters the occurrence
of the event is zero, the model assumes that firm combinations follow a
l
Poisson distribution written as P ¼ e k!lk where P ¼ the probability of a carrier
combination, l ¼ the expected number of events per unit time and k is the
observed number of events during time interval t. The Poisson distribution
expresses the probability of a number of events occurring in a fixed period
of time. It is assumed that these events occur with a known average rate, and
are independent of the time since the last event. This last assumption is
worrisome because merger activity is thought to occur in waves. To control
for this possibility, the model incorporates a variable to indicate ‘time since
last event’.

Data set and sources

Because the US liner trades are heavily weighted towards import cargo, both in
terms of volume and value, the data used in the model of this paper is derived
exclusively from the import market. The implicit assumption is that decisions
by carriers are made based on the lucrative leg of the journey rather than
in consideration of the total inbound and outbound volumes. The data on
import volume (in twenty-foot equivalent units (TEUs)) and growth, industry
concentration, vessel technology and excess capacity are derived from various
issues of Port Import Export Reporting Service (PIERS) ‘On Board Review’.
Freight rate data is sourced from the US Bureau of Labour Statistics. After
adjusting for lags and moving averages used in the model, the data begin in the
second quarter of 1993 and run through the third quarter of 2006.

Structural variables

In the neoclassical model, mergers are a natural response to shocks that

change the structural conditions of the industry. These shocks include sudden
technological progress, sudden and unanticipated changes in demand, and
changes in regulation. The variables used in this model either directly measure
the above or form adequate proxies. The following provides an outline of each
of the exogenous variables used in the model, and their likely sign.
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 Structural factors underlying mergers and acquisitions in liner shipping

Demand Shocks ( þ /): Shocks, or unanticipated and large swings up or

down in demand may increase the likelihood of consolidation. Negative shocks,
if prolonged, raise the intensity of competition for existing businesses to such an
extent that prices collapse and weaker firms are forced to either fail and exit or
be acquired. The effect is more prominent, the greater is the ratio of fixed to
variable costs. The intuition is that with high fixed costs, firms are less able to
adjust to new market realities and subsequently become takeover targets. On
the other hand, positive shocks to demand may create incentives to fully exploit
the additional demand by pursuing economies of scale through horizontal
integration. Positive shocks are represented by a dummy variable equal to 1 for
quarters during which year-over-year (YOY) volume growth is greater than the
sample average YOY quarterly growth rate – calculated sequentially from
the beginning of the forecast period – plus two times its standard deviation
and 0 otherwise. Thus, the basis for a positive shock at time t is the mean
realisation of demand growth in time t-n where n is the beginning of the sample
period. Similarly, negative shocks are quarters when demand falls below the
average growth rate calculated sequentially, by more than 2 standard devia-
tions. As expected, positive shocks coincide with the 1997 Asian Financial Crisis
and with the post-9/11 economic recovery. Negative shocks are generally con-
current with the economic slowdown of 1995 and 2002, the dot-com bubble
burst and 9/11. Each incidence of a negative shock occurs with about a 2–4-
quarter lag from these events.
Technological Progress ( þ ): The deviation between the maximum capacity
vessel and the average capacity of a vessel serving US trade lanes shall proxy for
technological change (in the model the variable is listed as Vessel Size Differ-
ential). It is well known that the size of container ships has risen significantly
over the past decade and undoubtedly will become even larger over the next
decade. Once these ships are introduced, the unit costs savings, assuming
no diseconomies at dock-side facilities and high capacity utilisation, give the
operator a significant advantage over rivals, who are subsequently compelled to
introduce similarly sized vessels. Such vessels require large capital commit-
ments that are more easily financed by large firms. Mergers become
more attractive, therefore as a means of easing access to capital. Additionally,
larger ships are more difficult to fill by a single firm. This undermines the
achievement of scale economies. Again, in this instance, mergers become more
attractive.
Excess Capacity ( þ ): There are several factors that underlie the creation of
excess capacity, including changes in technology and changes in demand,
but other factors such as entry and expansion of existing carriers may also
contribute. Excess capacity creates incentives to combine assets because it
represents a loss of market power among incumbents. As such, the floors on
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 Fusillo

prices are lowered and margins decline. Excess capacity is calculated as the
aggregated nominal rated capacity of containerships serving inbound US trade
lanes less demand in TEUs then expressed as a percentage of existing capacity.
Both PIERS and the Lloyd’s Register of Ships are used to produce the excess
capacity series.
Freight Rates (): Changes in demand may also show up as changes in
freight rates. Mergers are anticipated to decline in freight rates, as increasing
freight rates imply improving profitability and less need for the pursuit of cost
efficiencies. They may also signal an improvement in market power and as such
reduce the incentive for merger activity. Comprehensive and detailed price
series are not easy to obtain for the liner trades but the US Bureau of Labor
Statistics collect and form aggregate price indices for import liner markets.
The aggregate US inbound liner trade rate will serve as the price series for the
model. As it is unlikely that carriers make merger and acquisition decisions
based on 1 quarter of price data alone, the series is converted to a 4-quarter
moving average and then lagged by 2 quarters to allow carriers to have
sufficient time to discuss and plan their merger and acquisition activity before
the combinations become operational.
Changes in Regulation ( þ ): OSRA heralded the demise of conferences but
also made consolidation through alliances, discussion agreements and mergers
more attractive. It forced carriers to pursue scale and network economies,
which in many cases could only be achieved by combining the assets of
individual firms. OSRA is represented by a dummy variable equal to 1 for the
quarters after its passage and zero otherwise.
Demand Growth ( þ ): Demand growth may influence the likelihood of
consolidation for the same reasons as shocks to demand. The higher is demand
growth, the more feasible is the decision to deploy larger vessels and capture
economies of scale. Such deployments, however, may not be financially
attainable except when firms can combine their assets. And even if a single firm
has deep enough pockets to deploy such vessels, achieving economies of scale
aboard them requires the firm to generate enormous levels of demand on
frequent sailing schedules. Combining the customers of two or more carriers is
a viable means of achieving this. Growth is defined as the 4-quarter moving
average of the YOY percent change in the volume of US containerised trade
imports lagged by 2 quarters.
Time Since Last Event (): If mergers are defensive or pre-emptive in
nature, then the less the time since last occurrence of a combination, the more
likely the occurrence should be going forward. This implies that merger and
acquisition activity should be clustered around particular periods of time.
If managers observe previous combinations and decide they are a threat to
their own competitive position, then they are likely to engage in defensive
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 Structural factors underlying mergers and acquisitions in liner shipping

combinations on an accelerated timetable. As such, mergers should be

decreasing in time since the last event.
Concentration (): Mergers are hypothesised to decrease in industry con-
centration. A decline in concentration signals a decline in market power and
undermines the industry’s ability to set collective prices and, in decreasing cost
industries such as liner shipping, risks igniting damaging price wars. As such,
firms are more likely to initiate merger and acquisition activity at low levels of
industry concentration.6 In the model, concentration is measured by the four-
firm concentration ratio for the aggregate import markets. This is simply the
sum of the market shares of the top four firms in the market. Given that mergers
directly increase industry concentration raises the suspicion that concentration
is simultaneously determined with mergers. An appropriate lag structure should
eliminate this concern, however, to be sure, the model is run with an instru-
mental variables (Generalised Method of Moments) estimator to augment the
count models.
The decision to merge or acquire is not typically thought of as a snap
or rash decision but one that is arrived at by managers observing structural
conditions over time. Therefore, demand shocks, excess capacity, demand
growth and freight rates enter the model with a two-period lag of their 4-quarter
moving averages. Vessel size differential enters with a 2-quarter lag but it is not
constructed as a moving average. The basic equation is

"P # "P #
t4 t4
t FRt t ExKt
MergeCountt ¼ b0 þ b1 þb2
4 4
t2
"P # "P #t2
t4 t4
t GrMt t CRt
þ b3 þb4 ð1Þ
4 4
t2 t2
þ b5 DSizet2 þ b6 QtrsSincet þ b7 PosShockt2
þ b8 NegShockt2 þ b9 OSRAt þ et

where MergeCountt is the number of carrier combinations short of alliances, FRt

is the index of freight rates taken from the US Bureau of Labor Statistics, ExKt is
excess capacity, GrMt is the YOY growth rate of imports, CRt is the
four-firm concentration ratio, DSizet-2 is the difference between the largest
containership and the average, QtrsSincet is the number of quarters since the
last occurrence of a carrier combination, PosShockt-2 is the occurrence of
positive shocks to demand, NegShockt-2 is the occurrence of negative shocks to
demand, OSRA is a dummy variable indicating 1 for the quarters after
the passage of the legislation in the second quarter of 1998 and 0 otherwise.7
Table 2 displays the descriptive statistics for the variables in the model.
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 Fusillo

Table 2: Descriptive statistics

Mean Median Maximum Minimum Observations

Merger count 0.81 0.00 4.00 0.00 54
FRt 87.37 82.70 127.22 65.28 54
ExKt 0.30 0.29 0.35 0.26 54
GrMt 0.09 0.10 0.18 0.02 54
CRt 0.33 0.32 0.35 0.30 54
Dsizet 3991.51 3988.53 4836.55 2737.59 54
Quarters sincet 3.69 2.00 22.00 1.00 54
Positive demand shockt 0.33 0.00 1.00 0.00 54
Negative demand shockt 0.09 0.00 1.00 0.00 54
OSRA 0.56 1.00 1.00 0.00 54

Note: Freight rates, capacity utilization and import growth are 4-quarter moving averages lagged 2 quarters.
Industry concentration is a 4-quarter moving average, not lagged. Vessel size differential, positive demand
shock and negative demand shock are each lagged 2-quarters.

Estimation, Results and Discussion

The choice of a Poisson count data model follows from the large number of
zeros in the merger count over time. The appropriateness of the Poisson over
the negative binomial was investigated as well. The Poisson model restricts the
conditional mean and variance of the count series to be equal, that is, it is
assumed that v(xi; b) ¼ m(xi; b). A violation of this restriction leads to a con-
dition known as ‘overdispersion’ and in such a case the negative binomial
distribution is often used instead. However, a test for this restriction confirms
that the Poisson model is an appropriate estimator for each of the models.8
However, the concentration variable is suspected of being endogenous and may
require an instrumental variables estimator such as Generalized Method of
Moments (GMM). Finally, several of the exogenous variables are likely to be
correlated and therefore unsuitable to consider together. For example, import
growth, shocks and excess capacity show significant degrees of correlation and
result in high standard errors and nonsensical signs. Therefore, five separate
variants of equation (1) are estimated to seek some commonalities among the
exogenous variables. The results of estimating variants of (1) using the Poisson
distribution and GMM are reported in Table 3.
In terms of their goodness of fit, each model performs at approximately
the same level. The EViews programme reports the likelihood ratio test,9 and
its associated significance, and the adjusted R2. The adjusted R2 is also
reported in the GMM models. Both statistics indicate that although the models
explain anywhere between a fifth and a third of the variation in merger
and acquisition activity, none are overwhelmingly robust. This was not
unexpected, as the objective of the models was solely to isolate the effect
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 Table 3: Model results

Variable Equation (1) Equation (2) Equation (3)

Poisson GMM Poisson GMM Poisson GMM

Coeff Std. Err. Coeff Std. Err. Coeff Std. Err. Coeff Std. Err. Coeff Std. Err. Coeff

r 2009 Palgrave Macmillan 1479-2931

Constant 6.67 6.28 12.06** 4.25 6.57 7.03 12.44** 5.52 8.3 6.04 12.90**
FR 0.05*** 0.01 0.05*** 0.01 0.05*** 0.02 0.06*** 0.01 0.05** 0.02 0.06***
ExK 31.18*** 9.63 19.96*** 2.77 — — — — — — —
GrM — — — — — — — — 0.41 3.92 0.89
CR 38.11** 18.14 40.22** 12.22 14.76 19.23 26.74* 15.65 18.07 16.25 27.62*
Dsize 0.0004 0.0005 0.0002 0.0002 0.0003 0.0004 0.0002 0.0002 0.0001 0.0004 0.0002
Quarters since 0.02 0.05 0.02 0.02 0.01 0.05 0.00 0.02 0.01 0.05 0.00
Positive demand shock (2) — — — — 0.71* 0.38 0.56** 0.26 — — —
Negative demand shock (2) — — — — 0.74 0.68 0.22 0.19 — — —
OSRA 2.22*** 0.56 2.33*** 0.3 1.88*** 0.56 2.23*** 0.38 1.60** 0.57 2.12***

Adj.R2 0.262 — 0.324 — 0.258 — 0.231 — 0.135 — 0.138

LR 29.81 — NA — 23.23 — NA — 13.32 — NA

Maritime Economics & Logistics

P-value 0.000 — NA — 0.002 — NA — 0.038 — NA
Structural factors underlying mergers and acquisitions in liner shipping

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221
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Table 3: Continued

Variable Equation (3) Equation (4) Equation (5)

GMM Poisson GMM Poisson GMM

Std. Err. Coeff Std. Err. Coeff Std. Err. Coeff Std. Err. Coeff Std. Err.

Constant 5.06 10.01 6.42 13.95** 4.8 2.95 6.3 9.43 6.29
FR 0.01 0.06*** 0.02 0.06*** 0.01 0.04** 0.01 0.05*** 0.01
ExK — — — — — — — — —
GrM 3.32 — — — — — — — —
CR 13.92 24.45 17.38 31.05** 13.69 4.18 17.34 18.29 17.73
Dsize 0.0002 0.0003 0.0004 0.0002 0.0002 0.0003 0.0004 0.0002 0.0002
Quarters since 0.03 0.01 0.05 0.00 0.02 0.03 0.04 0.01 0.02
Positive demand shock (2) — 0.88** 0.36 0.63** 0.28 — — — —
Negative demand shock (2) — — — — — 1.12* 0.64 0.49* 0.26
OSRA 0.55 2.05*** 0.55 2.28*** 0.43 1.44** 0.47 1.99*** 0.41

Adj.R2 — 0.250 — 0.240 — 0.220 — 0.200 —

LR — 21.92 — NA — 19.73 — NA —

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P-value — 0.001 — NA — 0.003 — NA —

*Statistically significant at the 10 per cent level; **statistically significant at the 5 per cent level; ***statistically significant at the 1 per cent level.

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 Structural factors underlying mergers and acquisitions in liner shipping

of structural market factors while ignoring strategic considerations, agency

effects and incentives.
The merger count declines in freight rates consistently across all equations
with approximately the same magnitude. Higher freight rates reduce incentives
for mergers holding all else constant, possibly because they signal an increase
in market power. When rates decline, however, the signal emitted is a decline in
market power that may be redressed through consolidation.
The effect of excess capacity was tested in equation (1). As anticipated, in
both the Poisson and GMM specifications, the effect was positive and statisti-
cally significant at the 5 per cent and 1 per cent levels, respectively. This is
consistent with other empirical and theoretical works that suggest excess supply
destabilises the competitive environment and makes consolidation more
attractive.10 Excess capacity may also serve as a proxy for shocks either to
demand, production technology or from changes in regulation. In such
instances, excess capacity unexpectedly rises and carrier combinations become
a critical element of the process of adjustment to a new equilibrium.
The signs on concentration are also consistently negative and are
statistically significant at the 5 per cent level in more than one-half of the
equations. As in the case of the results for freight rates, they indicate that
merger activity heightens when supplier market power is in decline.
The growth rate of demand was tested in equation (3). A positive coeffi-
cient would imply that carriers are taking advantage of demand growth to
capture economies of scale. However, counter to expectations, its coefficient
was negative and it was not statistically different from zero. Likely growth in
and of itself is not likely to disturb equilibrium relationships among suppliers as
long as that growth is stable. More likely it is sudden and unanticipated changes
in demand that disturb supplier relationships sufficiently to produce increased
merger and acquisition activity. The results for demand shocks discussed below
make this clearer.
Equations (2) and (4) contain the results of demand shocks. The signs are
as neoclassical theory would predict. Positive shocks destabilise the supplier
equilibrium and create incentive to pursue economies of scale. The results
were statistically significant at the 5 per cent level in both specifications of
equations (2) and (4). However, this result should be qualified in that positive
shocks tended to coincide with the spate of combinations that occurred
as a result of the impending passage of OSRA. Thus, disentangling this variable
from the OSRA effect is not entirely possible. Equations (2) and (4) indicate
that negative shocks have precisely the opposite effect except that they are
statistically significant only when they enter in isolation of positive shocks
such as equation (5) likely because of collinearity. While negative shocks
destabilise supplier equilibrium, they also reduce the odds of capturing
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economies of scale through mergers and therefore have a depressing effect on

the number of combinations.
The results for technology shocks as approximated by the differential
between the maximum vessel size and the sample average were not significant
in any of the equations. One explanation is that the rate of technical change
during the sample period has been too gradual to greatly impact merger
decisions in liner shipping. Another problem is that ship size differentials may
not be the best indicator of technical change. Instead, advances in computing
technology, or even specific aspects of vessel technology may serve as better
proxies.
All five equations contain the quarters since variable. In no case were, the
estimates statistically significant; and in half of the equations the signs were
unexpectedly negative, suggesting some correlation between this variable and
the other exogenous variables in the model. On their own, these results can
neither confirm nor deny the existing of merger and acquisition clustering
around points in time.
All five equations indicate that mergers are significantly more frequent as a
result of OSRA than in prior years. This is the effect of the regulatory shock put
forward by the neoclassical school and is self-explanatory. As OSRA signalled
the dismantling of cooperative behaviour through the conference system – a
radical change in industry structure – mergers and acquisitions have served as
a substitute. This brings up the question of whether shippers can expect to
see more consolidation activity and an increase in supplier market power now
that the EU has dismantled the liner conference system on their trade lanes.
The answer may be that many of the major mergers that would have taken
place have already done so as a result of US shipping policy reforms. Although
there may be more consolidation, the pace may be slower.

Conclusions

The objective of this paper was to explore the neoclassical motivations for
mergers and acquisitions in US liner shipping markets. The models provide
some support for the neoclassical theory that industry-specific shocks motivate
merger activity in liner shipping. In particular, the results appear to show
that carriers are prone to seek combinations when demand conditions are
unfavourable, as indicated by the negative sign on freight rates, and the positive
sign on excess capacity. On the other hand, the models indicate that combi-
nations also become more attractive when shocks to demand are positive.
As specified, however, it is not clear that the effect of positive shocks can
be disentangled from the industry’s preparations for OSRA.
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 Structural factors underlying mergers and acquisitions in liner shipping

As predicted by the neoclassical school, the results indicate that regulatory

reforms that disturb cooperative relationships among suppliers will raise the
probability and occurrence of carrier combinations. Thus, given the imminent
reforms in European liner markets and elsewhere11 the model supports the
theory that the increase in market concentration revealed in US liner trade
markets over the past decade is bound to accelerate.12 The peculiar nature
of the industry, the most critical of which is its high fixed to variable costs
ratio, almost guarantees that with cooperation through conferences ruled
out, individual firms will seek either to increase the number and strength of
strategic alliances or pursue mergers and acquisitions. Against the backdrop
of increasingly large vessels that need to be filled to achieve their potential cost
savings, the reforms will almost certainly raise industry concentration.
Whether concentration will lead to supra-normal pricing is left for post-
deregulation analysis. In some industries there is a positive relationship
between concentration and profits but it is not universally inevitable.13 Certainly,
however, fewer carriers will control increasingly large market shares and that
should raise at least some concern among regulators. The implication is that the
EU should be vigilant in examining the competitive effects of mergers after
repeal of antitrust immunity.

Notes

1 While mergers waves are empirically supported there is no evidence that they occur with any
specific periodicity. See Golbe and White (1993) and Barkoulas et al (2001).
2 Gort (1969) provides the comprehensive neoclassical view on merger activity. More up-to-
date research on the topic is found in Andrade and Stafford (2004), Andrade et al (2001),
Mitchell and Mulherin (1996) and Jensen (1993).
3 Gorton et al (2000).
4 Goriatchev (2006, p. 6).
5 This was particularly true in the airline industry. See Gregor et al (2001).
6 Schoenberg and Richard (1999) find that while ‘y exposure to deregulation is in fact the most
important single discriminator between industries with high and low acquisition activity,
industry concentration and industry growth rate are also supported as determinants of the
takeover rate within an industry’.
7 There were no instances of negative demand growth greater than 1 standard deviation for the
length of the sample period.
8 See Cameron and Trivedi (1990).
9 The LR test measures how well the model predicts the dependent variable relative to just a
constant term.
10 See for example, Maloney and Robert (1988) and literature cited in Note 2.
11 India is the latest country to have abolished liner shipping conferences from its markets.
12 See Lam Jasmine et al (2007) for a comprehensive view of structure conduct and performance
in liner shipping.

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13 There is no conclusive evidence that concentration in liner shipping positively and

significantly influences price. See Haralambides (2004) for a discussion.

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