Mergers and Alliances in the Liner Shipping Industry: An Historical Perspective

By Menachof, David A.; Damian, Anthony | Journal of Transportation Management, Fall 1998 | Go to article overview

Mergers and Alliances in the Liner Shipping Industry: An Historical Perspective


Menachof, David A., Damian, Anthony, Journal of Transportation Management


INTRODUCTION

In the present decade, mergers and strategic alliances have become the model for liner shipping companies in coping with the globalization of the world economy. The present day competition and rise in the cost of capital has resulted in a steady fall in profits. Liner shipping companies "are characterized by operating scheduled services between predetermined ranges of ports on a continuous basis." (U.N.) Most liner shipping service today is focused on containerized freight traffic. Competition in the liner shipping industry has been in existence since the days when sailing ships were introduced. The intense competition at the turn of the last century can be compared to the present day competition in the liner shipping industry. The commonality between the two periods represents an attempt to increase price stability and profitability This paper will chronicle the merger history of the liner shipping industry and conclude with the current rationale for the most recent wave of merger activity and how it might affect the shipper.

HISTORY OF THE MERGERS AND THE MERGER WAVE CYCLE

Four periods of high merger activity, called merger waves, can be identified in the history of US and UK industrial development. During these periods, consolidation of various industries took place. The liner shipping industry was one such industry affected by these merger waves. In the US, these industrial merger waves occurred between 1897-1904; 1910-1929; 1965-1969, 1984-1989, and most recently in the early 1990's continuing to the present. The reason for the occurrence of these merger waves was different for each period. The first wave resulted in monopolistic merger, the second wave for oligopoly, the third wave for conglomerate merger, the fourth wave was the period of hostile and mega-mergers and the present day merger's objective is strategic gains (Gaughan 1996). The merger activity in liner shipping has coincided with the merger activity in other industries. Mergers, acquisitions and alliances in the liner shipping industry have always occurred in a periodical wave manner. From the data collected (see Appendix), the merger waves in the liner shipping industry can be categorized into four periods, 1875-1898; 1914-1926; 1964-1973; and 1981-1989, which with little exception correspond to the general industrial merger waves. The present day merger activity can be traced from 1995-present day. These periods of merger waves saw increased activity of mergers, acquisition and alliances.

The First Merger Wave: 1875-1898

In the late 19th century, steamships used to regularly ply between Europe and India/Far East, but the competition was not very severe. The opening of the Suez Canal in 1869, which reduced the voyage duration, increased the effective carrying capacity of each vessel and created cutthroat competition among the shipowners, finally resulting in the formation of shipping conferences. It was one of the first types of mutual pact among shipowners to protect their interests. In the following years, many conferences were formed to safeguard shipowner interests (Deakin and Seward 1973). The period before 1900 saw heightened activity in the formation of shipping conferences and the period between 1890-1898 saw increased merger activity.

This merger wave occurred after the depression of 1883 and peaked between 1898 and 1902. General industry mergers during this period were horizontal and often resulted in a monopolistic market structure (Gaughan 1991). Similar monopolistic market structures were also witnessed in the liner shipping industry, where the conference system created a price cartel. An example to this effect was rate fixing set by the shipowners of the Calcutta conference for the carriage of tea (Deakin and Seward 1973). It was financial factors which forced the end of the first merger wave, including the collapse of the shipbuilding trust in 1900 and the crash of the stock market in 1904 in the US (Gaughan 1991). …

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