Do M&A Deals Make 3PLs Better Service Providers? Copyright Luke Sharrett, Getty Images

Do M&A Deals Make 3PLs Better Service Providers?

Services may improve, but pricing could rise while selection falls.

  • In early May, Echo Global Logistics announced its second acquisition of the year: One Stop Logistics, a $50M freight brokerage on the West Coast.  Echo Global, a non-asset logistics provider, has expanded its revenue to an expected $1.1B for the year. 
  • Less than two months before, Jeff Silver, CEO of Coyote Logistics, and his team announced they were merging with Access America to create a +$2B truckload-centric brokerage. 
  • XPO, led by Brad Jacobs, has continued its aggressive “$5B in 5 Years” plan by making five acquisitions since January 2013 to put it into the $2B revenue club. 
  • Roadrunner Transportation Systems, with its less branded yet aggressive acquisition approach, has announced seven purchases of non-asset and asset-based companies in 2013 and 2014 to significantly expand its service offerings. These investments will continue to push the company beyond its beginnings in less-than-truckload into a more full-service logistics provider across multiple modes.

Strip away the hyped press releases and Wall Street excitement about these deals and one question remains: so what?  The verdict is still out on how this will affect the industry, or if such consolidation will be good for shippers and carriers.  It’s a commonly held belief that most M&A activity doesn’t create the value most buyer management teams say it will for shareholders.  This is due to a condition which Warren Buffet describes as when “managerial intellect [loses to] managerial adrenaline.” 

Acquisitions are exciting but can be costly in both price to the seller and a management distraction from running the business as they conduct due diligence and integrate the new company.  Whether or not it is good for owners is an entirely separate study that much more skilled economists and analysts are capable of conducting.

To those of us who play in the day-to-day of the industry, a more relevant conversation can be had around the impact on the freight industry.  Though the whole list of potential ramifications is a lengthy one, we have a few thoughts on what may be some of the more prominent pros and cons as the buying frenzy continues for truckload and less-than-truckload brokerages.

Full Truckload Brokerage

Pros:

Truckload brokers are skilled at finding carriers to haul loads that a single shipper would never be able to find on its own.  Having multiple large brokers with +25,000 truckload carriers in their arsenal will allow for more efficient carrier procurement and will help to position trucks in the geographies they’re most needed.

Larger brokerages will also find creative ways to get technology in place with small to mid-sized trucking companies that have traditionally been very technology-averse.  Their success in incenting trucking companies to adopt new technology may have potentially monumental impacts on the efficiency of the entire trucking industry.

Cons:

More efficient carrier procurement practices will inevitably lead to reduced rates to the truckers as technology and large carrier pools allow brokers to “buy smarter,” no matter the experience of the individual broker or the market conditions.

Though reduced prices (may) benefit shippers, the smaller carriers that are unable to operate at lower prices may consequently be forced to resort to practices to get business from a shipper community that will be increasingly reliant on brokerages, leaving them in a potentially challenging position to keep their assets moving.

Less-than-Truckload Brokerage

Pros:

Less is more.  Having fewer – but larger – brokerage customers will let LTL carriers create more efficiency in customer management, pricing changes and testing of strategic initiatives by working with 7-10 large brokerages vs. hundreds or thousands of small brokerages.

These bigger brokers with larger IT budgets are generally able to conduct transactions with greater efficiency using more modern tools like web services for rating, dispatch, tracking and images that gives their shippers better control of their freight.

Cons:

The very large brokers will eventually begin to mean so much to these LTL carriers and may begin to demand – maybe rightfully so – “Wal-Mart” like pricing.  By having fewer customers to play off of one another, keeping operating ratios strong on brokered business will require a much more analytical approach for yield management than what most LTL carriers are prepared to conduct today.

The large brokers will inevitably desire to grow their market share and will more frequently bump into the LTL carrier’s major account sales representatives in the marketplace in the pursuit of bigger opportunities.  As a result, rules of engagement will become more complex between the brokers and the LTL carriers as they compete for the same piece of the pie.

Across other modes (e.g., international forwarding, intermodal) and with more complex logistics management services, the larger brokerages will get better at effectively providing multi-service offerings.  Many companies adamantly claim in marketing materials to be a “one-stop shop” for multiple logistics services, but few have been able to truly offer those services expertly across all modes and levels of supply chain complexity.  Of the major players, it seems as if Echo and the new Coyote are quickly becoming the closest to being able to fly a “one-stop shop” banner; however, with this consolidation and technology advancements, perhaps we’ll be seeing others emerge as the “everything store” in logistics.  For now, we’ll continue to watch as this consolidation continues to unfold and see what new opportunities are created or what negative implications it has for shippers and carriers in the years to come.

Joel Clum is president of CarrierDirect, a transportation and logistics industry consultancy to third-party logistics companies and carriers.

 

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