Early Signs

Nov. 1, 2008
We could be seeing some early signs of a restructuring of the global logistics industry. Or it could just be some localized bad news. The whole North

We could be seeing some early signs of a restructuring of the global logistics industry.

Or it could just be some localized bad news.

The whole North American parcel sector is challenged, and current reports have DHL accelerating its restructuring to cope with worse-than-anticipated results in the US domestic market. Described as a critical link in its global network, the question has been posed whether DHL can return its US network to what it had before the Airborne Express acquisition or, alternatively, what effect a dramatic downsizing or exit from the US market could have on its global network. That's only one example.

In a larger context, has the march to global dominance been stopped? Does this suggest that top-performing local or regional players will remain a key resource rather than a target for acquisition? In a word, will the consolidation that has been taking place in the industry turn from acquisition to alliance?

Arguing against acquisition is a tighter credit market. Even those companies with good credit can find it more costly to borrow. Those with a strong cash position may find it advisable to put that cash into the current business and infrastructure rather than acquisitions.

The US dollar has rebounded a bit on currency markets, so the buying leverage the Euro had is largely mitigated. But the domestic economy may constrain a buying spree abroad.

Share prices have dropped, affecting another major source of cash for acquisitions (or leverage where a share swap is used for an acquisition).

Volumes and capacity affect pricing, which drives revenue and, returning to DHL for a moment, what happens to the $1 billion outsourcing deal with UPS if volumes are not sufficient to generate the expected base revenue? A similar case might be made for acquisitions. If the ability of the proposed acquisition to produce a certain level of revenue is impaired, the basic assumptions change. Is the return still there? If the timeframe has lengthened, is it acceptable to the acquiring company's board and shareholders to delay the return on its investment?

Of course, lowered results and forecasts do create a bargain hunter's paradise. Good companies with quality performance levels find their shares undervalued as an entire market segment drifts downward. For a group with access to cash, that may be a deal too good to pass up. And, if you're that potential target, which way do you go? Look for an alliance partner who can help rebuild the volumes that prop up your higher valuation, or take the buy out?

Two quality players who value their independence might strike a deal and avoid acquisition, forestalling some of the industry consolidation that has dominated the logistics segment in recent years. If that's the case, the leading regional player may remain just that.

Bargain hunting can backfire though and a company could acquire an operation that was teetering on extinction only to drag down its own overall performance at a time when it should be enhancing its price/value proposition. In that case, it may have been better to let the poor performer fail and move into that space with a brand extension that maintains its service promise.

Newton's law of thermal equilibrium says that if you add hot water to cold, you get a tepid result. The global logistics market can't afford more tepid performers. If these down markets are going to force some restructuring, let's build for strength.

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