What Buyers, Sellers, and Investors Often Overlook During Due Diligence
Mergers and acquisitions in the maritime sector can offer great growth opportunities. Private equity firms, strategic buyers, and marine operators often seek acquisitions to enhance their capabilities, gain assets, enter new markets, and solidify their positions within the maritime industry.
However, purchasing a marine business differs from acquiring a traditional operating company. Marine organizations engage in complex operations that involve vessels, waterfront assets, specialized labor, intricate contracts, environmental risks, regulatory obligations, and increasingly interconnected technology. These operational aspects can significantly impact the financial viability of what might initially seem like an appealing transaction, making them essential considerations during due diligence.
While financial diligence reveals a company's earnings, marine risk diligence needs to assess whether the assets and operations supporting those earnings can sustain them.
Understanding What You're Really Acquiring
This is what I call the Quality of Risk.
Two marine companies may report similar earnings but have vastly different levels of operational stability, capital needs, and liability exposure. One may benefit from well-maintained assets and stringent safety and risk management practices, while the other may struggle with deferred maintenance, aging infrastructure, unresolved claims, or a heavily dependent workforce.
Identifying these differences before finalizing a deal is crucial to comprehending the risks associated with those earnings.
Marine Assets Reveal the True Risk
While a vessel schedule may detail ownership, age, and value, it usually doesn't indicate future drydock requirements, machinery reliability, maintenance backlogs, accident history, or unresolved survey issues. This is also true for shoreside assets; shipyard dry docks, cranes, fire protection systems, and waterfront infrastructure can impose significant operational and capital demands, with terminals relying on specific berths, cranes, or essential equipment.
Deferred maintenance can act as hidden transaction debt. Such expenses may not be reflected in the purchase price, but the buyer inherits the responsibility. Thus, physical asset diligence must delve deeper than just the asset schedule.
Insurance Programs Tell Their Own Tale
Insurance due diligence should encompass more than verifying the existence of policies and checking their limits.
Reviewing historical losses, ongoing claims, reserves, deductibles, self-insured retentions, and coverage gaps sheds light on the organization's risk management over time.
In the context of a marine acquisition, I would emphasize: Does the insurance framework actually align with the operation?
Are vessel values, navigation limits, and P&I provisions suitable? Are crew, longshore, and state workers’ compensation exposures appropriately classified? Do coverages for ship repair, terminal operations, stevedoring, pollution, and cargo accurately reflect the services provided?
The key question is not just whether insurance exists, but whether the insurance program meets the actual operational needs of the marine business.
Environmental Liabilities Can Last Beyond Ownership
Waterfront facilities, shipyards, terminals, fuel systems, and vessel operations can expose businesses to environmental risks that necessitate specialized due diligence.
Factors like historical contamination, tank issues, sediment and dredging problems, waste management, stormwater concerns, spill history, vessel pollution, and operating permits all deserve scrutiny.
The buyer must not only determine if an issue exists but also assess its potential impact on safe operations, vessel movements, dredging, fueling, permitting, or continued facility usage.
The Human Capital Aspect is Unique to the Maritime Sector
Marine businesses heavily rely on specialized personnel. Licensed mariners, skilled tradespeople, and experienced waterfront staff can be challenging to replace. Workforce diligence should evaluate dependencies on critical roles, succession plans, safety performance, labor issues, and employee classifications.
This classification matter is particularly maritime. State workers’ compensation, USL&H, and Jones Act exposures often overlap within the same organization. Knowing what employees do, where they work, and their relationship to vessels is crucial for understanding that risk.
Marine Contracts Can Shift Risk
Contracts for charters, ship repairs, terminal agreements, towing, and customers can determine who bears financial consequences when problems arise. Clauses for indemnification, insurance obligations, and limitation of liability, which are discussed in detail in the referenced Maritime M&A Risk Guide, should be assessed alongside the actual operations and insurance programs of the company. A profitable marine contract can still lead to substantial risk if the organization has accepted liabilities that its operating controls or insurance cannot cover.
When Technology Fails, Operations Suffer
Cyber due diligence should also address the operational ramifications of technology failures. What happens if a vessel navigation system, terminal platform, crane, berth, or other crucial asset goes offline? Is there alternative equipment or capacity available? How quickly can the operation bounce back?
For marine buyers, assessing technology risks must increasingly accompany considerations of business interruptions and operational resilience.
When Marine Diligence Meets the Deal
Representations and warranties insurance can be vital for some transactions, but it doesn't substitute for thorough marine diligence.
After identifying factors like deferred maintenance, environmental issues, regulatory shortcomings, or other known exposures, the parties involved must decide how to tackle these concerns. Depending on the situation and guidance from advisors, this might involve remediation, contractual risk sharing, insurance, or financial adjustments to the deal.
The goal is not to turn every operational issue into an insurance problem. Rather, it is to fully understand the marine risks before ownership is transferred.
Protecting the Created Value
Risk management should continue beyond the deal's closing. The first 100 days present a chance to deal with outstanding maintenance and safety issues, review open claims, validate asset schedules, align contractor practices, enhance cyber defenses, and integrate insurance and risk management strategies.
Maritime acquisitions provide significant opportunities, but in the end, the buyer acquires more than just financial performance.
The buyer is also acquiring the operational aspects behind those earnings.
A deep understanding of the vessels, waterfront assets, workforce, contracts, insurance, environmental risks, and technology supporting that operation can paint a clearer picture of the risks being taken on.
For a more detailed insight, download the Maritime M&A Risk Guide: Identifying the Risks That Can Change Deal Value.
To discover more about marine practices, visit https://hylant.com/industries/marine.