Consolidation Slows in Global Logistics

In the very buoyant years leading up to mid-2008, globalization and low international trade barriers were the main drivers for exceptionally high growth and profit in both freight forwarding and value-added logistics services. From that point forward, transport volumes and inventory turnover fell substantially, especially during the third quarter of 2008. This was due to declining industrial activity and low consumer demand in the face of a spiraling global economic crisis.

In Germany, which is a leading global exporter of goods to global markets, industrial production in automotive and machine tools sank by more than 40% in the first quarter of 2009, followed by a 22% contraction in April, when compared to the prior-year periods. The international freight forwarding industry was hit especially hard, with air and road freight sectors suffering the most.

Prompt interventions by government and financial organizations have helped to reduce the severity, and hopefully the length, of the downturn’s impact. Activity in recent months indicates that industries such as chemicals, fertilizers and energy-related sectors are beginning to rebound.

Transport and Logistics M&A in Europe

In such an environment, the global consolidation trend within the transport and logistics industry has come to a virtual halt, with fewer deals and lower values across all industry sub-sectors. We expect this trend to continue for the remainder of 2009, despite the pressures on large logistics providers to extend their geographic reach or services portfolio. Given the difficult economic environment and associated cost pressures, companies are increasingly concentrating on their core competencies and cash balances before looking into further bolt-on acquisitions.

Prior to the downturn, consolidation in the transport and logistics services industry was primarily driven by leading European players, as opposed to US companies. Particularly active acquirers included Deutsche Post WorldNet (Germany), Deutsche Bahn (Germany), DSV (Denmark) and Kühne & Nagel (Switzerland). In the case of Deutsche Post WorldNet and Deutsche Bahn, their strength is derived from a strong home base and partially protected domestic market segments—where they enjoy almost no competition. These resources were used to build strong forwarding and logistics services businesses around the world.

Most acquisitions by the European-based players were aimed at building an integrated, international logistics group able to handle large volumes for worldwide clients, or on a more regional scale, to create a leading niche position. For example, with the takeover of ACR Logistics in 2005, Kühne & Nagel achieved further expansion in the significant French market and the fortification of a contract-logistics business in new customer segments.

The Kühne & Nagel move and the acquisition of BAX Global by Deutsche Bahn Group in 2005 were direct reactions to Deutsche Post’s acquisition of Exel earlier in the year. That acquisition had made Deutsche Post a global leader in air freight, ocean freight and logistics services. In 2008, Kühne and Nagel further added to its portfolio by acquiring Hapag Lloyd, a leading container shipping company.

DSV has also developed a stronghold in global logistics services via acquisitions. Its 2008 purchase of Belgium-based ABX Logistics, with its operations around the world, demonstrates that the company is seeking to become a strong global competitor.

Meanwhile, Deutsche Bahn has made several strategic acquisitions in 2009, including the Polish rail operator PCC Logistics Group acquired from PCC SE. This deal is of particular importance, as it could potentially further strengthen DB Schenker’s position in offering pan-European and trans-European rail freight services from Western Europe through Poland to Russia.

Logistics M&A in North America

The story of mergers and acquisitions for North American-based logistics companies looks different. North American logistics services providers seem to seek acquisitions that expand their position in existing markets, such as expanding domestic service routes and adding critical mass to take advantage of economies of scale. However, the relative strength of European automotive, chemical or other industries with global production and supply chains versus their US counterparts make the need to establish client relationships in Europe a must-have for US logistics providers.

Given the competitive strength of the local European logistics services providers, one of the few options to gain market entry or share of market in this global setting is to actively design and pursue acquisition strategies. This can be done in combination with a focus on certain niche activities, where scale economies are not as critical. It can also be achieved through services where special resources are needed, such as oversized equipment or hazardous goods transportation. Project logistics companies, for example, feature a unique business model with core competencies in global freight forwarding—a particular engineering know-how and access to a largely blue-chip customer base—that make them indispensable service providers for their clients.

Outlook

An unprecedented decline in freight volume has left many smaller logistics companies struggling to meet their financing and working capital requirements. In this regard, many may feel pressure to seek the support of a strategic investor in order to stay afloat. Aside from the potentially large number of available targets, the time could be right for US logistics providers to seek strategic acquisitions in Europe, as European players are likely still focusing on the integration of recent acquisitions and dealing with the current economic environment. None of them are expected to approve large acquisitions in the near future, potentially creating a window of opportunity for US or other global bidders.

Whether this will lead to a new round of activity remains to be seen, but the stage could be set for more strategic moves in the logistics market.

Friedrich Bieselt is a managing director and head of the Transportation and Logistics group for Lincoln International, a global mid-market investment bank, in Germany. The firm specializes in providing merger and acquisition advisory services, private capital raising, and fairness opinions and valuations for leading organizations involved in mid-market transactions worldwide.

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