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Maritime Policy & Management

An International Journal of Shipping and Port Research
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Value creation through corporate destruction? Corporate governance in shipping takeovers

Theodore Syriopoulos a; Ioannis Theotokas a a Department of Shipping, Trade and Transport, School of Business, University of the Aegean, 2A Korai str, Chios, Greece Online Publication Date: 01 June 2007 To cite this Article: Syriopoulos, Theodore and Theotokas, Ioannis (2007) 'Value creation through corporate destruction? Corporate governance in shipping takeovers', Maritime Policy & Management, 34:3, 225 - 242 To link to this article: DOI: 10.1080/03088830701342973 URL: http://dx.doi.org/10.1080/03088830701342973

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Value creation through corporate destruction? Corporate governance in shipping takeovers

THEODORE SYRIOPOULOS* and IOANNIS THEOTOKAS Department of Shipping, Trade and Transport, School of Business, University of the Aegean, 2A Korai str. 82100, Chios, Greece
This paper investigates corporate governance implications for shareholder value in shipping takeovers. Inadequate corporate governance structures are shown to affect corporate growth and even turn a company into a takeover target. The interesting case study of Stelmar Shipping is employed in an event study model, in order to evaluate the impact of takeover bids on corporate value and assess target and bidder shareholder returns. In line with past evidence, target shareholders are found to attain positive value gains but bidder shareholders only marginal benefits. The empirical findings underline the need for convenient corporate governance systems that minimize frictions related to agency problems and potentially result to a positive impact on shareholder value.

1. Introduction Intensified competition in the shipping business has accelerated corporate consolidation in the industry. Mergers and acquisitions have been taking place at a high pace over the last few years across all major market segments [1]. At the same time, recent developments in both freight and financial markets have increased the attractiveness of stock markets as an investment funding mechanism; an increasing number of shipping companies have proceeded to Initial Public Offerings (IPOs) on international stock markets. To mention just the case of the Greek shipping business, six companies have been publicly listed on the New York Stock Exchange (NYSE) over the last three years, while several others prepare to follow. In this environment, the corporate governance issue ranks high in the agenda of the shipping companies. According to the OECD [2], corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Based on that, a broad perspective of corporate governance covers company relationships with its stakeholders. From a narrower perspective, corporate governance focuses on managementshareholder relationships and associated shareholder value implications. The major objective of this paper is to investigate the role of corporate governance and assess the impact and implications for shareholder value following corporate takeovers. A case study methodological approach is employed to investigate these issues in the shipping industry. For that, Stelmar Shipping Ltd is undertaken as a
*To whom correspondence should be addressed. e-mail: tsiriop@aegean.gr
Maritime Policy & Management ISSN 03088839 print/ISSN 14645254 online 2007 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/03088830701342973

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useful case; its corporate governance system is evaluated and its business course is analysed; post-merger implications for target and bidder shareholders are assessed on the basis of an event-study model. Stelmar Shipping is a company that started as a family-owned enterprise; went publicly listed with its founder initially remaining as the Chairman; proceeded to separate ownership from control, with the founder remaining the major shareholder; and ended up as a takeover target to finally merge with a competitor, all within a ten-year period. This corporate profile makes Stelmar a unique case for the shipping industry and an interesting one to evaluate. The paper contributes a number of innovative and interesting empirical findings with a view to corporate governance implications for mergers and their impact on shareholder value in the shipping business. To the authors knowledge, these issues have not been previously investigated. The empirical results, however, should be treated with caution. Further research over a larger sample of shipping mergers and takeovers should be undertaken to support the robustness of the conclusions drawn. The paper is organized as follows. Section 2 outlines corporate governance implications for the market for corporate control. As an application, Section 3 presents the case study of Stelmar Shipping. Section 4 evaluates corporate takeover implications for shareholder value applying an event study model and discusses the empirical findings. Section 5 concludes.

2. Corporate governance and takeovers Corporate governance structures affect corporate value through two distinct channels: (i) the expected cash flows accruing to investors and (ii) the cost of capital, i.e. the expected rate of return [34]. An efficient corporate governance structure is anticipated to show positive correlation with improved operating performance, higher stock price and higher firm valuation [56]. Firms with weak corporate governance mechanisms appear to be less effective in attaining robust financial results and ensuring value maximization. Poor financial performance, in turn, increases considerably the risk of a hostile takeover bid. Empirical evidence indicates that firms subject to a hostile takeover bid underperform [78]. In the absence of corporate governance controls, the interests of managers versus those of shareholders are more likely to diverge [9]. Monitoring and incentives have been identified as important governance controls to reduce agency costs but their impact on firm performance has been mixed [1016]. According to agency theory, managers may opportunistically use their control to pursue objectives that are contrary to the interest of shareholders. Thus, market mechanisms are needed to prevent managers from doing so [17]; the stock market appears to be one of the most effective. Within this market, the market for corporate control can be seen as the field where alternative management teams compete with each other for the right to manage corporate assets owned by the shareholders. The management team that attaches the highest value to corporate assets or promises the highest returns to shareholders takes over the right to manage these assets until it is replaced by another management team that attributes even greater value to corporate assets [1820]. Competition between management teams in the market for corporate control increases the pressure on managers to perform well [2122]. In mergers and acquisitions (M&As), the course of a merger deal can be affected by managers personal interests and incentives, not necessarily aligned with those of their shareholders. The managers of the target firm, for instance, may be in danger of

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losing their managerial positions in the post-merger successor firm. This can result to a loss of future compensation and possible misalignment of incentives between the targets board and shareholders [2324]. In some target companies, incumbents might attempt to avert value enhancing mergers (managerial entrenchment [25]). In other cases, target executives may agree to lower merger premiums in exchange for offers of future employment or other perquisites with the successor company [26]. Since target firm shareholders can receive a substantial premium in a merger while target managers risk losing their seats, manager incentives to promote a merger deal tend to diverge from those of their shareholders. Shareholders generally prefer their company to become a target, while managers prefer their company be one of the survivors. The attitude of the management towards a takeover deal can reveal the efficiency of the corporate governance structure towards shareholder interests. Stock price reaction to a merger bid is affected by potential agency problems in the target firm [27]. Adverse managerial objectives are likely to lead to value destroying acquisitions and yield lower returns, if any, to bidder shareholders [2829]. Mergers can have both contractionary and expansionary effects in corporate restructuring [30]. When an industry experiences excessive capacity, mergers often serve a contractionary role resulting in industry consolidation. In cases where an industry faces strong growth opportunities and high profitability, mergers play an expansionary role to raise new capital. Acquisitions or divestitures can create value when they bring efficiency to firms. A merger can improve the performance of the target firm by replacing inefficient management teams, introducing new technology and know-how, or restructuring corporate assets to meet new market conditions [3132]. Mergers and acquisitions may destroy shareholder value if motives other than value maximization dominate. The class of non-value-maximization theories is based on the hypotheses of managerial self-interest [3334] and managerial hubris [35]. The former hypothesis argues that M&As may simply be the outcome of managers self-interest. Managers of acquiring firms may attempt to build large empires to satisfy their own ambition. They may also intentionally acquire assets that necessitate their personal skills to protect themselves from labour market competition, although the assets may not be profitable for shareholders. The hubris hypothesis argues that, even if the managers want to work for the best interests of their shareholders, they might sometimes make wrong decisions about M&As because of their hubris. They might overestimate either the benefits from M&As and overpay the targets or their own ability to control and operate a large organization or even underestimate the post-merger integration costs. In these cases, mergers result in wealth transfer from acquirers to targets and do not create value for acquirer shareholders. In this framework, the impact of corporate governance on shipping mergers is investigated. The natural divergence of target shareholder and manager incentives in response to a merger bid renders takeovers a model experiment for exploring corporate governance effectiveness and assessing implications for shareholder value. These issues have not been investigated previously in the context of the shipping business. Thus, this paper attempts to fill this gap and yield a range of innovative and useful insights [3637].

3. The case of Stelmar Shipping The shipping industry experiences robust consolidation trends and Stelmar Shipping Ltd is considered to be an exceptional case study paradigm. Stelmar had experienced

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a dynamic course of business growth and moved gradually from a family-owned firm to a publicly listed company with separate management and ownership entities. Partly due to persisting corporate governance deficiencies and managerial conflicts with the founder and major shareholder, the company became a takeover target and, following successive takeover attacks, it was finally merged with a major competitor. 3.1. Corporate profile of Stelmar Shipping Stelmar Shipping Ltd was founded in 1992 by Stelios Hajiioannou, as an international tanker company that developed its fleet with a primary focus on Handymax tankers (refined petroleum products) and Panamax tankers (crude oil). Stelmar has operated a large and mainly modern tanker fleet of 41 double-hull vessels (consisting of 24 Handymax, 13 Panamax and four Aframax tankers), plus two leased Aframax and nine leased Handymax vessels, with an average vessel age of six years. Total cargo-carrying capacity has surpassed 2.5 million deadweight (dwt) tons [3839]. The companys customer base has included major multinational oil companies, state-owned oil producers and other shippers mostly involved in longterm charters (ranging from one to seven years). What has differentiated Stelmar from its competitors has been its business strategy of focusing on time-charters, which provided earnings stability in volatile freight markets. Stelmar went publicly listed on the NYSE in March 2001. Stelmar Shipping has operated under different corporate governance structures. During the companys start-up phase, Stelmar was founded as a private familyowned company. The major shareholder was serving also as the Board Chairman; management and ownership were not separate at that stage. Following a phase of robust growth rates, Stelmar went publicly listed on the NYSE and expanded its shareholder base; the founder stepped down from the Board, remaining a major shareholder, and management was separated from ownership. Strategic management disputes, some financial slowdown and renewed investment interests for the major shareholder were decisive factors that fuelled a series of corporate governance frictions. These concerns provoked three successive takeover bids and led finally to the OSGStelmar merger. The financial performance of Stelmar has been associated with the fluctuations experienced in the shipping business over the 20012003 period (table 1). Revenue increased from US$109 million (2001) to US$162.4 million (2003), reflecting a growth rate of 49.5%. Net income, however, fluctuated from US$34 million (2001) up to US$43 million (2002) then down to US$39 million (2003). As a result, earnings growth turned from 27.3% (2002) to 10.6% (2003) and earnings per share (eps) slipped from US$2.47 (2002) to US$2.21 (2003). During the same period, total assets rose from US$592 million to US$897 million (51.4%). 3.2. Takeover attacks for Stelmar Shipping Following listing on the NYSE in 2001, Stelmar Shipping experienced a phase of rapid growth and fleet expansion that resulted in its ranking as one of the top shipping companies in Handymax vessels for oil products. In mid-2004, however, the founder and major shareholder (27% of equity) was officially announced to be privately negotiating the merger of Stelmar with OMI Corporation. OMI, a shipping company with a fleet of 21 product carriers and 16 crude oil tankers, proposed a stock-for-stock merger at 3.1 shares of OMI for one share of Stelmar; alternatively,

Value creation through corporate destruction?

Table 1.
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Financial performance of Stelmar Shipping.

2003 2002 156 508 108 069 62 463 62 112 2001 108 647 76 811 49 513 51 102

Revenue Gross profit Operating profit Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Net income Total assets Long-term debt Stockholder equity Earnings per share (eps) Earnings growth (%) EBITDA/revenue (%) Operating profit/assets (%)
Figures in USD thousands. Source: Company Annual Reports; Reuters.

162 391 118 020 62 879 55 511

38 631 897 421 452 647 358 841 2.21 10.75 34.18 7.01

43 286 823 357 413 851 312 148 2.47 27.26 39.69 7.59

34 013 592 183 326 862 209 448 1.94 47.03 8.36

OMI was prepared to provide up to 25% of the proposed stock exchange in cash (table 2). Following rejection of the OMI offer and mounting disputes over Stelmars business strategy, the major shareholder took action to replace the Board of Directors. In retaliation, Stelmars Board proceeded to approve a new takeover bid proposal by Fortress Investment Group LLC, a private equity firm. The Fortress bid was set initially at US$38.55 per share in cash and was subsequently improved to US$40 per share in cash (table 2). This would have been the first time a non-listed private investment company merged with a listed shipping company. Fortress, however, eventually withdrew its offer, as the major shareholder strongly opposed the proposed deal. Escalating corporate governance frictions led to a decisive Overseas Shipholding Group (OSG) bid to acquire Stelmar (4th Q 2004). The OSG bid price for Stelmar was set at US$48.00 per share in cash (table 2). OSG, a leading independent bulk shipping company engaged primarily in the ocean transportation of crude oil and petroleum products, has one of the largest and most modern tanker fleets, ranking as the sixth largest independent tanker company worldwide (approximately 13.4 million dwt). From a strategic viewpoint, OSG management evaluated that the merger would result in a leading OSG position in product tankers and Panamax tankers, would complement OSGs leading position in the Very Large Crude Carriers (VLCC) and Aframax sectors and its recent entry into the Liquid Natural Gas (LNG) sector, and would contribute to a more balanced mix of spot and time charter revenue, improving both the quality and sustainability of OSG future earnings growth. The merger creates a shipping company that is the second largest publicly traded oil tanker company measured by number of vessels and the third largest measured by deadweight tons (table 3). The combined market value of OSG-Stelmar equity is estimated at about US$841 million; including Stelmars outstanding debt, this figure increases to US$1.3 billion. Approximately 74% of Stelmars shareholders approved the merger agreement with OSG. Following the completion of the legal procedures, the stock of Stelmar ceased trading on the NYSE board (January 2005).

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Table 2.
StelmarOMI SJH 24.78(1) 434 17/5/04 37.32 654 50.6 0.44 1.51 Stock-for-stock(9) 10.83 980 2.26 1.66 1.98 1.29 1.50 35.44(2) 621 20/9/04 40.00(4) 701 12.9(5) NA 1.13 Cash OMI SJH SJH 44.32(3) 776 13/12/04 48.00 841 8.3(6) 0.34 1.08 Cash StelmarFortress*

Takeover bid valuation for Stelmar Shipping.

StelmarOSG OSG 56.51 2.305

Target/bidder stock price Market value (US$ million) Bid announcement Bid price (US$ per share) Bid value (US$ million) Premium on target price (%) Takeover relative size(7) Takeover relative payment(8) Method of payment Market value (bidder)/(target) Revenue (bidder)/(target) Net earnings (bidder)/(target) Assets (bidder)/(target) Equity (bidder)/(target)

T. Syriopoulos and I. Theotokas

2.97 2.80 3.14 2.23 2.56

(1) As of 14 May 2004; (2) as of 17 September 2004; (3) as of 10 December 2004; (4) the Fortress bid price per share was set initially at $38.55, corresponding to a bid value of US$675 million and a premium of 8.78% on target price; it was subsequently improved to $40; (5) premium of Fortress bid on OMI bid: 7.2%; (6) premium of OSG bid: (i) on OMI bid: 28.6%; (ii) on Fortress bid: 20%; (iii) on 14/5/04 Stelmar price: 93.7%; (7) takeover relative size (market value) target equity/bidder equity; (8) takeover relative payment amount paid/target equity; (9) merger terms were proposed at 3.1. OMI shares for 1 SJH share, implying that Stelmar shareholders would own 40.5% of the combined company; OMI proposed alternatively a stock-for-stock plus 25% in cash. As of 20 January 2005 (official date of merger completion), Stelmars stock ceased trading on the NYSE board. *Financial data on Fortress Investment Group, a private equity company, have not been available (NA). Source: Company Annual Reports; Company Official Announcements; Reuters.

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Table 3.
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Targetbidder fleets.
OSG(2) 28 20 14 1 2 25 4 10 104 13 393 195 9 50 3 868 753 OMI 2 15 24

Stelmar(1) Handymax Aframax Panamax Suezmax Capesize VLCC LNG(3) Product/chemical US fleet New buildings Total fleet Total dwt. 24 4 13 41 2 600 000

Figures as of December 2004. (1) The fleet includes also nine leased Handymax and two leased Aframax vessels. (2) Owned operating fleet: 63 vessels (9 358 302 dwt); chartered-in: 27 vessels (3 502 136 dwt); chartered-in commitments: 1 vessel (305 177 dwt). (3) On-order (864 800 cbm). Source: company Annual Reports.

Table 4.
Firm Target Bidder Combined
Source: [47].

Takeover hypothesesexpected effect.

Synergy hypothesis Positive Non-negative Positive Hubris and synergy hypothesis Positive Negative Positive

Hubris or empire building hypothesis Positive Negative Non-positive

4. Corporate takeovers and shareholder value An M&A deal can be considered as a corporate event that moves the involved entities along the profit function through a change in size, scope and distance from the efficient frontier [40]. Past research underlines the role of takeovers in improving cash flows and fundamentals as well as in penalizing poor managerial performance [41]. Empirical evidence (mainly from the banking sector) indicates positive and significant increases in stock market value for the average merger at the time of the deal announcement [40]. A positive impact can be explained by an increase in efficiency, synergies or market power following the deal. The investigation of the financial performance of bidders and targets before the corporate event (takeover bid) can reveal some insight into the motivations of the deal. Poor financial performance, for instance, of the target company relative the sectors average may signal an attempt to replace inefficient management [41]. The Stelmar case enables testing of two distinct hypotheses (table 4): the synergy hypothesis and the hubris or empire building hypothesis mentioned earlier [42]. The synergy hypothesis predicts that target firms returns should be positive, bidder returns should be non-negative and the combined firm returns should be positive.

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Synergies may arise in situations where the bidder and target operate in similar industries, a focus effect [43], as in the case of Stelmar and OSG. The hubris and empire building hypothesis predicts that target firm returns should be positive, bidder firm returns should be negative and the combined firm returns should be non-positive; mergers are not wealth-creating events but attempts to build corporate empires serving managerial self-interests. Managers may prefer to stimulate corporate growth rather than corporate value as their private benefits tend to grow with firm size [4446]. An alternative hypothesis is that mergers are a function of both, synergy and hubris, hypotheses. This would predict a positive revaluation of the combined firm with negative bidder firm returns. Positive synergies may be associated with a merger; a bidder however may overpay for the acquisition of these synergies [47]. As a note of caution, the fair valuation of firms which are operating in highly volatile markets, such as tanker shipping, is a difficult empirical task, particularly as hostile takeover bids are usually made without access to due diligence. The risks of the bidder getting the price wrong appear so high that overvaluation of the target company cannot always be attributed to hubris. When a merger is announced, three different pieces of information affect the stock prices of the target and bidder, though they are difficult to distinguish [27]. The merger announcement contains information about the potential synergies arising from the combined corporate entity, the stand-alone value of the companies involved in the merger and the value split between target and bidder. To better understand merger dynamics in the Stelmar case, we briefly consider the life cycle of a typical takeover deal. Prior to the takeover, the target firm has experienced a long price decline that typically reverts about one month before the takeover announcement [48]. The bidder, meanwhile, exhibits modest price increases. A clear pattern of positive stock price performance is documented for takeover targets around the announcement date. Target firms earn a 6% average return over the three days surrounding a takeover announcement. Bidders involved in successful takeovers show limited price reaction at that time. In the interim period, between takeover announcement and execution, both the target and bidder of a successful takeover show relatively limited price movement, providing no alternative bidder appears. These empirical findings appear remarkably stable over time [49]. 4.1. An event study model for Stelmar Shipping An event study methodology is employed in order to evaluate the implications of the takeover attempts for Stelmar and to calculate abnormal returns for target and bidder shareholders. Despite some scepticism over certain limitations of the event study framework [50], the latter remains a robust approach for detecting abnormal mean returns associated with corporate events [51]. A basic event study approach can be considered as a four-step procedure. First, expected (normal) returns are calculated using preferably a market model, although alternative models, such as the mean adjusted return model or the market adjusted return model, have also been proposed [52]. Second, abnormal returns (AR) during some event interval [T1 T2] are estimated, as the difference between realized (event) returns and the expected returns, conditional on the market model. Third, abnormal returns over the event window are cumulated to produce cumulative abnormal returns (CAR) separately for target and bidder shareholders. Finally, the statistical significance of these abnormal returns is evaluated. T1 and T2 represent the start- and end-day of the event window, respectively. The day of the first official company announcement on the takeover bid

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1,250.00

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55.00 50.00 Stelmar stock price (USD) 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00
5 12/4/2 /4 0 19 /2004 / 0 26 4/2 4 /4 00 /2 4 3/ 00 10 5/2 4 /5 00 17 /2 4 /5 00 24 /20 4 /5 0 31 /20 4 /5 04 / 7/ 200 14 6/2 4 /6 00 21 /2 4 /6 00 28 /20 4 /6 0 10 /20 4 / 0 17 8/2 4 /8 00 24 /20 4 /8 0 31 /20 4 /8 04 / 7/ 200 14 9/2 4 /9 00 21 /2 4 /9 00 28 /20 4 /9 0 5/ /20 4 12 10 04 /1 /20 19 0/2 04 / 0 26 10/ 04 /1 20 0/ 04 20 04 5/ 12 11 /1 /20 19 1/2 04 /1 0 26 1/2 04 /1 00 1 4 3 /20 10/12 04 /1 /20 17 2/ 04 /1 20 24 2/2 04 /1 0 31 2/2 04 /1 00 2/ 4 2 7/ 004 14 1/2 /1 00 /2 5 00 5

OMI bid for Steimer: $37.32 (17.5.04)

Fortress bid for Stemler: $40.00 (20.9.04)

1,200.00

1,150.00 S&P500

OSG bid for Stelmer: $48.00 (13.12.04)

1,100.00

1,050.00

1,000.00

950.00

SJH

S&P500

Figure 1.

Target stock price: bib announcement window [230 1 30].

is taken as the initial announcement day; this is day 0 in the event window for both target and bidder firms (figure 1). We construct abnormal returns separately for the target and the bidder firm in each takeover bid for Stelmar. Initially, the market model (equation 1) is employed to calculate normal (expected) returns for firm i on day t, in the absence of a takeover bid. Abnormal returns (ARit) are then calculated for firm i on day t as in equation (2): R i  Rmt "t "t $ N0, ht it i ARit Rit R Rit i  Rmt it i 1 2

where return is measured as [(Pit Pi(t1))/Pi(t1)] and Pit is the share price of security i at day t; R is the normal expected return on security i for event day t; Rit is the it observed (realized) return on security i for event day t; Rmt is the observed return on the market portfolio m for event day t; i measures the mean return on security i over the study period not explained by the market; i is the beta coefficient (sensitivity/ risk) of security i relative to the market portfolio and "t is a statistical error term ("t $ N (0, ht)). The usefulness of this empirical approach comes from the fact that, given rationality in the stock market, the effect of a major corporate event such as a M&A will be reflected immediately in the underlying asset prices. Thus, the events economic impact can be measured using asset returns observed over a relatively short time period, which are compared and contrasted with normal asset returns depicted by the market model. The normal return is defined as the return that would be expected if the corporate event did not take place. The market model relates the

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return of any given asset (security) to the return of the market portfolio. The models linear specification follows from the assumed joint normality of asset returns. The value-weighted S&P-500 stock index in NYSE is taken to represent the market portfolio in order to estimate coefficients i and i, for the target and bidder firms. The market model parameters are estimated over a [360 31] day-time interval. In volatile sectors such as shipping, a specialized shipping stock index may add certain merits to the market model. On the other hand, such a choice may lead to some bias in the empirical results, since there are few quoted stocks and a specified shipping index would be only a limited subset of the total market portfolio. Cumulative abnormal returns are determined using a geometric process [53] (equation 3): YT2 1 ARi 1 ARi1 1 3 CART1 T2 iT
1

where ARi is the ith day abnormal return and ARi1 is the cumulative product of abnormal returns of all days prior to the ith day over the event window. Focusing only on the separate corporate entities (target firm/bidder firm) of a M&A may provide a partial and perhaps distorted interpretation of market reaction to the takeover bids announcement. The economic impact of a takeover bid is better appreciated when the weighted wealth gains are calculated for the target and bidder firms. Combined cumulative abnormal returns (CCAR) of the joint firm (target firm bidder firm) indicate total (combined) shareholder value gain or loss due to the takeover bid. This is calculated as the weighted sum of the variation in market value of the target and bidder firms by the following model [54]: CCAR Vib CARib Vjt CARjt =Vib Vjt 4

where Vib and Vjt are the market values of the ith bidder firm (OMI/Fortress/OSG) and the jth target firm (Stelmar), respectively, one-day prior to the start-period of the event window of the initial bid announcement date (i.e. T1 1); CARib and CARjt is the cumulative abnormal return for the ith bidder firm and the jth target firm, respectively over the [T1 T2] event window (equation 4). To infer with a certain level of confidence that abnormal returns are statistically significantly different from zero, a relevant t-test is estimated as: p 5 t-test CARi = VARCARi T1 T2 and is compared with the corresponding t-critical value. The null hypothesis tested is that abnormal returns cumulated over the event window are zero. 4.2. Empirical findings The empirical findings on the takeover bids for Stelmar Shipping by OMI Corporation and Overseas Shipholding are summarized in tables 5 and 6 [55]. In line with past empirical practice, cumulative abnormal returns are measured over several symmetric as well as asymmetric event windows [T1 T2] around each initial bid announcement date for Stelmar. This approach minimizes statistical sensitivity of (target and bidder) shareholder valuation to the choice of the event window and contributes to a robust assessment of the market reaction before and after the takeover bid announcement. In order to simplify the analysis, we present the findings for a range of symmetric [T1 T2] event windows, where T1 (D J) and T2 (D J)

Value creation through corporate destruction?

Table 5.
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OMI bid for Stelmar.

Value / **(US% million) 25.4 94.9 92.9 69.3 131.6 25.3 11.4 40.9 CCAR1*** (%) 7.02 5.21 6.14 2.05 CCAR2*** (%) 5.18 3.39 3.97 1.38

Event window Target firm: [30 30] [10 10] [5 5] [1 1] Bidder firm: [30 30] [10 10] [5 5] [1 1]

Price (US$) Stelmar 28.72 24.48 24.45 24.38 OMI 11.16 10.00 9.92 10.55

Market value (US$ million) 503.1 428.8 428.3 427.1 1.010 905.3 898.1 955.1

CAR*(%) 5.06 22.13 21.67 16.23 13.03 2.89 1.27 4.29 (1.56) (2.05) (2.14) (2.17) (2.34) (1.44) (0.39) (1.20)

(.): t-statistics; statistical significance at the 5% critical level. *CAR: cumulative abnormal returns. **Value /: (market value CAR) value gain/loss for target and bidder shareholders. ***CCAR1, CCAR2: combined cumulative abnormal returns, weighted by market value; total assets, respectively.

Table 6.
Event window Target firm: [30 28] [10 10] [5 5] [1 1] Bidder firm: [30 28] [10 10] [5 5] [1 1] Price (US$) Stelmar 38.60 43.94 43.15 43.64 OSG 56.78 64.70 63.00 58.73 Market value (US$ million) 676.2 769.7 755.9 764.5 2.235 2.547 2.480 2.312

OSG bid for Stelmar.

CAR*(%) Value / ** (US$ million) 102.9 46.6 69.5 63.2 467.4 570.7 200.5 36.5 CCAR1*** (%) 12.52 15.80 4.05 3.24 CCAR2*** (%) 12.58 18.08 4.52 3.44

15.21 6.05 9.19 8.27 20.91 22.40 8.08 1.58

(2.52) (1.50) (2.24) (2.10) (2.22) (3.72) (2.75) (0.45)

(.): t-statistics; statistical significance at the 5% critical level. *CAR: cumulative abnormal returns. **Value /: (market value CAR) value gain/loss for target and bidder shareholders. ***CCAR1, CCAR2: combined cumulative abnormal returns, weighted by market value; total assets, respectively.

and J 30, 10, 5 and 1 days and D 0 is the day of the bid announcement [56]. This way we can capture early stock price reactions and run-up induced by leakage of information (inside trading) prior to the takeover announcement and detect potential information processing after the event [5758]. Focusing on target (Stelmar) performance, a highly positive and statistically significant effect is evidenced around the announcement date as has been anticipated. In most cases, abnormal returns are found to be significantly higher in the longer event periods (30 days prior to bid announcement) and declining closer to the announcement date. This may reflect information leakages from the target prior to

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the announcement and insiders pre-announcement positioning and is actually supported by increased trading activity (volume of transactions) on Stelmars stock. This is plausible since market participants may have some inside information when target companies start looking for potential buyers or show some intention to sell. The declining trend seen in CARs, as we move closer to the announcement date, may be related to the fact that some bids were finally unsuccessful (OMI, Fortress) or that a long period to finalize the offer has raised doubts about the ultimate success of the negotiations. For the [1 1] event period, cumulative abnormal returns (CARs) for Stelmar shareholders were estimated at 16.23% and 8.27% in the OMI and OSG bid, respectively. An increase in target shareholder value is supported then in these takeover bids. This outcome is in accordance with past literature, as shareholders of target firms were found to invariably receive large premiums (on average between 2040%) relative to the pre-announcement share price [40, 59]. Contrary to the target firm, bidder firms experience mixed market effects, although negative CARs prevail in most event periods examined. This reflects an unfavourable impact of shareholder value losses, especially for OMI shareholders. For the [1 1] event period, CARs for bidder shareholders were estimated at 4.29% and 1.58% in the OMI and OSG case, respectively. It has been argued that unsuccessful bids have bid premiums that are considerably lower than those in successful hostile bids. In fact, they are much closer to the bid premiums in accepted bids, suggesting that the market is anticipating some restructuring after unsuccessful bids but not at as high a level as in successful bids [60]. Past empirical evidence indicates an unfavourable effect for the shareholders of the bidding firms [44]. Combined cumulative abnormal returns (CCARs) depict the combined short-run economic effect of both target and bidder firms weighted by their market value. Empirical results and implications are found to diverge when the OSGStelmar bid is compared to the OMIStelmar bid (figures 2 and 3). In the case of the unsuccessful OMI bid, the combined entity appears to potentially produce positive shareholder value effects in most event periods. In the case of the successful OSG bid, the estimated CCARs indicate some potential shareholder value gains only closer to the bid announcement ([1 1] event period). The bidder-target entity experiences 2.05% and 3.24% three-day CCARs in the OMI and OSG bids, respectively [61]. 4.3. Discussion of the results The empirical findings in the case of the Stelmar takeover raise a number of interesting issues. For a start, a competitive market for corporate control ensures that target firms capture most expected gains and obtain large wealth gains around the bid announcement. Given the premium paid to target shareholders and the markets assessment of no aggregate wealth gains from the merger, bidder stockholders end up experiencing non-positive (or marginal) net wealth gains. The possibility that a merger is motivated by an objective to replace inefficient management and to improve efficiency cannot be ruled out. These results are consistent with empirical findings for mergers in US [54, 59] and European banks [40, 59]. The evidence implies that when the market reacts positively to mergers, it may anticipate benefits of economies of scope and scale (resulting in reduced costs and increased operational efficiency) or advantages of market power in a particular industry (oligopolistic rents). With a view to the shipping market, the combined corporate entity following the OSGStelmar merger is going to be a global leader in

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10.00% 5.00% 0.00% 30 26 22 18 14 10 6 5.00% 10.00% 15.00% 20.00% 25.00% Target: Stelmar Bidder: OMI CCAR

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10

14

18

22

26

30

Figure 2.

CARs and CCARs target: Stelmar versus Bidder: OMI [30 30].

20.00% 15.00% 10.00% 5.00% 0.00% 30 26 22 18 14 10 6 2 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Target: Stelmar Bidder: OSG CCAR 2 6 10 14 18 22 26

Figure 3.

CARs and CCARs rarget: Stelmar versus Bidder: OSG [30 30].

both crude and product tankers segments, attaining cross-product diversification and risk dispersion. In relation to corporate governance, the implicit threat of potential takeovers has a disciplining role on managers, possibly forcing them to follow shareholder valuemaximizing strategies [62]. An anticipated high level of managerial turnover in the

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target firm followed by large-scale restructuring would indicate that the successful OSGStelmar merger indeed performs a disciplinary role in an attempt to eliminate past corporate governance weaknesses. These actions, however, are necessary but not sufficient conditions for takeovers to be disciplinary because they could reflect disagreement over a strategic redeployment of assets [60]. It has been argued that if takeovers are disciplinary, then takeovers which give rise to managerial control changes should have higher bid premiums than those which do not [60]. These issues cannot be definitely assessed for Stelmar as yet, since the OSGStelmar merger was only recently concluded [63]. Corporate governance issues, however, are anticipated to affect the sharing of gains between targets and bidders rather than affecting the overall merger value [64]. Considering mergers with good managers versus bad managers, the former are expected to pay a higher premium for a takeover if they expect the deal to have potential for larger value creation. In these deals, the bid premium may thus serve as a signal of deal quality, implying a positive relationship between premium paid and merger gains. On the other hand, a positive revaluation of the combined firm with negative returns for the bidder firm may support the combined synergy and hubris hypothesis, as seems to be the case for the OSGStelmar bid. The adverse economic impact seen for the bidder could indicate potential economic limitations for the merger [65] or even that bad managers pursue their personal motives and thus overpay for mergers that provide them with the private benefits of diversification. This in turn implies a value transfer from bidder to target [66]. The announcement of a takeover bid for one firm can induce spillover effects to industry peers that are in turn accompanied by a positive revaluation of their market value. Market evidence indicates that major Stelmar peers, such as Tsakos Energy Navigation (TEN), Teekay Shipping Corporation (TK), and General Maritime Corporation (GMR), experienced significant positive market revaluations indeed, ranging from 12.01% (TEN) to 85.33% (GMR) [67], during the period of the takeover bids for Stelmar. This stock price appreciation may reflect expectations for ongoing restructuring throughout the industry [68].

5. Conclusions The primary objective of the paper has been to investigate the implications of corporate governance structures for shareholder value in corporate takeovers. An interesting feature of the shipping industry is that it continues its operation on a traditional basis, in the sense that family capitalism retains its dynamism and remains a dominant managerial model. During recent years, changes in the environment of the shipping business have led a growing number of shipping companies to adopt a corporate structure that allows them to exploit capital market advantages. The majority of Greek-owned publicly listed companies apply a corporate governance model based on a concentrated ownership structure with major shareholders directly represented on the Board of Directors or even holding managerial positions themselves [69, 70]. Stelmar Shipping has been an exception, as ownership stakes have been relatively dispersed and owners exercised indirect control on management by electing representatives to the Board. Key issues were raised with the Stelmar case study, related to the extent that companies, with promising growth prospects in the corporate arena, turn simply to an investment vehicle for major shareholders, become a takeover target due to

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corporate governance deficiencies and finally exit their autonomous market course as they merge with a rival company. Whether this is also a promising development for long run shareholder advantage remains to be seen. Empirical research indicates that corporate governance concerns over management effectiveness and strategic choices can turn the company into a takeover target. The course of corporate growth may have been different for Stelmar had corporate governance been more effective and had its founder and main shareholder not been devoted to his principle of be(ing) an investor in shipping, as in any other business that creates a good economic return [71]. In any case, the OSG takeover of Stelmar resulted in a Stelmar stock price appreciation with a 94% takeover premium (relative to the stock price one day prior to the first bid announcement). This market value increase of Stelmar was mainly distributed to company shareholders. However, the long run impact on post-merger company performance and the shareholder value implications associated with the effectiveness of the merger will have to be assessed in due course. [72, 73]. The Stelmar case clearly underlines the central role of corporate governance in the shipping industry and puts forward a number of future research directions. Strategic questions that could be investigated refer to whether a corporate governance model, such as that of Stelmar, secures the long-run development of a company or whether it simply achieves short-term financial returns. Furthermore, this corporate governance model should be evaluated in contrast to alternative models prevailing in the industry [74]. The concentration of ownership structure is also an interesting issue for further investigation in shipping, as empirical findings suggest that a more concentrated ownership structure is positively associated with higher firm profitability [75]. The present empirical findings should be treated with caution, since their robustness should be tested against a larger sample of M&A cases in the shipping industry. The construction of a meaningful and flexible corporate governance index, based on the particular characteristics of the shipping industry, would support the direct assessment of corporate governance implications for shareholder value.

References and notes

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