Acquisitions are a versatile strategy for the transportation and logistics sector. The prospect of better market conditions could boost the appetite for trucking acquisitions, though the timing and extent of the U.S. Federal Reserve’s rate cuts and freight market recovery will be crucial.
Knight-Swift (CCJ Top 250, No. 5) on Tuesday made a big move, acquiring Los Angeles-based regional LTL carrier Dependable Highway Express, strengthening Knight-Swift's West Coast LTL operations and firming up a national footprint with Knight-Swift's existing AAA Cooper and Midwest Motor Express businesses. Looking ahead for the rest of the year and early 2025, analysts noted key factors that could influence potential buyers’ purchasing power to expand markets and services.
“I think there are more ideal times than others,” said Spencer Tenney, president and CEO of Tenney Group. While there’s significant pressure in the market, Tenney said it’s about taking on the mindset of focusing on what you can control.
Tenney said that M&A activity has muted, though there’s been a notable uptick in the beginning of the second half of the year.
“We wish that the freight market was rebounding faster, but it continues to be stubborn,” he said.
Buyers’ comfort level, he said, is at a greater level than months ago. Even though conditions aren’t necessarily ideal, they’re stable enough for players to put significant resources to grow their companies through acquisition.
This is also echoed by Jonathan Adams, managing director of transportation and logistics at Capstone Partners, who said that he is “cautiously and selectively optimistic.”
As freight rates went down and interest rates went up in 2023, offering a less conducive environment for the M&A market to thrive, Adams said it looks like those two factors will reverse in 2024 and 2025. Freight rates will rise, and interest rates will decline, albeit at a slower rate.
However, Adams said that lingering overcapacity from the excess of 2021 and 2022 could cause a rather anemic recovery.
“The least efficient capacity will ultimately be forced to leave the market, either by being acquired by more efficient competitors or by going out of business,” he said.
The challenge lies for the companies in the middle, Adams said. “Do you have the capital and expertise to thrive in these markets, or would an earlier sale transaction deliver higher value? Only a thorough and objective appraisal is likely to supply a reliable answer.”
The right environment
So, do the coming months look attractive for buyers or sellers?
Tenney pointed out that people who feel the pressure of compressed rates and rising expenses, and may not see an ability to enhance their current situation, may feel more inclined to go to market and do the best they can to transition ownership to a party who can take the business to another level.
Risk appetite is a bigger factor.
“It’s more than just about dollars and cents," Tenney said. "Is this the best time? Do I think that I can get a fair return if I continue to invest in the business? Some folks believe they can, and some folks have convinced themselves that’s not a good use of capital.”
Analysts agree that the upcoming presidential election could have significant impact on capital investment, as well as if in the second half of the year there is not a full normalization or meaningful enhancement in the freight market.
“The U.S. election not having a clear path forward scares investors,” said Peter Stefanovich, president at Left Lane Associates. “Once that’s done and with lower mean interest rates, it’s going to allow people to get excited about further investing.”
“We’re going to probably still see some headwinds into Q4, but with great potential of M&A activity in 2025,” Stefanovich said. With lower interest rates and the elections done, he said he believes there would be people who have been “waiting on the sidelines” during the downturn to exit.
Tenney shared similar sentiments, noting that there’s going to be a release of pent-up supply of companies that are ready to exit and transition ownership. “Primarily, folks that just have been in the space a long time and don’t have a successor, and they want to have as much influence as possible over who’s going to take the company’s legacy into the future.”
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Going forward, Peterson Hawkins, general partner at Lilium Group, noted that the best positioned assets have weathered the market conditions well. “I think they will be attractive targets for larger strategics who are looking to recover earnings and potentially expand service offerings at attractive values.”
“I think a very different capital structure is here to stay with greater equity given the higher interest rate environment,” Hawkins said. “Watching to see if financial buyers can hit their hurdles in that market will be interesting."
Adams noted there’s ample opportunity for buyers and sellers in the market.
“The most successful will be those that use accurate data and objective thinking to gain a clear understanding of the value of their company today and the way in which future trends are likely to influence its evolution.”
