More logistics consolidation ahead

More logistics consolidation ahead

Shippers increasingly seek all-in-one logistics providers that can package, assemble, store and transport products and related information globally. Yet the logistics industry remains highly fragmented, with few full-service players. No provider of value-added warehousing, forwarding, asset-light transportation management or asset-based contract carriage controls more than 6 percent of the $65 billion logistics outsourcing market. This is despite the fact that the industry had more mergers from 1998 to 2002 than in any prior five-year period.

During that span, many large integrators, international forwarders and third-party logistics companies acquired smaller providers. UTi Worldwide Transport acquired Standard Corp. in 2002; UPS purchased Fritz Cos. and APL Logistics bought GATX Logistics in 2001; and Deutsche Post purchased Danzas Air & Ocean in 1999 and DHL Express (in a series of transactions from 1998 to 2002) to expand its forwarding and package-delivery capabilities.

Beginning in early 2002, however, deal-making slowed significantly because of the global recession, downtrodden stock prices and the slow integration of previous acquisitions. While the DHL-Airborne acquisition in 2003 was a harbinger, the $1 billion in merger activity in June 2004 signaled that the M&A revival had begun. Traditional logistics providers prefer to buy rather than build essential geographic reach, expertise or technology capabilities to satisfy shipper demands. Many shippers now consider information movement more important than cargo movement as they seek real-time visibility throughout their supply chain. We expect IT considerations to underpin the expectations for supply chains. Many of the services and IT capabilities now seen as differentiators will soon become common as shippers request seamless cross-border capabilities, customs clearance, security services, integrated IT systems, export-import and forwarding.

In a competitive global environment with China looming as the dominant player, logistics companies can't afford to ignore shippers' demands. Large conglomerates are attempting to provide all-in-one service with core competency in transport, warehousing and shipment track-and-trace and value-added visibility and seamless cross-border capabilities. Small logistics companies have carved out niches with expertise in vertical solutions including packaging and light assembly, or geographic presence. The middle-market competitors that remain are attractive takeout candidates.

The presence of private equity investors in the logistics industry - ignored for so many years - illustrates the strong demand for opportunities in the market. Expect a 12-to-18-month surge in M&A activity. The global economic recovery, dynamic secular trends, improving financial performance within the sector, rising stock valuations and historically low interest rates have made logistics investments attractive. Ample consolidation opportunities, coupled with more generous financing and open exit windows (through IPOs and sales), have fueled prices, interest levels and deal volume.

In addition, many large logistics companies have finally integrated prior acquisitions, and now can re-evaluate takeout prospects. Smaller companies, recognizing the need to build a niche along vertical or geographic lines, will likely seek to acquire complementary companies. New competitive pressures from China and other markets should further accelerate M&A activity.

Who will survive this activity? Appropriately positioned small logistics companies can capitalize on the smaller U.S. exporter market, which re-quires outsourced logistics services for overseas expansion. To stand out in the market, logistics providers must offer specialized services, coordinate reciprocal-agency agreements with overseas counterparts, or consider franchising to expand with limited financial outlay.

Large logistics providers must market their services to differentiate themselves and attract international trading conglomerates. Core services including tracking, transport and delivery are expected. Large logistics companies should highlight their scope of operations, cross-border operations, or value-added customer service and relationship management skills. Many logistics companies are buying warehouse providers to round out offerings, while European logistics providers have been acquiring U.S.-based logistics companies. At the same time, traditional forwarders and transportation companies are racing to become 3PLs, picking off smaller logistics players as opportunities arise.

Increased global trade, pressures for seamless services and rising costs of IT requirements will cause logistics companies of all sizes to evaluate their global supply-chain strategies. Expect consolidation to be the conclusion of many of those strategic analyses.

Gary S. Ciuba is a managing director at Stephens Inc., in Little Rock, Ark. He can be reached at (214) 258-2738, or via e-mail at gciuba@stephens.com.