Merging byte by byte

A need for capacity has many trucking companies shopping for smaller carriers. Information technology can be a solution, as well as a challenge, when combining companies or assets.

In July 2003, O&S Trucking realized it had some major challenges in the coming months. The Springfield, Mo.-based carrier’s annual business planning effort spotlighted several concerns. First, it was apparent that due to trucking failures in recent years, an emerging economic rebound and the January implementation of the new hours-of-service regulations, trucking capacity was getting tighter, says President Jim O’Neal.

Also, O&S Trucking’s largest shipper, representing as much as 50 percent of the carrier’s business, planned to rebid all existing lanes without giving an edge to incumbents. The carrier risked losing up to 75 percent of the $10 million account at the end of 2003. (Ultimately, O&S Trucking retained most of that business.)

O&S Trucking also identified some opportunities. Many family-owned trucking businesses built after the 1980 deregulation act were facing succession challenges and were ready to consider alternatives. Also, the carrier’s food-related freight had dwindled to less than 30 percent. Despite the accessorial headaches, growing that segment of the business would make O&S Trucking’s business less vulnerable to economic cycles. But order backlog meant it would be difficult to buy many new refrigerated trailers until late 2004.

“We felt the diversification of our base of business imperative and the timing opportunistic,” O’Neal says.

So during the fall of 2003, O&S Trucking negotiated the purchase of three local refrigerated carriers. Between Thanksgiving and New Year’s Day, those deals took the carrier from 320 tractors and 660 trailers to 450 tractors and 780 trailers, including the new O&S Refrigerated division of 200 tractors and 230 trailers. The carrier also eliminated some local competition for both freight and drivers.

Despite the dramatic growth and creation of a new division, O&S Trucking has added only six positions to its administrative staff since this time last year.

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“Technology is the biggest single ticket item because of the efficiencies gained with regard to personnel,” O’Neal says. “We wouldn’t have been able to attempt this without our culture, but technology gives us confidence.”

O&S Trucking is hardly alone in judging the time as right for acquisition. As capacity lags behind demand, carriers are increasingly eager to ensure they have the drivers, trucks and trailers to meet customers’ needs or to pursue new lines of business. Many potential buyers and sellers are looking at deals more favorably than in recent years when so many carriers were upside down in their equipment valuations, says Gailyn Larsen, a director of Larsen, Batts, Welborn & Co., a mergers and acquisition consulting firm specializing in the truckload industry. The biggest impediment to more deals, Larsen says, is uncertainty over the effects of the hours-of-service regulations. But beyond that, the economic environment for consolidation is positive, he says.

As carriers pursue deals, they usually focus on big worries – financing, liabilities, book of business, equipment condition and so on. Often, trucking executives don’t appreciate the role of information technology. IT incompatibility can be a barrier to overcome, but technology can also help to build scale without adding overhead.

Technical due diligence
If a transaction involves more than a simple asset purchase, a signed letter of intent between the parties will trigger a fairly exhaustive due diligence investigation into corporate structure, financing, contracts, litigation, catastrophic accidents, taxes and so on. Information technology issues rarely, if ever, make or break deals and typically receive little priority. But while the attorneys and top executives don’t lose sleep over the IT implications of a merger, the acquiring carrier’s technical staff should take stock early on of what it will be dealing with.

Indianapolis-based Celadon Group, for example, brings economy of scale to acquisitions by shifting back-office functions, such as accounting and payroll, to the parent company, says Mike Gabbei, vice president of information technology. Celadon acquired certain assets of Burlington Motor Carriers in 2002 and Richmond, Va.-based Highway Express in 2003.

As part of due diligence, Celadon performs a thorough analysis of the seller’s information systems. An acquisition team, which includes a representative from the IT department, visits the prospective seller and conducts a thorough analysis of the business. The IT manager

Through a recent acquisition, Summitt Trucking is ahead of schedule in growing from 0 to 200 trucks in two years. The acquired carrier was still in the Dark Ages in terms of technology. “One of the big challenges is to get their employees’ and drivers’ thought processes in tune with ours,” says President David Summitt. Above: A Summitt Trucking employee watches fleet operations in real-time with advanced software and wireless communications.

reviews each of the major functional areas of IT, such as hardware, software, leases, staffing levels and the company’s overall direction from an IT perspective, Gabbei says. By converting the acquired company to Celadon’s enterprise system, most of these costs are eliminated.

“To really gain efficiencies, you have to be on one enterprise system,” Gabbei says. Although the individual technology components of the acquired companies are shut down, in almost all of Celadon’s acquisitions, the acquired companies still have the same face-to-face relationships with their customers and drivers, Gabbei says.

Bringing scale
A sound path to profits is to leverage managerial resources to generate more revenue without increasing overhead, and information technology is widely acknowledged as a principal tool. That’s why Celadon places such a priority on being able to centralize back-office functions such as billing and payroll for all its holdings.

One way that O&S Trucking was able to use its technology to increase the profitability of its acquired companies was to decrease the ratio of fleet managers to drivers. With software that integrates a mileage/mapping database and mobile communications, one fleet manager at O&S Trucking could effectively manage 45 drivers. But the fleet managers at Stever Trucking – the largest of O&S Trucking’s three acquisitions – were managing 25 drivers at the time of the acquisition, O’Neal says.

O&S Trucking uses a Windows-based transportation management system from Show-Me Software Systems, a company O&S Trucking created in the 1990s. The carrier’s system integrates with ALK’s PC Miler to automate driver routing and mileage calculations and with Qualcomm’s OmniTRACS to automate tracking and driver communications.

Another technology that helped O&S Trucking grow with limited increases in overhead is TMI’s TripPak Online imaging and workflow solution. After drivers deposit trip envelopes in the drop boxes at truck stops, the envelopes are sent to TMI where documents are scanned and the images linked to O&S Trucking’s software through the Internet. Clerks can then process billing documents, as the images are linked to dispatch data. TripPak Online makes it possible for employees at any terminal office to view documents without having to receive and process invoices, O’Neal says.

Anita Christian, chief financial officer of O&S Trucking, says that TripPak Online made it possible to take on 200 more trucks and add only one person in payroll and billing.

Celadon’s Gabbei also attests to how Celadon’s document imaging system helped bring immediate cost savings to the companies it acquired.

Drivers at Highway Express, for example, now scan in their paperwork at any Highway Express/ Celadon terminal or at 200-plus truck stops with Pegasus TransTech’s Transflo imaging system. The scanned paperwork automatically appears at Celadon for payroll, billing and credit/collection purposes. After scanning documents at truck stops or at terminal locations, Highway Express personnel can pull up driver information as though the documents were on site. “All we had to do is communicate to drivers how to do that,” Gabbei says.

The human element
Trucking company executives can’t ignore cultural issues when a large company is acquiring a smaller one, says Jay Robinson, a partner of law firm Scopelitis, Garvin, Light and Hanson specializing in mergers and acquisitions. Changes in pay, benefits and work rules can disrupt the lives of the smaller company’s employees, he says. Cultural problems can undermine the premise of the merger. “I have negotiated a number of deals that were driven solely by picking up drivers,” Robinson says. But inability to merge cultures can result in a significant loss of drivers, he says.

Indeed, the difficulty of integrating cultures explains why more than 50 percent of M&As never reach maturity, says Andy Ahern, president of Ahern & Associates, a management consulting firm specializing in transportation. Carriers must take into account employees’ and drivers’ willingness and capacity to change their practices and routines.

“A lot of people think that the drivers are not affected by system changes,” says Celadon’s Gabbei. “They most definitely are.” Simply requiring drivers to enter data into the company’s

Using driver scanning stations, such as the one above, Celadon Trucking reduces overhead costs of its acquired companies by centralizing billing and payroll processes.

in-cab messaging units, for example, can cause turnover and dissension in the ranks, he says. “You have to go through a very lengthy communications and training process to ensure you’re not disrupting the driver’s life. In all cases, you really can’t guarantee that.”

After taking over Bestway Trucking in 1983, David Summitt grew the business from $600,000 in revenue in 1983 to a $60 million carrier in 1999 and sold the company to the Transit Group. In January 2003, he started his own company, Summitt Trucking, in Clarksville, Ind., with 125 new trucks and a back office equipped with the latest information technologies. Through a recent acquisition of a 20-truck carrier, the company is well underway to reach its two-year business plan of 200 trucks, Summitt says. But the carrier it acquired, Big T. Trucking, could not be more different in terms of technology.

“One of the big challenges is to get their employees’ and drivers’ thought processes in tune with ours,” Summitt says. “We had a look at it in advance and realized it was going to be a problem.” Summitt Trucking uses TMW Systems’ fleet management software, integrated with Great Plains accounting software. It also uses Qualcomm’s OmniTRACS and ALK’s PC Miler and Fleet Commander – a visual map of the United States that displays Summitt’s trucks and loads.

Summit Trucking plans to display instant data from its fleet management software onto a plasma screen in the office, using TMW’s Results Now, a feature that gives operations personnel an instantaneous snapshot of various pre-planned daily and weekly averages compared to real-time information, such as revenue per truck. It also provides exception reports, such as late loads, which operations personnel will see on the plasma screen.

The system “literally gives a report card,” and helps fleet managers and dispatchers to set individual goals on a daily or weekly basis, Summitt says. Such technology is a significant leap for the personnel at Big T. Trucking, which was using a paper-based dispatch system.
In addition to the time spent training new employees to use the software, Summitt Trucking is phasing in the Qualcomm system for the new drivers. The conversion will take about 120 days, Summitt says, because he plans to phase out the acquired tractors and replace with new tractors, equipped with in-cab messaging. Summitt is providing drivers with cell phones for the time being.

Need for patience
The business world today expects instant availability of information and data, but that’s not always the reality in trucking. A surprisingly large number of carriers still use legacy systems or greatly outdated or oddly customized versions of commercial enterprise systems. Imagine merging an operation based on an AS/400 system with one running a DOS application originally designed for a PC equipped with a 386 processor. No, converting an acquired company to a shared enterprise system may not happen overnight, and some of the anticipated cost savings and competitive advantages of the new entity may be delayed. According to Celadon’s Gabbei, training and cutover are some of the biggest issues that slow return on investment, from an IT perspective. “It gets hairy when you switch from one system to another.”

Cooperating without merging
A merger or acquisition is not the only way to quickly add capacity and to broaden the customer base. Through affiliate relationships, some carriers are growing without making new capital investments or expanding their overhead.

And by being associated with larger, more financially secure partner, smaller carriers can lower insurance rates, expand freight networks and improve cash flows and buying power.

Florence, Ala.-based USA Motor Express has added significant equipment capacity through affiliate partners. So far, USA Motor Express has entered into three such arrangements, says Leon Balentine, president of the 245-truck carrier. Affiliates operate under USA Motor Express’ DOT authority and cargo and liability insurance. USA Motor Express is 100 percent responsible for its affiliates’ compliance and safety record.

Affiliates have access to USA Motor Express’ available freight by connecting through the Internet to its McLeod LoadMaster software. Each time USA Motor Express hauls a load from its affiliates’ customer base, it pays out a 5 percent commission. The company takes a 15 percent commission when it arranges a load for the affiliate, which is usually a backhaul. The software automatically calculates the fees due. The company handles all billing and collections for its affiliates.

“We will take over and do all their back-office functions and bankroll them,” Balentine says. “We pay them weekly, instead of them waiting 45 days to get paid.” USA Motor Express affiliates handle their own staffing decisions.

Major liquid bulk carrier Quality Distribution operates a similar affiliate program. Because of its size, Quality Distribution brings significant scale in terms of cost savings and revenue opportunities to the affiliate. Affiliates operate under the Quality Distribution’s authority and insurance and lease trailers owned by Quality Distribution. They supply their own power units, says Keith Margelowsky, the company’s senior vice president.

Affiliates become part of Quality’s national network and gain access to nationwide freight contracts.

As part of the agreement, Quality Distribution keeps 15 percent of the affiliate’s linehaul revenues. To help manage its dispatch, Quality supplies affiliates with computers and dispatch software from TMW Systems, Margelowsky says. With a real-time dispatch system, affiliates can offer customers new tools, including the ability to check load status online, and the technology they need to get into the big shippers, such as electronic data interchange.

“When you’re in the small category, under 100 trucks, there are a lot of things you don’t have,” Margelowsky says.

Quality Distribution handles all invoicing for its affiliates, reducing administrative overhead and speeding cash flow. Drivers turn their paperwork in at any one of Quality’s 150 terminals for immediate scanning or use truck stop scanning at Pilot truck stops and other locations using Pegasus TransTech’s Transflo system.

All things considered, affiliate arrangements can give both parties the benefits of a merger or acquisition, such as more capacity and reduced administrative costs, without the cost and risk of a complete takeover. “More and more people are going to this type of arrangement,” Balentine says.