It's been tried before

It's been tried before

I read with interest Bill Mongelluzzo's article in the Dec. 22 JoC about the potential for a large shipper to buy a container line. Included were comments from Don Breazeale, formerly of Sea-Land Service. Nowhere in the article was it noted that Sea-Land was once owned by R.J. Reynolds, a significant-sized shipper. Under Reynolds ownership, Sea-Land grew into a true international transport power, having the capital required to build or acquire vessels and rolling stock. It also signed what was then groundbreaking terminal contracts that were used for Sea-Land's exclusive use.

Over time, however, Reynolds became disenchanted with Sea-Land because of vastly fluctuating returns and the obvious high level of capitalization required, something that was frowned upon by Wall Street and that affected the company's stock price. Reynolds eventually spun Sea-Land off as a separate publicly traded company.

During the time that Reynolds owned Sea-Land, the relationship between Sea-Land and the "shippers" owned by Reynolds was at best tenuous. Each of the subsidiaries had its own profit and loss to account for, and the traffic manager in each company was under pressure to keep costs down.

Consequently, no huge amount of favoritisim was shown to Sea-Land. Indeed, the other Reynolds subsidiaries often used their common ownership by Sea-Land as leverage with other carriers to obtain lower rates. And competitors of Reynolds, such as Philip Morris, avoided Sea-Land as much as possible. The impact of that? Over the course of time after Sea-Land was spun off by Reynolds, Sea-Land's revenue from Philip Morris grew from $12 million annually to $50 million annually!

I believe the real issue involved here is whether a retailer or manufacturer wants to drastically move away from its core business by acquiring an ocean carrier. In the case of R.J. Reynolds, the company found that Sea-Land simply didn't fit into its portfolio of manufacturing firms, and that the services provided by Sea-Land really didn't provide any advantage to those other subsidiaries.

The decision to acquire a company is strictly a business proposition. Is there significant opportunity to get a very good return on the investment? As noted in the JoC article, recent earnings in the shipping industry have hit all-time highs, with global markets increasing at double-digit rates, making the supply-demand ratios favorable to carriers.

Many observers probably looked at the profits from the purchase and sale of Horizon Lines by Carlyle Group as an indicator of what opportunities there might be. But will the supply-demand ratios continue? Not according to global marketing experts, who point to the mass building and deployment of 8,000-TEU-plus ships during the next three years.

Was the purchase and sale of Horizon Lines something that can be considered the norm, or an anomaly? How well did Neptune Orient Lines do with the purchase of APL? In the recent past, not bad, but what about overall?

Finally, if a Wal-Mart or some other shipper were to buy a shipping company, how much time and effort would that take from their top management in doing what is necessary to ensure that their billion-plus dollar investment is producing what they expected?

Senior management's time is precious, and if the core business is retail or manufacturing, what effect would there be on their highly profitable retail business when they have to spend time on a global transportation business that is being affected by all of the new ships being put into service?

Can they afford to divert their focus from their highly profitable core business? Can a non-transport based firm buy into that business and be successful? Some have, as noted in the JoC article, and one could point to Matson Lines and its ownership as another example.

But I would argue that those are very different than buying a global carrier. They are niche players in niche markets, not global players in the global markets. It will be interesting to see who tests those waters.

Gary Ferrulli, a former Sea-Land Service executive, is president of Global Logistics Consulting in Las Vegas. He can be contacted via e-mail at ferrullig@mindspring.com.