David Samra: «The influence of the foundation is most damaging»

The Managing Director of Artisan Partners criticizes the role Panalpinas major shareholder and names risks related to the acquisition strategy of the freight forwarder.

The US-based investor Artisan Partners holds 12% in Panalpina (PWTN 224.6 0.63%). Managing Director Davis Samra has recently reinforced criticism on the strategy of the freight forwarder, after DSV (DSV 647.2 0.37%) made an informal offer for Panalpina. In an interview with «Finanz und Wirtschaft», he explains why.

You said «there are risks associated with a large M&A transaction for Panalpina.» Why?
Generally speaking, large acquisitions rarely create value. Though small bolt-on acquisitions come at lower prices and are less complex to integrate, large acquisitions usually come at higher prices, require financial leverage, and are much more complex to operationally integrate and importantly to retain customers. Large acquisitions require a management team and an organization with experience and even in those cases, as indicated above, in most cases returns are below a company’s cost of capital. Panalpina is in the midst of a complex IT roll-out and has had management turnover at the regional level. As such, the company does not seem to be in the position today to try to do better than most when making a large acquisition.

Panalpina and the Ernst Goehner Foundation argue that they have made significant investments in the IT system and that this will be one important factor for creating value.
A key variable in the freight forwarding business is to have a sophisticated IT platform. It is a standard tool that is required to effectively compete. Panalpina has spent considerable time and capital in implementing its new IT system and once complete Panalpina will have a basic platform in place that can be used to refine and eventually catch up to the more sophisticated systems used by its largest competitors. Though the IT platform is not fully implemented we do have some insight into the impact that it has had on the business. First, management has had to back away from its margin targets, partially due to the slowdown in the oil and gas sector several years ago, but mainly due to the lack of margin improvement experienced in those geographies where the system roll-out is complete. Second, significant excess personnel had to be hired at Panalpina to help process transactions once the system was implemented in certain large geographies. The excess personnel remain at the company which has depressed operating profitability. As you can see, it would seem premature to deem the process a success or failure. It also seems premature to consider adding significantly higher volumes over the platform.

What do you think about Agility, the company that Panalpina is in discussions with?
This would be a complex acquisition mainly because the bulk of Agility’s profits come from an infrastructure business rather than freight forwarding. It is unclear how a deal would work.

The Ernst Goehner Foundation is convinced that a stand-alone strategy can create more value than Panalpina being acquired by DSV. What do you answer?
If there is a strategic decision to be made, it is often tempting for executives to focus on what could be created in a large deal. However, it is also important to look at the historical fact pattern, the performance of the management and of the IT system. So the opportunities have to be risk-adjusted, and there are a lot of risks: merger risks, integration risk, financial risks, etc.

Would you sell your shares to anyone who offers 170 or 180 CHF, e.g. if the foundation would decide to buy out the other shareholders?
Our preference would be an acquirer to offer shares than cash. For us it is tax-efficient and we can participate in the synergies that would be created by an acquirer. If Panalpina is going to make a large acquisition and get massively indebted, we would clearly prefer cash.

So you would prefer DSV’s first offer to the second?
We would prefer a large share component as part of the offer, yes.

Are there Governance issues that have to be resolved?
The influence of the foundation is the most damaging Governance issue. When you shield a management team from market forces you end up with a mediocre outcome similar to what  Panalpina’s shareholders, employees, the beneficiaries of the foundation and Swiss society have experienced since the listing of the company.

How would you prove this statement?
Well, the most obvious place to start is to look at the performance of the share price compared to its largest competitors. But you can also look at several basic facts and statistics since the company has been listed. Revenue has declined, net income has declined, the number of employees has declined, the balance sheet has deteriorated, and Panalpina was involved in a bribery scandal that resulted in a fine by the US Department of Justice.

Should the limitation of voting rights fall at the next AGM?
The shareholder voting limitation is another piece of evidence that the foundation is unwilling to subject the company to market forces.

What should the board of directors of Panalpina do?
We have been invested in Panalpina for more than a decade and we would encourage the board of directors to look at ways of improving the value of the company and the outcome for all stakeholders. Pursuing a large acquisition as a defensive move or poison pill is not a well thought out strategy and will not help to solve Panalpina’s problems.