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This article was downloaded by:[HEAL- Link Consortium]On: 12 November 2007Access Details: [subscription number 772811123]Publisher: Taylor & FrancisInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK
Maritime Policy & ManagementAn International Journal of Shipping and PortResearchPublication details, including instructions for authors and subscription information:http://www.informaworld.com/smpp/title~content=t713694970
Value creation through corporate destruction?Corporate governance in shipping takeoversTheodore Syriopoulos a; Ioannis Theotokas aa Department of Shipping, Trade and Transport, School of Business, University ofthe Aegean, 2A Korai str, Chios, Greece
Online Publication Date: 01 June 2007
To cite this Article: Syriopoulos, Theodore and Theotokas, Ioannis (2007) 'Valuecreation through corporate destruction? Corporate governance in shippingtakeovers', Maritime Policy & Management, 34:3, 225 - 242
To link to this article: DOI: 10.1080/03088830701342973URL: http://dx.doi.org/10.1080/03088830701342973
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MARIT. POL. MGMT., JUNE 2007
VOL. 34, NO. 3, 225242
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 valuein shipping takeovers. Inadequate corporate governance structures are shown toaffect corporate growth and even turn a company into a takeover target. Theinteresting case study of Stelmar Shipping is employed in an event study model, inorder to evaluate the impact of takeover bids on corporate value and assess target
and bidder shareholder returns. In line with past evidence, target shareholders arefound to attain positive value gains but bidder shareholders only marginalbenefits. The empirical findings underline the need for convenient corporategovernance systems that minimize frictions related to agency problems andpotentially 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: [email protected]
Maritime Policy & Management ISSN 03088839 print/ISSN 14645254 online 2007 Taylor & Francishttp://www.tandf.co.uk/journals
DOI: 10.1080/03088830701342973
8/3/2019 Event Study in Shipping Industry 6522 (1)
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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 mergewith 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 ofStelmar Shipping. Section 4 evaluates corporate takeover implications for share-
holder 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, marketmechanisms 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 bymanagers 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
226 T. Syriopoulos and I. Theotokas
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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 corporaterestructuring [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 ShippingThe shipping industry experiences robust consolidation trends and Stelmar Shipping
Ltd is considered to be an exceptional case study paradigm. Stelmar had experienced
Value creation through corporate destruction? 227
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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 oilcompanies, state-owned oil producers and other shippers mostly involved in long-
term 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 family-
owned 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, earningsgrowth 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 shippingcompany 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,
228 T. Syriopoulos and I. Theotokas
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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 transporta-
tion 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 producttankers 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$1.3
billion. Approximately 74% of Stelmars shareholders approved the mergeragreement with OSG. Following the completion of the legal procedures, the stock
of Stelmar ceased trading on the NYSE board (January 2005).
Table 1. Financial performance of Stelmar Shipping.
2003 2002 2001
Revenue 162 391 156 508 108 647
Gross profit 118 020 108 069 76 811
Operating profit 62 879 62 463 49 513
Earnings Before Interest, Taxes,Depreciation and Amortization
(EBITDA)
55 511 62 112 51 102
Net income 38 631 43 286 34 013
Total assets 897 421 823 357 592 183
Long-term debt 452 647 413 851 326 862
Stockholder equity 358 841 312 148 209 448
Earnings per share (eps) 2.21 2.47 1.94
Earnings growth (%) 10.75 27.26
EBITDA/revenue (%) 34.18 39.69 47.03
Operating profit/assets (%) 7.01 7.59 8.36
Figures in USD thousands.Source: Company Annual Reports; Reuters.
Value creation through corporate destruction? 229
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Table
2.
TakeoverbidvaluationforStelmarShipping
.
StelmarOMI
StelmarFort
ress*
Stelm
arOSG
SJH
OMI
SJH
SJH
OSG
Target/bidderstockprice
24.78(1)
10.83
35.44
(2)
44.32(3)
56.51
Marketvalue(US$million)
434
980
621
776
2.305
Bidannouncement
17/5/04
20/9/04
13/12/04
Bidprice(US$pershare)
37.32
40.00
(4)
48.00
Bidvalue(US$million)
654
701
841
Premiu
montargetprice(%)
50.6
12.9
(5)
8.3
(6)
Takeov
errelativesize
(7)
0.44
NA
0.34
Takeov
errelativepayment(8)
1.51
1.13
1.08
Methodofpayment
Stock-for-stock(9)
Cash
Cash
Marketvalue(bidder)/(target)
2.26
2.97
Revenu
e(bidder)/(target)
1.66
2.80
Netearnings(bidder)/(target)
1.98
3.14
Assets(bidder)/(target)
1.29
2.23
Equity
(bidder)/(target)
1.50
2.56
(1)
Aso
f14May2004;
(2)
asof17Septemb
er2004;
(3)
asof10December2004;
(4)
theFortressbidpricepershare
wassetinitiallyat$38.55,correspondingtoabidvalue
ofUS$675millionandapremiumof8.78%
ontargetprice;itwassubsequentlyimprovedto$40;
(5)
premiumofFortressbidonOMIbid:7.2%;
(6)pr
emiumofOSGbid:
(i)onO
MIbid:28.6%;(ii)onFortressbid
:20%;(iii)on14/5/04Stelmarprice:93.7%;
(7)
takeoverrelativesize
(marketvalue)targetequity/bidder
equity;
(8)
takeover
relative
payment
amountpaid/targetequity;
(9)
mergertermswereproposedat3.1.
OMIsh
aresfor1SJHshare,implyingthat
Stelmarshareholderswouldown40.5%
ofthecombinedcompany;OM
Iproposedalternativelyastock-for-stockplus25%
in
cash.A
sof20January2005(officialdateo
fmergercompletion),Stelmarssto
ckceasedtradingontheNYSEboard.
*FinancialdataonFortressInvestmentGroup,aprivateequitycompany,havenotbeenavailable(NA).
Source:
CompanyAnnualReports;Compa
nyOfficialAnnouncements;Reuters.
230 T. Syriopoulos and I. Theotokas
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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.
Table 3. Targetbidder fleets.
Stelmar(1) OSG(2) OMI
Handymax 24 28
Aframax 4 20
Panamax 13 14 2
Suezmax 1 15Capesize 2
VLCC 25
LNG(3) 4
Product/chemical 24
US fleet 10
New buildings 9
Total fleet 41 104 50
Total dwt. 2 600 000 13 393 195 3 868 753
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 358302 dwt); chartered-in: 27 vessels (3 502136 dwt);chartered-in commitments: 1 vessel (305 177 dwt).(3) On-order (864 800cbm).Source: company Annual Reports.
Table 4. Takeover hypothesesexpected effect.
Firm Hubris or empire
building hypothesis
Synergy
hypothesis
Hubris and
synergy hypothesisTarget Positive Positive Positive
Bidder Negative Non-negative NegativeCombined Non-positive Positive Positive
Source: [47].
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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 stimulatecorporate 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 eventstudy 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 abnormalreturns 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
232 T. Syriopoulos and I. Theotokas
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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):
Rit i i Rmt "t"t $ N0, ht 1
ARit Rit Rit Rit i
i Rmt 2
where return is measured as [(Pit Pi(t1))/Pi(t1)] and Pit is the share price of securityi at day t; Rit is the normal expected return on security i for event day t; Rit is the
observed (realized) return on security ifor event day t; Rmt is the observed return on
the market portfolio m for event day t; imeasures the mean return on security iover
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 depictedby 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
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
OMI bid for Steimer:$37.32 (17.5.04)
Fortress bid for Stemler:$40.00 (20.9.04)
OSG bid for Stelmer:$48.00 (13.12.04)
5/4/200
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5
Stelmarstockprice(U
SD)
950.00
1,000.00
1,050.00
1,100.00
1,150.00
1,200.00
1,250.00
S&P500
SJH S&P500
Figure 1. Target stock price: bib announcement window [2301 30].
Value creation through corporate destruction? 233
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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 mayadd 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):
CART1T2 YT2
iT11 ARi 1 ARi1 1 3
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:
t-test CARi=ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiVARCARiT1T2
p5
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 thetakeover 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)
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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 longerevent periods (30 days prior to bid announcement) and declining closer to the
announcement date. This may reflect information leakages from the target prior to
Table 6. OSG bid for Stelmar.
Event
window
Price
(US$)
Market value
(US$ million) CAR*(%)
Value / **
(US$ million)
CCAR1***
(%)
CCAR2***
(%)
Target firm: Stelmar
[30 28] 38.60 676.2 15.21 (2.52) 102.9 12.52 12.58
[10 10] 43.94 769.7 6.05 (1.50) 46.6 15.80 18.08
[5 5] 43.15 755.9 9.19 (2.24) 69.5 4.05 4.52
[1 1] 43.64 764.5 8.27 (2.10) 63.2 3.24 3.44
Bidder firm: OSG
[30 28] 56.78 2.235 20.91 (2.22) 467.4
[10 10] 64.70 2.547 22.40 (3.72) 570.7
[5 5] 63.00 2.480 8.08 (2.75) 200.5
[1 1] 58.73 2.312 1.58 (0.45) 36.5
(.): 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 5. OMI bid for Stelmar.
Event
window
Price
(US$)
Market value
(US$ million) CAR*(%)
Value /
**(US% million)
CCAR1***
(%)
CCAR2***
(%)
Target firm: Stelmar[30 30] 28.72 503.1 5.06 (1.56) 25.4 7.02 5.18
[10 10] 24.48 428.8 22.13 (2.05) 94.9 5.21 3.39[5 5] 24.45 428.3 21.67 (2.14) 92.9 6.14 3.97
[1 1] 24.38 427.1 16.23 (2.17) 69.3 2.05 1.38
Bidder firm: OMI
[30 30] 11.16 1.010 13.03 (2.34) 131.6
[10 10] 10.00 905.3 2.89 (1.44) 25.3
[5 5] 9.92 898.1 1.27 (0.39) 11.4
[1 1] 10.55 955.1 4.29 (1.20) 40.9
(.): 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.
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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 thata 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 iscompared 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 ensuresthat 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 particularindustry (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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both crude and product tankers segments, attaining cross-product diversification
and risk dispersion.
In relation to corporate governance, the implicit threat of potential takeovers hasa disciplining role on managers, possibly forcing them to follow shareholder value-
maximizing strategies [62]. An anticipated high level of managerial turnover in the
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
30 26 22 18 14 10 6 2 2 6 10 14 18 22 26
Target: Stelmar Bidder: OSG CCAR
Figure 3. CARs and CCARs rarget: Stelmar versus Bidder: OSG [30 30].
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
5.00%
10.00%
30 26 22 18 14 10 6 2 2 6 10 14 18 22 26 30
Target: Stelmar Bidder: OMI CCAR
Figure 2. CARs and CCARs target: Stelmar versus Bidder: OMI [30 30].
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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 controlchanges 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 thecombined synergy and hubris hypothesis, as seems to be the case for the OSG-
Stelmar 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 andremains 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 thatcompanies, 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 andhad 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. Strategicquestions 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 profit-
ability [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 shippingindustry. 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.
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242 T. Syriopoulos and I. Theotokas