If you read only the headlines, it would be difficult to comprehend the merger and acquisition trends in the transportation and logistics industry in 2022.
Spencer Tenney, president and CEO of Nashville-based transportation and logistics-focused M&A advisory group The Tenney Group, compared it to whiplash during Truckload Carriers Association's recent 2022 Mergers & Acquisitions Recap + 2023 Forecast webinar. The first half of the year, he said, was like the “wild wild west” with extremely low interest rates; exploding demand for transportation services across North America that created pronounced needs to increase supply chain capabilities; and a once-in-a-lifetime increase in the value of used equipment that created opportunities for buyers and sellers to get deals done efficiently.
But then the tide turned. The Fed increased interest rates and a 40-year record-high inflation drove expenses, from driver pay to insurance, through the roof.
“Things began to slow, and people began to change their attitudes about the freight market, about having capital for deals,” Tenney said. “So, especially in Q4, many deals that we were working on, especially the large deals, either went on pause, were delayed and pushed into 2023 (or) just didn't make it.”
Still, a lot of deals got done in 2022, and Tenney said he expects that trend to continue in 2023, though the size and structure of deals will differ, along with a shift in the types of company profiles targeted for acquisition – profiles that were born out of some of the new risks that entered the market specifically in 2022.
Tenney said 2023 is a prime year for small- and medium-sized acquisitions, and while larger M&A deals will occur, he doesn’t expect to see as many. That’s because the cost of capital has increased, and the general position of banks right now is conservative, but he said he doesn’t think interest rates will affect companies’ needs to use M&A as a tool to offset rising expenses, among other things.
“Where we’re going to see some of that evolving in structure is maybe the market for debt becomes less favorable. What we're going to see is buyers and sellers working around that, using assumption of fleet debt, which has better, more favorable terms in the current market, as an instrument to work around and mitigate costs that don't add value to buyers or sellers,” Tenney said. “I think buyers will still be pretty aggressive; they just have to package deals in different ways.
Don’t assume there's going to be a huge deration in value … It's just evolution of structure and how deals get done, but there's going to be a ton of deals that get done.”
A time to sell
Multiple factors will spur those deals.
In 2022, an unexpected trend occurred where a lot of foreign investors made their first transportation investments in North America. Davis Looney, director of business development at The Tenney Group, said he expects to see that continue to drive M&A this year.
In addition, Tenney said there were multiple company owners that had scheduled to sell their businesses and exit the industry in 2021 or 2022, but their business was performing at such a high level they couldn't walk away.
“We feel like that activity that should have taken place is probably getting pushed into 2023,” he said. “There's still this pent up supply of sellers that because of age, health or whatever else are going to be exiting. You combine that with what we saw in Q3 and Q4: a record activity of new buyers.”
Tenney said there are a lot of headlines that say the transportation and logistics space is attracting a lot of new investment, and while he doesn’t disagree with that, The Tenney Group’s data suggests that the same types of profiles are doing the most deals when it comes to actually making an offer.
He said 75% to 85% of deals were made by strategic buyers, meaning a regional or national transportation logistics player, a public strategic or a private equity-backed strategic: companies that have an existing investment in this space, versus a private equity without a platform or a private investor, for example. One exception, he said, is the freight technology type investment, which is a different type of investor altogether and not one The Tenney Group considers in its data (truckload or brokerage firms).
“Over the last three years, there hasn't been much deviation. Although the world's basically turned upside down in terms of risk and opportunities, the players have relatively stayed constant,” Tenney said. “That's extremely helpful for folks that are trying to figure out ‘How am I going to get out of this space when I'm ready?’ You need to understand the profile of the buyer and what they care about so you can begin grooming your business accordingly.”
In 2023, the profile of a company looking to be acquired matters: it doesn’t have to be a large company, but it does need to be well-managed, Tenney said.
“I think we'll see buyers narrow their focus to deals that they're most confident fit their strategic plans,” Looney added. “That could mean diversifying into new verticals or commodities or in markets just to hedge their exposure to any one particular industry and in advance of a questionable larger economic environment going forward. Or it could mean shifting alternatively into what they're most comfortable with, and maybe that's building density and maybe shrinking the size of acquisitions they're interested in just to ensure less integration risk.”
Tenney said very high-performing businesses that have insulation from some of the broader market trends are the types of profiles that will influence broader growth strategies for some of the major acquisition players.
One company that has risen as a major player is Werner Enterprises (CCJ Top 250, No. 13).
The company acquired Tampa, Florida-based ReedTMS Logistics, an asset-light logistics provider and truckload carrier that offers a suite of freight brokerage and truckload solutions, in November for $112.4 million. It acquired Indiana-based truckload carrier Baylor Trucking just before that in October and in 2021 acquired an 80% equity ownership stake in Pennsylvania-based regional hauler ECM Transport Group and final-mile carrier Nehds Logistics.
“The prior 60 years, they had never integrated acquisitions as part of their growth strategy,” Tenney said, attributing that shift to Werner’s newest leader Derek Leathers. “It’s very symbolic of a much broader trend of this rising generation of leaders that don't see acquisitions as risky growth. They actually see it as the inverse; if you want to be competitive, and more specifically, if you want to create value for your shareholders, acquisitions must be part of the overall growth strategy.”
He said Werner made these deals to enhance its capabilities, and that’s what will be the trend in 2023: more tuck-in or bolt-on acquisitions versus add-on acquisitions.
“What we're seeing in this market today is that everything is fair game. Every buyer is looking for any competitive advantage they can get, which is super exciting,” Tenney said. “2023 is the year of the tuck-in acquisition. I think you're going to see regional and national strategic players having a ton of the smaller bolt-on acquisitions that are extremely efficient and add immediate efficiency to the operation.”
Best practices in buying and selling
Tenney and Looney offered some advice for those looking to acquire or be acquired this year.
Tenney said there are three steps on the seller side to making a deal:
Step 1: Get involved in best-practice groups to create value by doing things that only the top 5% of carriers do in this space.
Step 2: Multiply the available channels in terms of how you can exit; you need to systematically reduce dependence on ownership and push that down to the leadership team.
Step 3: Charge all key leaders, both in terms of executive and management teams, with moving the business value needle in a way that unlocks creativity, unlocks ideas and inspires them to execute on that because of the increased authority it gives them in the business.
Looney added that companies should educate themselves on the M&A process.
“Where's the gap between where you stand today and where you want to be when you exit? From there, assess what's going to be required of you to close that gap and what are you willing to do to actually fill that gap,” he said.
On the acquiring side, Tenney said these are the three simple things that the most prolific acquirers in the transportation and logistics space do without question every time:
1: They have a very defined strategy that's disseminated with the leadership team, along with their centers of influence, that can help create deal flow.
2: The surest way to alienate a fantastic business is to sign an NDA and think that entitles you to whatever you want. Show restraint.
3: Make offers fast and often; it can box out the competition among other buyers.