The Rise of the Logistics M&A Mega Deal

hands-1063442_960_720As well as 2015 being the warmest year since records began (in 1850), it was also pretty hot 12 months in the area of business mergers and acquisitions, which hit a new high of $4.3 trillion in deals struck. Specifically in the logistics industry, several so-called mega deals led to a near year-on-year doubling of M&A value to $173 billion, according to data from PwC.

Prominent among the 2015 deals: FedEx’s $4.8 billion grab for TNT; XPO Logistics’ acquisitions of Norbert Dentressangle ($3.5 billion) and Con-Way ($3 billion); Japan Post’s $5.1 billion purchase of Australia’s Toll Group; and Kintetsu World Express buying Singapore’s APL Logistics for $1.2 billion from shipping line owner NOL, which was itself bought out a few months later by France’s CMA CGM in a $2.4 billion deal.

At the recent LogiSYM conference here in Singapore, and with reference to this highly active backdrop, I explored the logistics M&A landscape and the mechanics of deal making together with an expert panel. The following Q&A summary highlights the main discussion points and useful learnings during the session.

Q: Why are we seeing this heightened M&A activity in the logistics industry?
A: As well as existing 3PLs looking to increasing scale and searching for growth by getting into emerging markets and expanding the served base of industry sectors, the extent of margin compression in the industry – the value of world trade declined by 14 percent in 2015 – is pushing consolidation. Interest rates are still low by historical standards and private equity firms are increasingly being drawn to the sector, especially when they see some of the high valuations applied to logistics companies.

Q: How should a company go about evaluating potential merger or acquisition candidates?
A: It has to be driven by strategy. Are you looking for market extension, customer acquisition, to take out competition, access to skills or intellectual property? Define what size of company you need to make a difference and search for targets that meet the criteria. In the screening process, identify companies that can offer realistic growth in terms of delivering free cashflow if not immediately then at least at some point in the future.

Is the candidate a cultural fit? It may look great in terms of having all the right trade lanes, warehouses and transportation assets, for example, but if the culture is not compatible with yours it is going to be very difficult to make it work.

And because mergers and acquisitions can often get complex and emotional, at every step of the deal process it’s important to remind yourself why you are doing this, what is the desired outcome, and what should look this look like in a few years’ time? There are examples in the logistics industry of certain companies being “deal junkies”, expending energy on making deals rather than on analyzing whether they make strategic sense.

Q: Post-deal integration is a frequent and notorious stumbling block to M&A success. What can be done to smooth the critical integration process?
A: Especially for an acquiree, it is inevitable that the initial reaction will center around uncertainty – what is going to happen to my company and how will I be affected?  So you need put out information, preferably at a personal level, about why the business is being sold, explaining any new terms and conditions resulting from the deal, and if there are going to be retrenchments, these need to be spoken about sooner rather than later.

If you are the acquirer, it’s worth remembering that there is likely to be a lot of smart people as well as systems and processes in the company that you’re buying, so look to get the best out of both businesses. This will also help in the integration process as people appreciate the efforts of combining the strengths of two companies. People often forget there’s also nervousness on this side of the deal – you’ve just spent millions or even billions of dollars and you need to show success.

Often when it does happen, breakdown in execution occurs in the second to fourth tiers of management with individuals who were probably not involved in the visionary deal making and may have not fully bought into the idea. So it’s really critical to get these people on board because otherwise they will not communicate appropriately with their reports (don’t assume HR is going to do this job) and the integration will be affected. If they still do not come on board and whether it’s the acquirer or acquiree, it is better to let them exit at an early stage.

Q: Is the trend of logistics industry M&As set to continue and in what likely form?
A: Yes, deals are going to continue over the next few years. Driven by necessity as margins continue to fall, there is still room for consolidation in the industry and at least three or four of the top 50 companies are engaged in discussions right now. Money coming out of Asia, especially China, to buy developed market assets is likely to be a rising phenomenon. And as well as more small and mid-sized M&As, the last mile fulfilment and the logistics technology and software sectors will see increasing deal activity.

In addition, against a backdrop of disruption and transformation in other industries, don’t be surprised to see some ambitious, game changing moves involving new entrants with deep pockets. Amazon’s recently announced (March 9) investment in Air Transport Services Group (ATSG) so that it can run its own cargo delivery operation flying 20 used Boeing 767 freighters could be a harbinger of what lies ahead.

Bob Gill is the General Manager for Southeast Asia at ARC Advisory Group.  Bob has a background in editing industrial trade publications including those covering Asian logistics and supply chain management.

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