Despite a strong equity market and some high profile transactions, we thus far see relatively little evidence of a robust M&A market in the logistics sector. Most acquisitions by large competitors have been of targets with a specific industry expertise (e.g., health care) or geographic market. The Russian Railways acquisition of GEFCO, Platinum Equity’s buyout of CAT Logistics, and C.H. Robinson’s transaction with Phoenix are the most notable exceptions. But none of these match the size and complexity of Deutsche Post’s series of acquisitions in the 1990s or even of the last really big deal in the sector when CEVA (then known as TNT Logistics)combined with Eagle for $2 billion in 2007. Public multiples in the sector are down, reflecting concerns on whether — as a recent Merrill Lynch research report suggested on freight forwarding — the best days of industry growth are in the past.
The last acquisition wave was driven in part by unrealistic extrapolations of the status quo competitive environment and unreasonably low views of the cost of capital cost (used explicitly or implicitly to price acquisitions). A common characteristic of the most aggressive acquirers was availability of (and desire to redeploy) cash, either from a mature dominant business line in a conglomerate (e.g., Deutsche Post, Toll, UPS) or from aggressive lending to the LBO market. We now see the inverse of conditions during this period. Executive and investors are too gloomy, extrapolating the uncertainty of the recent past into perpetuity. Companies are very reluctant to spend excess cash and the leveraged finance market will not support aggressive capital structures. As a politician once said after the fall of the Berlin Wall, “The march to freedom in Eastern Europe is irreversible. But that could change.”
While many of the larger logistics combinations did not work out as easily or as well as investors and executives once hoped, M&A remains a potent tool for growth in the sector. With low margins and increasingly high fixed infrastructure costs needed to compete broadly, even relatively low cost savings or revenue enhancements can be enormously accretive for acquirers. Moreover, there remain numerous logistics companies in the hands of private equity holders, which will not remain static. And there are many quality logistics concerns still owned and run by their founders, who will eventually wish to retire. So we recommend a more balanced, long term view of the state of logistics M&A. Broad auctions of the type that attracted dozens of financial buyers might not make sense. But keeping a steady eye out for potential partners constituting the right strategic and organizational fit and a long term plan emphasizing value creation will pay off in the long term.
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