Advantages of the merger by ldc79916

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									                                CHAPTER 5

               Advantages of the merger
   91. In explaining the purposes of the merger Ross Group drew attention
to the difficult problems facing the industry arising from declining yields
and growing foreign competition on the fishing grounds and to the conse-
quent need, as stated in the National Plan*, for the modernisation of the
fishing fleet and for improvements in the arrangements for marketing and
distributing the catch. It was against this background that we considered
the benefits of the proposed merger.
   92. The White Fish Authority expressed the view that the merger would
be an important step towards enabling the industry to deal with this situation
successfully. On the catching side they argued that under the changed con-
ditions facing the industry only a limited future could be foreseen for many
of the traditional small businesses ; re-organisation into large units was
necessary in order to provide effective management, including the co-
ordination of the efforts of large fleets of trawlers on the fishing grounds,
as well as to facilitate the development of new techniques and to offer
employment conditions more attractive to labour in competition with the
increasing opportunities in other industries. In marketing the catch, they
thought that re-organisation into large units would assist the introduction
of mechanised processing methods and more efficient arrangements for
distribution and would facilitate the commercial exploitation of new products.
They suggested that the merger would create an organisation large enough
for it to bypass the old-fashioned and unhygienic method of selling fish by
auction on the quay but agreed that if, as Ross Group stated to us would
be the case, the combined company did not bypass the auction, then to that
extent the advantages of the merger would be reduced. They thought that,
through diversification into other fields, the combined company would be
better placed to withstand the inevitable fluctuations in the fortunes of the
fish industry.
   93. They recognised that modernisation of the industry was already taking
place and would continue even without the merger. A number of freezer
trawlers, for instance, were already in service and there were expected to be
three tunes as many operating within two years or so ; the use of modern pro-
cessing techniques was growing and the smaller merchants had the benefit
of road delivery services, including those provided by British Road Services,
fully as efficient as that which companies such as Ross Group obtained from
their own vehicle fleets. They thought, however, that such developments had
not been taking place fast enough because of the small scale of most of the
companies. The Authority would have preferred the industry to be
rationalised into three or four strong competing groups. But it was con-
sidered that the pooling in one company of the trawling skill of Associated
Fisheries and the expertise of the Ross Group in processing and distribution,
as well as the greater financial strength which it was thought would result,
  * Grand. 2764. (HMSO 30s.)
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would lead to a valuable acceleration in the modernisation of the industry,
and might stimulate others to join forces in order to compete.
   94. Ross Group themselves gave us a detailed analysis of the benefits which
they expected from the merger and, at our request, attempted to quantify
these benefits. Their estimates indicate the character and amount of gains
and savings which Ross Group suggest could be achieved.

Trawling and ancillary activities
(a) Trawling
   95. Ross Group believe that the most important benefit under this heading
would be an increase in the efficiency of catching of the distant water trawlers
resulting from their operation as a joint fleet. Ross Group explained:
       We have assumed that as a first step we are going to get up to their
    [Associated Fisheries] level, and then what we have tried to do ... is to
    make an assessment of the increased efficiency of the merged fleets because
     we think that together they will be better than they are separately, by reason
    of there being a bigger fleet, better information and so on. What we have
    done there is to take a figure of 2 per cent—it may seem to be a rather
    arbitrary figure, but that is what we took—as the improvement in efficiency
    of the merged fleets.
   96. Ross Group said that if the two fleets were joined there would be
scope for ' pooling of information'. At present information is exchanged
between the individual trawlers of each company's fleet by daily wireless
broadcasts specifying their position and their current rate of catch. This
reduces the time which trawlers have to spend searching for fish and
enables them to concentrate in the most productive areas. Information is,
however, restricted to vessels belonging to the same company and Ross Group
consider that such pooling of information between the greater number of
vessels in a combined fleet would lead to substantially increased productivity.
(The advantages of pooling information would not apply to freezer trawlers
since information is already exchanged between freezer trawlers of all
companies and indeed with those of some foreign countries.)
   97. Another benefit is said to be the improved career prospects which
the combined fleet would offer for crews (including the possibility of imme-
diate promotion of good mates in Associated Fisheries' fleet to be skippers
in Ross Group's fleet). This, it is claimed, would come about because there
is little interchange between the crews of different companies. It is thought
that the bringing of a large fleet under one ownership could widen the
opportunities for promotion for promising mates and deckhands, and so
make the fleet more attractive to new recruits. In this connection Ross
Group emphasised that the level of skill and responsibility required among
crews is rising with the advent of new techniques, while at the same tune
the competition for labour from other industries hi the fishing ports is
increasing.
  98. Ross Group estimate the total gain from improved efficiency in trawl-
ing at £321,000 a year. This represents the estimated increase in the value
of the catch which would result from bigger landings and, perhaps, better
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quality fish (through ships coming back earlier). Bringing the level of daily
earnings of Ross Group's distant water fleet up to that of Associated
Fisheries accounts for approximately half of this total; the rest is accounted
for by the increase in efficiency of the combined distant water fleet (esti-
mated at two per cent.) to be achieved after bringing Ross Group's fleet up
to the standard of Associated Fisheries.
(b) Ancillary services
   99. In addition certain economies are forecast in respect of repairs,,
servicing and administration (including the securing of a greater measure
of control over landings) and higher rates of discount to be obtained in the
purchase of ships' stores and gear. Some reduction in the cost of building
trawlers would also, it is claimed, be expected to follow from a policy of
placing all orders for the combined fleet with the Ross-owned shipyard,
Cochrane & Sons Ltd. of Selby. The total of economies is estimated at
£149,000 a year.
   100. Thus these various benefits in trawling and ancillary activities are
 valued by Ross Group at £470,000 a year, of which about two-thirds would
arise from the anticipated increased value of the catch by the combined
distant water trawler fleet.
Fish merchanting and distribution
   101. Ross Group have stated that it would be their intention, in the
event of a merger, physically to integrate the fish merchanting and distribu-
tion organization of Associated Fisheries with their own and to operate
the complete organization as one unit under one management. They believe,
in the light of their previous experience of the savings resulting from the
acquisition of fish merchanting enterprises, that the combined organization
would achieve substantial economies in operation, a reduction in total
capital employed and a rate of productivity higher than that capable of
achievement by the two companies operating separately. Ross Group
expect economies in various ways:
       (i) The number of people employed on purchasing fish at the Grimsby
           and Hull auctions would be reduced by about a quarter; the total
           number employed by the two companies for this purpose at present
           is 50-60 people.
      (ii) The number of vehicles needed for transport of fish from the fish
           market to the factories, for trunk deliveries from the ports to the
           inland depots and for distribution from the depots would be reduced
           by eliminating duplication.
     (iii) The fish processing factories of the two companies at Hull and
           Grimsby would be combined and would be able to achieve higher
           operating efficiency and possibly some capital saving.
      fiv) Overlapping would be eliminated in telephone, teleprinter and
           telex communications.
       (v) With the combined companies it would be possible to operate
           satisfactorily with a smaller buffer stock of frozen fish.
     (vi) There would be reductions of staff and overhead expenses in
           departments responsible for imports, technical services and market
           research.
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These various savings are valued by Ross Group at £245,000 a year. The
breakdown is as follows:
                                                            £ per year
    Coastal branches buying staff                               15,000
    Long distance transport                                     60,000
    Staff and overheads in import departments                   10,000
    Storage of frozen fish stocks                               39,000
    Communications, technical services etc. ...    ...  ...     62,000
    Interest savings from reduction in capital employed ...     59,000

                                                                 £245,000

   102. Outside the field of fish catching and distribution Ross Group
expect to achieve some economies in other activities, e.g. by closing the
London head office of Associated Fisheries (estimated at £75,000 a year),
combining the general road haulage businesses owned by the two com-
panies, putting their restaurants under a single management, and possibly
by re-organizing the public cold stores owned by a subsidiary of Associated
Fisheries.
Where the benefits would go
    103. Thus in total Ross Group estimate that the prospective benefits
which are quantifiable would be worth some £790,000 a year, in which by
 far the largest single item would be the improved efficiency of catch of the
distant water fleets. It is not suggested that these benefits would be passed
on to the public in the form of lower prices, except to the extent that prices
might be kept lower than would otherwise be the case as the result of
increased landings. But Ross Group consider that the main problem for
the fish industry, if it is to achieve long-term viability, is not how to offer
more competitive prices, since historically prices for fish have been too low
and fish is still cheap compared with other protein foods. The industry's
weakness lies rather in the very low rate of profit that it has been able to
achieve hi recent years, which is particularly serious for trawling because
of the heavy capital investment required in the replacement of ships. Ross
Group's object therefore would be, as far as possible, to devote the benefit
of the expected economies and improved earnings to increasing the rate of
return on capital in order to create an industry which would be capable of
attracting investment by the public and of achieving viability without undue
reliance on subsidies. They estimate that an increase in profits of £790,000
resulting from the merger would add 1-6 per cent, to the percentage return
of profits (before taxation and interest) on the capital employed by the
combined company.




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