Page 20: of Maritime Logistics Professional Magazine (Q1 2013)

Risk is at the heart of all Þ nancial transactions. That said; in cases of Mergers and Acquisitions, buyers and sellers of companies can and do have contrast- ing goals and very different notions of risk in a deal. Sellers often take their company or division to market in order to reduce risk, exchanging an operating unit for cash or securities. In the case of a closely-held business, the owner may hold almost all of his or her wealth in the stock of one company and selling the company is the path to diversifying their personal portfolio. For buyers of companies, the decision of whether to make an offer and at what price is underpinned entirely by risk analy- sis. Each potential acquirer in a competitive auction process will build Þ nancial models to determine the value and struc- ture of their offer. After carefully analyzing the target com- panyÕs operations and Þ nancial statements, the acquisition team develops a projected cash ß ow forecast that reß ects the new divisionÕs potential under their ownership. The team then determines the current value of those estimated cash ß ows us- ing a factor called the Òdiscount rate.Ó After the transaction, there may be some sharing of risk between buyer and seller in the form of deferred payments to the seller (an Òearn-outÓ) or a note held by the seller. Ship Building and Repair ? ConsolidationBuyers make acquisitions for a number of strategic reasons such as to build economies of scale, remove competitors, or diversify their product and service offerings. One trend that emerged in 2012 was consolidation in the ship repair market. General Dynamics NASSCO acquired two major US Navy ship repair yards in the Norfolk area in anticipation of a strong overhaul and repair market in the coming years. GD NASSCO followed its 2011 purchase of Norfolk?s Metro Machine with the acquisition of nearby, privately-held Earl Industries in the summer of 2012. Together these acquisitions provide GD with greater scale, a strong East Coast presence and a number of new government contracts for the repair of multiple combat and sup- port ship classes. Vigor Industrial continued to make news in the shipbuild- ing and repair M&A market as well. After acquiring Todd Paci c Shipyards in 2011 for $130 million, Vigor reached beyond their stronghold in the Paci c Northwest and acquired Alaska Ship and Drydock in Ketchikan after raising $75 mil- lion through private equity  rm Endeavour Capital of Port-land, OR. Vigor owner, Frank Foti, continues to build scale through acquisitions, while diversifying the company?s con- struction and repair capabilities to include cargo  eets, barges and workboats, ferries, and US Navy and Coast Guard ves- sels, among others.Kirby Corporation: Mastering Risk It is impossible to discuss strategic scaling in the maritime industry without mentioning Kirby Corporation. Publicly-traded Kirby (NYSE: KEX) has been almost single-handedly consolidating the inland and coastwise tank barge markets for a few years now. The company has been able to utilize its large borrowing capacity at reasonable rates to  nance several acqui- sitions, and some of the  nancial risk is offset by protections afforded by the Jones Act. The supply of vessels in the Jones Act markets is highly price ?inelastic? since new capacity can- not be readily added to the market, meaning that cash  ows can be calculated at least somewhat more readily than in a market with more  exible supply. Table 1 shows some notable recent Kirby acquisitions, and they seem to have had a good degree of success overall and exhibit strong cash  ows going into 2013. On the private equity front, JF Lehman & Company has Maritime Mergers and Acquisitions: All About RiskBy Harry Ward MaritimInsights20 | Maritime Professional | 1Q 2013MP #1 18-33.indd 20MP #1 18-33.indd 202/22/2013 10:56:07 AM2/22/2013 10:56:07 AM