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Deals Involving Smaller 3PLs Will Drive M&A Activity in 2016

Dec. 6, 2015
The explosive growth in e-commerce is driving the latest wave of transaction deals involving 3PLs.

When it comes to mergers and acquisitions (M&A) in logistics, “the last year and a half has been extremely busy,” involving everything ranging from small third-party logistics providers (3PLs) seeking scale and broader capabilities, to some of the biggest companies who are trying to get bigger, says Richard Armstrong, chairman of Armstrong & Associates.

He displayed a long list of just some of the most notable of these deals at the annual 3PL Value Creation Summit in October organized by his company, which performs industry research and advises on many of these deals. This annual confab draws top executives from the cream of the finance and 3PL industries.

Topping the recent M&A list is XPO Logistics’ purchase of Con-way Inc., including its Menlo Logistics unit, and the French logistics provider Norbert Dentressangle. Other major transactions include FedEx acquiring the nationwide warehouse-based 3PL Genco Distribution System and UPS buying Coyote Logistics.

The biggest deals may have garnered the most media attention, but much more M&A activity in logistics happened under the radar, largely involving smaller players. Why this is happening stems from the revolutionary changes sweeping through the industry.

Most notable are the explosive growth in e-commerce (both in business-to-consumer and business-to-business markets), requiring more sophisticated IT capabilities and the ability to manage the trucking capacity crunch, particularly regarding last-mile deliveries. This and low interest rates are driving concentration in the freight brokerage business, and has even spurred some 3PLs like XPO to add trucking assets to their portfolios.

However, venture capitalists and other investors value non-asset-based 3PLs more than asset-based firms like trucking companies because non-asset-based firms fare better in an economic downturn. 

“A dollar in revenue from a non-asset-based company is worth more than the same dollar from an asset-based firm, which suffers more once supply exceeds demand,” observes John Anderson, advisory director for Greenbriar Equity Group, owner of Transplace, which recently made a large investment in global transportation intermediary SEKO Logistics and acquired the 3PL M33 Integrated Solutions.

Purchasers also hunt for companies with IT and process capabilities to support e-commerce. “There are many warehouse management and transportation management systems out there that you can buy. Where I see a difference is in developing software to support e-commerce,” says Greg Morello, chief marketing officer of Port Logistics Group.

One example of this is UPS’s purchase of Genco. There were other similarly-sized warehouse-based 3PLs they could have acquired, but Genco boasts a specialized expertise in reverse logistics—crucial to an e-commerce strategy where package returns are said to average 25%.

Frank F. Mountcastle III, managing director of the middle market M&A advisory firm Harris Williams & Co., predicts, “2016 will be very busy but it will be the year of the smaller deal” as companies seek out add-ons to fill gaps in their transportation management and e-commerce capabilities. Buyers are willing to consider acquisition targets in the $5-10 million annual revenue range to accomplish this, but only if those firms can show steady annual earnings growth in the range of 25%, he notes.

Buyers also look for companies to be dominant within the right market niche, particularly if there is scarcity in the value they provide in doing so, observes W. Keith Prusek, managing director for logistics and transportation at BB&T Capital Markets. Small companies that try to be all things to all people are not attractive.

“Companies with cutting-edge technology have an advantage, regardless of their size,” says Sandy Stewart, managing director of transportation and logistics for the investment banking firm of Stifel Financial Corp. “There is a tremendous future for smaller companies that have developed systems for managing the entire supply chain from start to finish.”

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