Monday, February 18, 2008

Challenges ahead for Stock Exchange listed Greek shipping companies

With the Tradewinds recently reporting a count of 24 publicly listed shipping companies in Greece, I firmly believe that we are moving to a period of consolidation, mergers and restructuring over the next few years. Some companies will grow and prosper and evolve into world-class businesses. Others will fail and cease to exist.

Common statistics for US stock exchange IPO's are that up to 75% of these companies cease to exist over the first years from inception. For Greek companies coming from a culture where even 10-15 years ago, many business men had difficulties with balance sheets and relied on their bank account statement for their financial position, this poses some formidable challenges ahead.
Most businesses in Greece are small, closed family owned operations. Greek managers are not used to having to operate under an arms-length board with US-style corporate governance. The traditional management style has been highly centralized even to the point of physical limits. Often all decisions are concentrated to one key person and there is little tradition in delegation of responsibilities. Decision making is often very much like a line manager with quick decisions based on limited information rather than a corporate integrated style based on a team approach.

Institutional regulation in the domestic Greek Stock exchange has been notoriously lax. The notion of maintaining share value or management accountability are new concepts in Greece. The notion of hostile take-overs and management changes due bad performance is virtually unheard of.
US-listed Greek shipping companies appear to be exempt of the direct requirement of the Sarbanes-Oxley Act, but there is a system of self-policing where they are required to have an audit committee and report any material non-compliances.
Most Greek IPO’s tell more or less the same story:
  • The BoD’s are very often friends of the management with little industry scope and little weight in corporate oversight on business and financial decisions: lawyers, average adjusters, retired bankers. Rarely do you see Boards with strong independent shipping figures. There are exceptions, of course. Stelmar before being taken over by OSG had a chairman, who was a Major Oil company executive. This added value to the stock and led to a better payout in the eventual sale of the company. More recently, Aegean ANW has a well constructed BoD due in part to the involvement of Hamish Norton in the IPO and Peter Georgiopoulos as major shareholder. Unfortunately many other cases are weak and this is not good for effective oversight that could enhance company performance and share value. There is serious shortage of qualified people for board positions as well as most other senior management positions in shipping these days.
  • Management are often relatives and friends. but outside professional managers are becoming more common. Stelmar above led the way with a professional management team that organized the company. This poses an increasing management talent demand for listed-companies. Some like Diana DXS have turned to managers from multinational companies outside of shipping.
  • Of course, it is not only the titles. The people have to be productive and have something to offer. There has to be some real accountability of management to the BoD and BoD/ management to shareholders. Since Greek management comes mainly from closed, family businesses, this is often a new world for them. They are used to imposing their decisions on their subordinates. They are not accustomed to selling ideas internally, working integratively nor to accounting for past performance. Not unexpectedly, some shelter themselves with elaborate "poison pills." This can have a negative effect on share performance.
  • Greek companies often suffer from lack a productive corporate culture. Little attention is paid how to organize these companies with motivated staff that is efficient and gets results. Most local shipping companies have fairly formalistic ISM systems. Frequently in practice, there are seldom clear job responsibilities. People do not have objectives, etc. Insufficient money is spent for training and continuing education. The worst part of it is that in many larger companies in such environments with weak corporate culture, people can start to work for himself. This can easily degenerate into corruption. A number of large shipping companies in Greece have failed in the past because they lost control for these reasons.
  • The business model is ship provider. The listed company does the technical management and provides the crew and the vessels. Effectively the commercial part is outsourced as the vessels are mainly time-chartered. The companies do not control their market. They often have no direct relations with end-users. Some companies, of course, do have units spot or do profit sharing deals. Even in this case there is no really coherent market strategy. What markets to develop? What kind of customer base to build? There is often a great deal of dependency on a few Charterer customers.
  • The logistical concept of cargo systems or pooling where the Norwegians thrive is still rare among Greeks. The Greeks are mainly looking to play the market speculatively. Greeks have an excellent good track record in this regard, This is very different from building a service transport business with value and recurrent earnings. It is more like a hedge fund of steel commodity assets where profits are mostly from speculative and non-recurrent operations. With the size and affluence of Greek Shipping now in capital markets, this is gradually changing. Greek firms are buying into traditional cargo operators. George Economou of DRYS is buying out Heidmar from Morgan Stanley. Gabriel Panayiotides of EXM is the major shareholder of Torm.
  • The future earning multiples are generated by fleet expansion. The qualitative value element is insufficient. There no concept of brand image or breakthrough performance. Market penetration and customer base is secondary. Internal capacity to take on new business and cash flow generation to support growth is often underestimated. The primary goal is having a huge fleet as soon as possible. The risks in this strategy are liquidity pressures and uncompetitive cost structure that leads to insufficient sustainable competitive advantage in the market place and declining share value.

The concept of listed companies is good for Greek Shipping. The challenges serve as a catalyst for professional management on new level of sophistication and corporate accountablity. There is real evidence of some new world-class companies on the rise. Shipping has lived through an incredible period the last few years, riding a massive boom in commodities world-wide. With the prospects of a US recession looming in 2008 and the dry-bulk market boom fueled by port congestion and infrastructure problems, the coming years are likely to be challenging times. On the other hand, most Greek shipping companies are far more liquid and much better prepared for the years ahead than ever before.

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