Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
NOL and APL (A)
CASE 15
After several years of dismal results, Neptune Orient Lines (NOL) was widely viewed as a laggard. The national shipping line was one of the worst performers among Singapore’s many government-linked corporations. Perhaps the low point was reached in 1996, when industry publication Containerisation International ranked NOL last in a field of 24 shipping firms on return on assets, and 18th in net profit margins. This was in stark contrast to the performance of other government firms, several of which could claim industry-leading performance, reputation and profitability. This poor performance imposed great pressures on NOL to take drastic action. Possibly in reaction, NOL announced in April 1997 that it was acquiring APL, the leading U.S. shipping line. This would be the largest acquisition ever by a Singapore firm and would catapult the firm into the league of major shipping lines. There were some concerns that NOL’s strategy was risky, as it was acquiring a firm larger than itself for a price some observers judged to be excessive. But NOL’s management was confident that it had found a solution to its problems, and that the acquisition of APL would ensure its future success. The future seemed bright.
Introduction
NOL AND APL (A)
NOL
Southeast Asia-Australia routes. Its ship charter business, American Eagle Tankers, focused on chartering ships to transport dry or liquid bulk shipping. This business accounted for 15% of its revenue. Other minor activities such as travel and computer services accounted for the rest. NOL had investments in regional shipping lines in Singapore, Indonesia and the Philippines. In addition, it had a major stake in a joint venture in Vietnam to develop the country’s first purpose-built container terminal. Exhibit 1 presents financial data for NOL. Exhibit 2 provides information on leading industry firms. NOL’s performance began to suffer in the mid1990s, with a slowdown in regional economic growth, excess capacity in the shipping industry, severe competition, and declining shipping rates. In general, the characteristics of the shipping industry suggested a long term decline in profitability. As NOL earned much of its revenue in foreign currencies, the significant appreciation of the Singapore dollar up to the mid1990s lowered revenues in Singapore dollar terms. NOL’s response to these challenges was to restructure its organization and business processes to reduce overheads and increase responsiveness. It also replaced older ships with newer, more efficient ones. NOL announced disappointing results in 1996, as net profits declined by 54%. Analysts pointed out that the results were in fact worse than reported. Only the somewhat unusual classification of S$20 million of profits from the sale of ships as operating profits allowed NOL to report profits in its core shipping business. Management attributed the poor results to intense competition and depressed freight rates. NOL indicated that results were expected to be weak in the foreseeable future. Warning that shipping was not “in the best state of health”, NOL’s Deputy CEO, H.T. Lim described the challenges facing his firm and the industry: NOL was established as the national shipping line in 1967 by the government of Singapore. A national shipping line would allow Singapore to reap more of the benefits from the shipping business, as the country had one of the world’s busiest and most efficient harbors. NOL grew rapidly, benefiting from Asia’s and Singapore’s rapid economic growth, and from having its home base at the hub of one of the busiest shipping routes in the world. NOL’s growth and profitability were strong enough to allow listing on the Singapore Stock Exchange in 1981. The government retained about 33% ownership but did not appear to engage actively in the firm’s management. By 1996, NOL had grown into an important shipping line with a global presence. In revenue terms, it was the 16th largest shipping line in the world. NOL drew 80% of its revenue from container shipping liner operations. NOL was an important player on the Far East-North America, Far East-Europe, Intra-Asia, and “We have to deal with old problems like changes in oil price, currency fluctuations, over-tonnage of shipping and declining freight rates. Above all, we have to satisfy the demands of our customers and consumers for more efficient and economical transportation and the demands of our investors and shareholders for a reasonable return on their investment.” NOL indicated that although productivity savings would be pursued, improved performance would largely be dependent on improved freight rates. H.T.
After several years of dismal results, Neptune Orient Lines (NOL) was widely viewed as a laggard. The national shipping line was one of the worst performers among Singapore’s many governmentlinked corporations. Perhaps the low point was reached in 1996, when industry publication Containerisation International ranked NOL last in a field of 24 shipping firms on return on assets, and 18th in net profit margins. This was in stark contrast to the performance of other government firms, several of which could claim industryleading performance, reputation and profitability. This poor performance imposed great pressures on NOL to take drastic action. Possibly in reaction, NOL announced in April 1997 that it was acquiring APL, the leading U.S. shipping line.
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Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
NOL and APL (A) Exhibit 2 Operations and Profitability of Major Carriers (1996)
1997 2,672,466 197,390 2,381,085 93,991 168,856 (5,346) (80,211) (9,375) (230,836) 4,368 (297,304) (423,202) (439,754) (16,378) – 174 348,967 15,742 (106,529) 6,485,268 405,913 6,185,884 1998 Carrier Country of Origin Capacity (‘000 TEUs) Number of Vessels Orientation
NOL and APL (A)
Exhibit 1 Financial Data for NOL ($‘000)
1995
1996
Net profit margin
Return on assets
Turnover Depreciation Other Operating Expenses
1,866,600 160,661 1,548,006
1,928,410 164,788 1,626,056
157,933
137,566
4.6% 7.4% 4.0% 11.0% 5.6%
4.6% 10.3% 1.8% 2.1% 0.4%
Operating Profit/(Loss) before Tax Other Income Interest Expense Share of Associates Profits (Loss)
115,451 3,884
125,967 5,209
Profit/(Loss) before Tax Tax Extraordinary Items Minority Interests
46,366 4,392 38 3,101
16,808 3,595 3,719 3,745
Net Profit /(Loss)
45,113
20,677
2,485,328 67,891 53,416 15,932 19,364
2,555,556 90,410 55,522 12,205 11,949
Maersk Evergreen P&O Nedlloyd Sea-Land Cosco Hanjin Mediterranean NYK Mitsui OSK Hyundai ZIM Israel Yangming CMA-CGM OOCL NOL CP Ships K Line APL Hapag-Lloyd
SOURCE: Containerisation International (November 1997), Koh (2000).
Balance Sheet Property, Plant and Equipment Associates Investments Other Non-Current Assets Deferred Charges Intangible Assets Goodwill 4,957,428 108,399 127,564 163,977 152,467 32,817 262,228 5,804,880 2,150,895 7,955,775 722,293 220,641 942,934 34,355 9,629 544,013 95,512 722,293 (410,471) 311,822 35,441 26,602 581,277 82,123 7,364,671 5,494,801 1,869,870 4,564,434 113,683 131,378 357,090 35,573 30,297 262,346
Denmark Taiwan Netherlands USA China South Korea Switzerland Japan Japan South Korea Israel Taiwan France Hong Kong Singapore Canada Japan USA Germany
232 228 222 215 202 175 154 128 116 113 98 96 90 86 86 85 84 80 73
106 103 106 95 139 62 100 68 62 36 59 42 64 30 36 46 45 38 23
Global Global Global Global East/West Regional Asia East/West Regional Asia Global Global Global East/West Regional Asia East/West, Mediterranean East/West Regional Diverse East/West Regional Asia East/West Regional Asia Transatlantic East/West Regional Japan East/West Regional Asia Diverse
1.3% 3.2% 6.5% 1.4% 7.8% 0.8% 5.8% 0.6% 1.6% 7.5% 13.1%
1.3% 0.8% 0.9% 1.1% 5.6% 0.7% 5.8% 1% 1.3% 2.5% 1.2%
3,899
6,835
Total Non Current Assets Current Assets
2,645,830 992,951
2,732,477 1,041,222
Total Assets
3,638,781
3,773,699
Share Capital Reserves Share Capital & Reserves Minority Interests Deferred Income Deferred Tax Other Non-Current Liabilities
722,133 348,597 1,070,730 38,385 945 7,532
722,133 348,597 1,071,805 36,564 936 7,321
Lim expressed confidence in 1997 that freight rates would stabilize and that the situation would soon improve: “If you look at the lines’ results, many of them are reporting losses. That shows that you’ve already reached bottom. It may drop a little bit more, but I don’t think there’s much room to drop. We’re already scraping the bottom.”
Term Loans Long Term Debts (unsecured) Deferred Liabilities 6,057,677 1,898,098 7,955,775 7,364,671 5,892,452 1,472,219
1,317,666 650,000 28,081
1,258,204 650,000 148,168
3,168,762 1,102,046 160,426
4,004,288 709,289 141,610
The Acquisition of APL
Total Long term Liabilities Current Liabilities
3,113,339 525,442
3,172,998 600,701
Total Liabilities
3,638,781
3,773,699
Other Data Return on Equity Return on Assets Operating Margin Earning Per Share Dividends Per Share 32.0% 0.9% 4% (9.20) – 134.8% 5.7% 2% (58.60) –
3.9% 1.2% 8% 6.43 3.30
1.6% 0.4% 7% 2.35 2.50
SOURCE: Annual Reports.
In April 1997, NOL made an offer for all outstanding shares of APL, in the largest-ever acquisition by a Singapore firm. NOL’s initial offer of US$30 per share valued APL at S$1,060 million. However, this offer was rejected and had to be raised twice. Agreement was achieved at US$33.50, for a final acquisition price of S$1,200 million. This represented a 43% premium on APL’s average share price over the previous three months and the highest valuation ever placed on APL. The 148-year old California-based APL (previously known as American President Lines) was the oldest and the second largest shipping line in the U.S. APL had a
long history of success and innovation. In 1996, it was the 11th largest shipping liner in the world, with revenues of S$3,834 million and net profits of S$97 million. Though it had a smaller fleet than NOL, APL had higher revenue, profits and shipping volumes. APL had a reputation for innovativeness, having introduced major innovations such as the first transpacific steamship service, intermodal shipping (i.e. shipping containerized cargo continuously by road, rail, and sea), container tracing technologies, and computerized on-line shipping transactions. APL’s strengths were in transpacific routes, though it had some minor Asia-Europe and transatlantic routes. In addition to its shipping operations, APL had the largest freight rail services in North America, which covered extensive parts of the U.S., Canada and Mexico, This network was unique in accommodating “double-stacked” trains which carried containers in double-decker format. This was viewed as an extremely valuable network, as it allowed easy and efficient linking of sea and land shipment of containers. APL had harbor terminal operations in various U.S. and Asian ports, and substantial logistics operations, with a customer base of more than 400 major firms around the world. APL was
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Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
NOL and APL (A) Exhibit 4 Summary information for APL and NOL (1997)
Service Liner service routes Transpacific Asia-Europe Transatlantic Australia Latin America Intra-Asia 5 4 1 1 – Comprehensive 77% 17% – 6% 83,700 746,000 36 30 7 4,780 84,200 1,000,000 40 – – 4,000 86% – 14% – 6 3 – – 2 Being upgraded Revenue distribution Liner shipping Charter Logistics Others Operations 1996 Capacity (TEUs)* 1996 Shipments (TEUs) Containers ships Tankers Bulk carriers Employees
* Twenty-foot container equivalent units. SOURCE: Cargonews Asia, 5 May 1997, Lim (1998).
NOL and APL (A)
NOL’s Strategy
The acquisition would increase NOL’s fleet significantly, making it one of the five largest carriers in the world. The combined firm would have a 10% share of transpacific routes, the busiest in the business. The firm would become Singapore harbor’s largest customer, accounting for about 10% of its throughput. NOL would therefore enjoy the benefits of size, and resulting cost and competitive advantages. The larger operations would allow NOL to introduce new services and to customize services. NOL also indicated that APL’s port facilities and freight train network would give it important “landward” diversification. NOL indicated that the acquisition represented a strategic move to achieve competitive advantage in the face of significant price cutting, rising costs and overcapacity in the industry. CEO Lua explained that the acquisition would provide NOL with:
strong competitive bids. However, there were no reports of bids from other firms. NOL proposed to fund the acquisition with internal cash and borrowings of S$850 million. As a result, NOL’s debt-to-equity ratio would rise from about 2 to 3.9. Exhibit 4 provides a brief comparison of NOL and APL. Market reaction to the acquisition was swift. APL’s shares surged by 50% to US$30 while NOL’s rose by 8%. Most analysts were positive about the acquisition, with one securities firm, Vickers Ballas, predicting an eightfold increase in profits within three years. An Asian business magazine, Asia Inc., reported the acquisition as exemplifying the sort of bold action that leading Asian firms were beginning to take:
NOL APL
known to have a strong American culture that encouraged flexibility, innovation and change. Having undertaken two important re-engineering exercises, APL was believed to be leaner and more efficient than NOL. This performance was reflected in a 1997 industry survey, which rated APL third in the “Best Global Shipping Line” category and second in the “Transpacific” line category. The same survey ranked NOL eighth and sixth in these respective categories. Exhibit 3 provides summary financial information for APL. Nevertheless, there was some surprise at the price that NOL paid for what was seen as a barely profitable niche player in an industry suffering from low profitability. There was also concern about NOL’s low levels of cash and liquid assets. However, NOL argued that the 43% premium it paid for APL was less than the average premium of 45% for shipping mergers and acquisitions in the U.S. NOL also indicated that the premium was necessary to acquire APL in the face of
“The acquisition is the crown jewel in Neptune Orient Deputy Chief Executive Lim How Teck’s career. He was the driving force behind the deal and followed his motto ‘He who dares, wins’. When Lim heard that APL was for sale, he swung into action: He got his
Exhibit 3 APL’S Financial Information
1994 4,081 180 143 108 372 301 2,431 564 790 1,471 29 4% 12.70% 4.80% 0.63 1.5 1 2% 5.60% 1.70% 1.49 1.1 1 5% 14.30% 3.70% 1.4 1.6 1 972 663 1,652 26 974 704 1,692 29 192 92 2,657 396 316 2,632 96 149 42 197 139 98 4,096 3,910 1995 1996
$ million except per share data
1992
1993
Revenues Expenses Operating income Income before taxes Net income
4,139
4,190
230 158 128
214 174 129
“The broadest array of routes with the highest frequency of sailings, the fastest transit times, and the most extensive intermodal services. [We will] realize significant cost savings of at least US$130 million annually from the consolidation of certain operations and improved efficiencies, including enhanced network optimization, streamlined information technology systems, improved box utilization, lowered inland costs and reduced terminal expenses … We’re buying into APL because we like their double-stacked (freight) trains and because we like their terminals.” APL’s CEO Tim Rhein, also hailed the deal:
Cash and short term investments Working capital Total assets
217 (26) 2,362
135 82 2,338
Long term debt Stockholders equity Capital Book value per share
398 653 1,364 25
429 764 1,322 28
credit lines ready and approached the negotiating table ready to pay virtually any price … With APL, Neptune Orient took a giant leap toward improving its competitive position globally. And Lim expects the merger to save the group up to US$160 million a year. Neptune has tried to maintain the best of both cultures, retaining the APL brand name and adopting APL’s comprehensive computer systems. The group plans another acquisition in the next few years to enhance its global position. But this time, company executives say, price will be a more important consideration.”
Operating margin Return on equity Return on assets Debt equity ratio Current ratio Dividends per share
6% 11.60% 3.80% 0.75 1
5% 15.70% 5.50% 0.49 1.1
“The future of the shipping industry belongs to those who have a global vision, and the strategy and critical mass to realize that vision. This combination of the complementary APL and NOL route systems, service organizations and intermodal assets creates a global container line with resources to provide customers comprehensive and efficient worldwide shipping services. Importantly, our proposed merger with NOL will lead to the broad service scope and economies of scale that will transform us into a global transportation company for the 21st century.” NOL’s acquisition followed seven months after the mega merger of Britain’s P&O line with the Netherlands’ Nedlloyd lines. Analysts believe that NOL’s acquisition signaled continuing consolidation in the shipping industry and represented a defensive move on the part of NOL. According to industry journal, Containerisation International, there were 43 mergers and acquisitions between 1995 and 1999. It was believed that this consolidation would help stabilize or even raise freight rates in the industry. Industry analysts offered more direct views of the acquisition:
All figures were converted from US$ to S$ at the following rates: Year S$ per US$ 1992 1.6449 1993 1.6080 1994 1.4607 1995 1.4143 1996 1.3998 SOURCE: Annual Reports.
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Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
Chapter 15, Business Strategy in Asia, Kulwant Singh, Nitin Pangarkar and Loizos Heracleous, 2004
NOL and APL (A)
NOL and APL (A)
“This cut-throat industry is suffering from excess capacity and there are only two ways of competing. One way is to increase your market share by lowering your rates and the other way is to increase market share by buying your competitors. NOL has chosen the latter method.”
these cost savings could be achieved as “The two companies have a lot of synergies. The fit is a very good one.” His CEO agreed that synergy existed:
Looking Ahead
References
“NOL is a second tier global carrier with low market share in the main East-West trades and is taking over APL, a high margin global carrier with a strong presence in the Pacific ... It’s like a small fish taking over a big fish.”
“You cannot combine a hotel company with a shipping company and get synergy. But here it’s shipping line to shipping line. You enjoy a US$130 million synergy. That makes a lot of difference. Although we have interest costs, we still have a surplus when you measure against the US$130 million. These are within our control, nothing to do with the operating environment. So we are confident that these savings would be achieved.”
Synergy
NOL explained that in order for the acquisition to succeed, it would have to cut costs, expand market share and raise profits. NOL believed that consolidating operations would provide annual cost savings of S$190 million (US$130 million in 1997) in the long run, as long as freight rates remained unchanged. About 75% of the expected savings would result from higher and more efficient use of APL’s sea terminals and container freight trains, and of the combined shipping fleet. NOL would rationalize overlapping route networks and expensive fixed assets. The integration of management, information systems and ancillary services was an important area for potential synergy, and would account for about 25% of expected savings. NOL’s chairman, Herman Hochstadt, suggested that
In an earlier acquisition in 1997, P&O Nedlloyd had projected substantial savings. The firm subsequently announced that it had achieved the projected savings from the first year of the merger. It was believed that NOL had the potential to achieve similar success with its planned savings. Exhibit 5 compares the projected synergies that NOL aimed to achieve with those of the P&O Nedlloyd merger. NOL indicated that the acquisition would not affect its other businesses of operating port-related facilities in Bangkok, Colombo and Ho Chi Minh City. It was uncertain, however, of the effects of the acquisition on its membership in the Grand Alliance, as APL belonged to the Global Alliance, a competitor grouping. This issue was quickly resolved as both NOL and APL withdrew from their respective alliances, to join the newly-formed New World Alliance.
With the acquisition of APL, the route ahead for NOL seemed clear: First, integrate APL and NOL. Second, exploit the synergies from the combination of the two firms. Third, develop a strategy that would allow the integrated firm to grow faster and more profitably than the two firms could have done independently. Though none of these were simple challenges, NOL’s management appeared confident that they were ready to lead NOL towards greater success. Yet amid the celebration of NOL’s success, there remained some dissenting voices. NOL had overpaid for APL, they claimed. It would be difficult for NOL to extract the synergies that they had outlined, assuming that these synergies existed at all. NOL would therefore have difficulty recouping the premium it paid for APL, particularly as the industry was suffering from declining rates and overcapacity. The acquisition was a mistake and would be a drain on NOL’s performance for many years.
Amand, David, September 1997, “Finding curve,” Containerisation International. Asia Inc, October 1998, “From growth to survival.” Asia Times, April 15, 1997, “Neptune lines up with shipping giants.” Asia Times, May 13, 1997, “Mergers may help shippers stay afloat.” Business Times, May 25, 1998, “NOL eyeing another shipping line after APL.” Cargo News Asia, “Merger candidates stun container industry.” Cargo News Asia, “Asian Freight Industry Awards 1997.” Containerisation International, January 1999, “Predator or Prey?” Containerisation International Yearbook, various issues/ Drewry Shipping Consultants. Http://Web3.asia1.com.sg/timesnet/data/cna/docs/cna2527.html. Http://Web3.asia1.com.sg/timesnet/data/live/afia97.html. Koh, Yeow Koon, 2000, “Neptune Orient Lines. Acquisition of American President Lines & future outlook,” unpublished report, NUS. Lim, Geok Hock Joshua, 1998, “Mergers and Acquisitions in Singapore: A study of Acquisitions in the Shipping Industry,” Unpublished report, NUS. The Straits Times, April 17, 1997, “NOL: Offer price for U.S. carrier not too high.” The Straits Times, April 25, 1997, “NOL’s takeover target incurs $14 million net loss.” The Straits Times, September 17, 1996, “NOL interim gain plunges, merger may be considered.” Singh, Kulwant, 1997, “NOL’s acquisition of APL,” Asian Case Research Journal, 1, 217–221.
Exhibit 5 Comparison of Projected Cost Savings
NOL and APL $m 63 42 0 42 35 182 2.8 2.2 84 35 23 0 23 19 100 %
P&O and Nedlloyd
Projected savings in:
$m
%
Administration Container fleet operations Third party logistics operations Vessel operations/route elimination IT Total
182 28 42 28 0 280
65 10 15 10 0 100
Savings as % of annual turnover Volume (million TEU) Savings per TEU ($)
5.8 2.4 117
SOURCE: Drewry Shipping Consultants, author’s calculations.
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