Between 2004 and 2009, Agility Logistics acquired more than 40 companies. The buying binge brought the global footprint for the world’s 17th-largest logistics provider to 108 locations in the Americas, 173 in Europe, 188 in Asia and 97 in the Middle East and Africa.
The acquisition frenzy over, Agility today is focusing on organic growth with the companies it’s acquired, said Essa Al-Saleh, president and CEO of integrated logistics.
It’s that balancing act — growing organically and through mergers and acquisitions — for which many of the largest third-party logistics providers strive, but that is oh-so-difficult to attain. In large part, that’s because of the complex nature of acquiring and integrating what could be a foreign company with a dramatically different cultural environment. For those that pull it off, the payoffs can be huge. But there are also plenty of risks and no sure-fire formula for success.
For most 3PLs in acquisition mode, lowering the cost of delivering services and service quality are keys, said Ken Evans, U.S. transportation and logistics leader for PricewaterhouseCoopers. “Bringing in a large number of customers by acquisition can be a nice way to grow,” he said. “You can spread larger revenues over a smaller base of overhead.”
Other factors driving acquisitions include adding or expanding capabilities and bringing in top talent.
Supply chain complexity is also a factor, especially in sectors such as high tech and electronics where 3PLs provide highly specialized services, said Satish Jindel, president of SJ Consulting Group. “With scale, you have the ability to cater to the needs of larger enterprises,” he said.
Analysts anticipate a brisk pace for M&A activity in the transportation and logistics sector this year, tempered by caution and due diligence. “The health of the U.S. economy should spur more transportation and logistics deals in 2012,” PwC’s Fourth Quarter 2011 report on M&A activity in transportation and logistics sector said. “Buyers will continue to rigorously stress test valuation models to determine how global economic conditions could influence deals.”
Related: Top 40 Global 3PLs.
Last year, there were 170 mergers and acquisitions valued at more than $50 million in the global transportation and logistics sector, totaling $51.3 billion. M&A activity started strong in 2011, but tapered off because of global economic worries.
In the fourth quarter, 32 deals of $50 million or more were announced, totaling 12.8 billion, compared with 46 such deals in the third quarter totaling $14.2 billion.
But deals involving U.S. targets slowed significantly. Of the 32 fourth quarter deals, only four involved U.S. targets or acquirers, in part because of a stronger U.S. dollar.
Private equity investors prefer non-asset-based 3PLs, because they require much less cash flow to generate high returns. There are exceptions. In the case of Berkshire Hathaway’s $36.7 billion 2010 purchase of Burlington Northern Santa Fe, the investor was willing to accept a lower rate of return in exchange for the consistency and security of cash flow, Evans said.
The transportation and logistics market is a hot one. One indication of the strength of the logistics sector is the big imbalance between exits and investments, according to New York-based investment banking firm MidCap Advisors. Investors have sold only seven logistics-related companies since the beginning of 2009, while investors purchased 68.
Divestitures usually occur when companies decide to focus on core businesses. Equipment manufacturing giant Caterpillar, for example, is exploring a range of options for spinning off the external 3PL portion of its $2.2 billion Caterpillar Logistics Services unit. In December, the Peoria, Ill.-based company was talking with three private equity firms about a potential sale of Cat Logistics, the eighth-largest U.S.-based 3PL by revenue, according to SJ Consulting Group. Several factors, including uncertainty in the global economy, have held up a final deal, Caterpillar told Reuters.
U.S.-based companies, especially small to midsize 3PLs with good locations, strong regional capabilities or specialization, are a strong magnet for bigger 3PLs and private investors. “These folks exist because of their excellent service quality and strong customer satisfaction ratings,” Evans said.
One example is the recent acquisition of New York-based Associated Global Systems, a strong midsize 3PL, by Nippon Express, Japan’s largest international freight forwarder. In a statement, Nippon Express noted AGS’s reputation for meticulous service, expertise in transportation of precision instruments and oversize cargo, and broad domestic customer base.
Companies wondering whether M&A strategies are risky need look no further than YRC Worldwide’s domestic and foreign acquisition spree. In December 2003, Yellow, as the company was then named, acquired Roadway for $1.05 billion. Two years later, the less-than-truckload giant acquired USF for $1.5 billion.
In 2005, YRC purchased a 50 percent equity stake in JHJ International Transportation, China’s second-largest air freight forwarder at the time. In 2008, the company acquired 65 percent of Shanghai Jiayu Logistics, one of China’s largest truckload and LTL providers. The deals were valued at about $45 million each.
Revenue soared after the acquisitions, but debt swelled to $1.3 billion. Within a few years, YRC lost more than $2.6 billion, came close to bankruptcy and saw the value of its shares decline 98 percent.
“I disagreed with the new acquisitive strategy of the company, and I felt the acquisitions it was pursuing were ill-timed and were bad moves,” YRC CEO James Welch told Forbes magazine recently.
Welch, a 29-year YRC veteran, retired in 2007 as president and CEO. The company’s new board lured him back last July, and he’s taking the $4.9 billion company in a new direction.
Although YRC’s China investments were relatively small and provided a foothold in one of the world’s fastest-growing markets, Welch called the venture a disaster. “We lost money in China, which really didn’t complement our global operations,” he said in the Forbes interview.
In March, YRC sold back its equity stake to Shanghai Jiayu Logistics.
The YRC debacle provides a valuable lesson: A company whose house isn’t in order shouldn’t be pursuing acquisitions. Here’s another: Global growth means more than just the U.S. and China. “That doesn’t make you a global player,” Jindel said. “You have to have lots of global partners.”
Another big M&A risk is cultural incompatibility. “That’s where it gets tricky,” Evans said. “You have to be very careful with cultures.”
Culture was very much front and center in the $513 million merger between Pittsburgh-based Genco and ATC Technology, a Chicago-based provider of refurbishment services to consumer electronics and the light-, medium- and heavy-duty vehicle service parts markets, in October 2010. Analysts hailed that deal as a success.
“Genco has always had a sizable reverse logistics and returns business, and ATC is very good in testing and repair,” said Evan Armstrong, president of supply chain consultant Armstrong & Associates. “It’s one of the better strategic acquisitions.”
The newly combined company will be privately owned and operate as Genco ATC, with ATC a subsidiary of Genco and a separate business unit. The combined company will have estimated annual revenue of more than $1.5 billion, approximately 10,000 staff and more than 130 operations throughout the U.S., Canada and Mexico.
“Today, we increased the depth and breadth of our service offering and our ability to diversify into the fast-growing wireless, consumer electronics and information technology, and vehicle service parts markets,” said Herb Shear, chairman, president and CEO of the merged company.
Prior to meeting with Genco, ATC was exploring ways to increase its business and expand geographically, said Todd Peters, vice chairman of Genco ATC and CEO of ATC Cos. The company was on sound financial footing, with $70 million in cash and no debt, but there were challenges.
Analysts had a difficult time defining the company’s business model. Worse, a single client accounted for 70 percent of revenue, a potential red flag for investors. The company’s operations were concentrated in a few facilities near its Chicago headquarters.
Peters met Shear for the first time in December 2009 after an introduction by an investment banker. Peters was impressed when Shear showed up alone, with no entourage. The two men talked. There was no pressure, just a mutual sense of intriguing possibilities.
It was unclear at the time which company should be the acquirer. Ultimately, they decided it would be easier to take the merged entity private — ATC was publicly traded on NASDAQ — than form a new public company.
Peters always placed a premium on cultural compatibility. In Shear, he found someone with similar values and priorities, including a drive to succeed, a strong focus on customers and authentic appreciation of employee contributions. “There is a real sense of community there and a focus on teamwork, respect and accountability,” Peters said. “If you take care of your teammates, they will take care of the customers.”
Once the merger agreement was reached, the hard work of integration began. More than 300 discrete integration activities — from which rates, contracts and metrics to use to aligning medical plans — were identified.
The two companies were structured differently. About 75 percent of ATC’s revenue is derived from providing services to technology operators, retailers and manufacturers. The company operated out of a few facilities totaling 1 million square feet, making for a dense concentration of employees and tightly integrated activities.
Genco provides some of the same services but operated from more than 120 locations in the U.S., Canada and Mexico with 35 million square feet of warehouse space under management. Genco is also a big player in multiple sectors, including retail, consumer packaged goods and health care.
Despite the differences, the synergies were soon apparent. Dell, one of Genco’s first technology clients, suddenly found its 3PL partner had 3,000 new technology experts on board and modern facilities that could handle all of its value-added services in a single location. “Dell knew our capabilities,” Peters said. “It changed the conversation with them.”
Many corporate mergers are driven by investor demands for cost-cutting and short-term results. The Genco-ATC merger was predicated on long-term growth. The two CEOs took the time to understand why they were merging and what value the merger could provide to customers. A combination of debt and equity kept the leverage to a minimum and didn’t put undue pressure on cash flow.
The companies’ commitment to employees turned out to be more than lip service: When the dust settled, only 24 jobs out of 10,000 were eliminated.
Contact David Biederman at email@example.com.