Commentary: Law & Order litmus test

Are means, motive and opportunity enough for Maersk Line to make a move for South Korean ocean carriers Hanjin Shipping and Hyundai Merchant Marine?

   In a court of law – or at least in the courts of the TV show Law & Order – prosecutors need to show three things to convict a defendant: motive, means and opportunity. Of course, some physical evidence, like a murder weapon, DNA or something else linking them to the crime scene, eyewitness testimony, or a confession would certainly help, but that’s beside the point.
   In the world of high-stakes mergers and acquisitions, however, sometimes motive, means and opportunity still aren’t enough for a company to make a move.
   Case in point: recent reports that Maersk Line parent A.P. Moller-Maersk AS could potentially purchase not only the now insolvent Hanjin Shipping, but it’s South Korean compatriot Hyundai Merchant Marine (HMM) as well, just don’t pass muster, especially given the complete lack of physical evidence to suggest Maersk is pursuing such a deal.
   David Kerstens, Jefferies’s transport analyst in London, said in a recent interview with Bloomberg, “Maersk, as the market leader, will definitely participate in the consolidation – they will have to.” But, he noted, “the takeover options for Maersk are fairly limited, as most container lines are already tied up in alliances or are family or government-controlled. The most likely scenario is that Maersk would take over the assets of Hyundai and Hanjin.”
   As is almost always the case with M&A speculation, a report that followed in the Wall Street Journal cited anonymous sources “familiar with the matter” who said Maersk is unlikely to make a move for either carrier, and a company spokesperson even joked on Twitter that the only person not reportedly linked to the firm was Angelina Jolie (#Maerskelina). But this kind of response is to be expected regardless of the company’s true intentions.
   It’s not as if Maersk has sworn off acquisitions, far from it. The Danish conglomerate in September announced plans to split its operations in two, and the remaining transportation and logistics focused division is expected to grow both through organic means and strategic purchases. Hanjin in particular has a strong presence in the transpacific trade between Asia and North America, an area where Maersk is likely looking to expand its market share in order to stay competitive in the ever-consolidating alliance environment.
   And despite analyst suggestions to the contrary, Maersk certainly has the money for even such a large deal. According to the company’s most recent financial statements, Maersk had $11.5 billion in free cash as of the end of second quarter 2016. If management is concerned about liquidity reserves, it could lessen the up front cost by offering a cash-and-equity deal that would leave shareholders with a stake in the “new” Maersk.
   So the motive and means are there, and in the case of Hanjin, the opportunity to pick up a company – or at the very least a significant portion of its vessel assets—below market value may be there as well.
   The Seoul Central District Court last week confirmed it would put up a public notice of sale for Hanjin’s Asia-U.S. network, according to a report in The Korea Herald. It’s important to keep in mind that whereas most M&A deals are subject to the approval of a company’s shareholder, this decision will still ultimately be made by the Korean bankruptcy court.
   And with HMM, which recently underwent a financial restructuring of its own that included a renegotiation of charter rates with vessel owners, the opportunity may not be nearly as attractive given the company’s decidedly less dire situation. In fact, The Korea Herald suggested HMM might be a bidder for Hanjin’s Asia-U.S. business, but that the firm would proceed with caution given its own narrow brush with bankruptcy.
   It’s also important to keep in mind that these firms, like the majority of large Korean companies, are run by chaebols, tightly knit family groups with strong ties to the government and local community. Simply by virtue of being Korean companies, Hanjin and HMM handle a vast majority of cargoes originating in or destined for Korea. The idea of one or both carriers being taken over by a European conglomerate may not sit well with Seoul, let alone the Korean shipper customers that previously relied on them.
   But even if the Korean government agrees, and Maersk thinks it can convince former Hanjin and HMM customers to come along for the ride, the deal would still require regulatory approval from a wide range of competition authorities in the United States, Europe and China, just to name a few. Those agencies would likely look at alliance market share implications in their decisions as well.
   A few years back, prior to their forming the 2M Alliance, Maersk and MSC attempted to create what would have been called the P3 Alliance along with CMA CGM. That plan was scuttled by the Ministry of Transport in China because it was found to have an unreasonable market share. The magic threshold at that time was around 40 percent of major east-west vessel capacity.
   Although the 2M would not reach this level on the transpacific trade, nor or the transatlantic trade between Europe and North America, it would in the more highly consolidated Asia-Europe trade.
   The chart below, built using ocean carrier schedule and capacity database BlueWater Reporting’s Trade Route Deployment application, compares market share by deployed capacity for the three projected alliances in the Asia-Europe trade just before Hanjin declared bankruptcy and began removing its ships from service. Although the addition of Hanjin and HMM’s combined 16,619 TEUs in weekly capacity may not seem like a lot, it’s enough to push the 2M over the 40 percent threshold for market share with a total of 105,784 TEUs.

   By comparison, the 2M Alliance would only control a 25 percent market share in the transpacific trade if Maersk were to absorb the tonnage of Hanjin and HMM, but Maersk would be deploying over 85 percent of that 2M capacity. At a combined 84,289 TEUs, Maersk alone would have nearly double the deployed weekly capacity of its closest individual competitor in the transpacific – the merged CMA CGM-APL group at 49,905 TEUs – and the top four carriers would control an astonishing 55 percent of deployed capacity in the trade.
   If regulators wouldn’t allow the P3 to have a 40 percent market share in the major east-west trades, it seems unlikely they allow the 2M to do so now, even if it’s only on one of the three lanes. So although a move for Hanjin and HMM passes the Law & Order litmus test, in this case, means, motive and opportunity likely will not add up to an acquisition.