Last week I had the pleasure of participating in a shipper – carrier roundtable sponsored by Motortruck Fleet Executive magazine and Shaw Tracking. Lou Smyrlis, the moderator, raised the subject of industry consolidation with the group that was assembled. The consensus seemed to be that industry consolidation will continue in 2009 as it has in 2008, albeit under a new set of constraints imposed by the current economic downturn.
Bob Costello, Chief Economist of the American Trucking Associations, mentioned in a speech this week at the Canadian Institute Trade and Transport Conference that October freight volumes were unusually weak and reflect the downturn in the North America economy. This is worrisome since October is usually the best month of the year for freight activity. This does not auger well for those transport companies that have been in a survival mode during the “freight recession” of the past couple of years.
Is this the time to buy or sell a freight transportation company? There are several events that are having a direct bearing on the industry at this time. These include the credit crisis that has adversely affected the purchasing of houses and automobiles. Weakening economic fundamentals are causing unemployment levels to rise. In addition, the downturn in the value of housing and the stock markets are causing many middle class folks to feel insecure and fearful and less willing to spend money. The combination of all of these forces is driving down the demand for manufactured goods and retail volumes, the lifelines of freight transportation.
While these forces are at play, shippers are extending payment terms and carriers are facing tougher times borrowing money. Small trucking companies with a limited supply of customers and limited sales resources are particularly vulnerable. The end result is that this is an extraordinarily difficult time to run a transportation company.
We have more struggling transportation companies than ever before and they are cheaper to buy than they have been in many years. Mergers and acquisitions will continue, particularly for those companies with lots of cash on their balance sheets. However, buyers will be more deliberate in their approach. As we are seeing in the stock market, some sellers are simply capitulating and saying that this is the time to get out.
It should be pointed out that a number of studies have shown that over sixty percent of mergers and acquisitions fail. Despite the best of intentions, failure can be a result of several factors. In some cases, inadequate due diligence is done. Some of the assumptions made leading up to the purchase are incorrect. In other cases, no non-compete is signed with the owners. They may leave and form a new entity that competes “head on” with the acquired company. In addition to the owners, some other key people may leave and take some of the business with them.
For a number of mergers, the expected synergies and cost savings don’t materialize and/or the revenue stream does not meet expectations. In certain situations, the merger comes unglued due to poorly planned integration efforts, in sales and/or operations, or due to a culture clash between the employees of the two businesses. Customer affecting service changes, the departure of trusted customer service, dispatch or sales personnel (to a competitor) may drive customers to another transportation company. Many times the old owners find it difficult to function within the new owner’s environment or lose motivation due to the big payday they received.
What can you do to increase the odds of success?
The shipper- carrier roundtable participants suggested that the high failure rate will not stop the freight carrier consolidation movement. The current economic difficulties will likely spur an increase in desperate sellers and interested buyers. Critical success factors include:
• An assessment of the growth that can be achieved organically versus through acquisition, within a prescribed period
• A careful assessment of the synergies that are at play and the integration hurdles that may be faced
• Having a clear focus on whether the proposed acquisition is the right strategic fit
• Performing a thorough due diligence that looks at revenue growth, cost reductions, cultural fit, ROI, risk factors, retention of key employees
• An understanding of the expected competitor behaviour
• Effective management of human resources and customers
• Excellent post implementation follow up
• A thorough assessment of the financial risks and rewards
As has been proven time and time again, even the best due diligence cannot anticipate all of the challenges that lie ahead. Often the post acquisition reality is very different from the picture painted during the period leading up to the purchase. On the other hand, a successful acquisition can fill a void in a company’s service and/or geographic coverage and boost financial results. Therefore the best advice is buyer beware!