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Buyers and sellers

MISSISSAUGA, Ont. – The pace of mergers and acquisitions could be a major driving force in changing the Canadian trucking industry for the future.

MISSISSAUGA, Ont. – The pace of mergers and acquisitions could be a major driving force in changing the Canadian trucking industry for the future.

In a for-hire industry of 12,000 carriers competing for $34 billion in annual revenues, and dealing with an average operating ratio of about six cents on the dollar even in good years, transportation CEOs have made it clear they would like to consolidate the industry.

Medium carriers, meanwhile, say they want to either grow or sell.

So what do buyers and sellers contemplating these scenarios need to know?

At a recent Driving for Profit seminar series, sponsored by Truck News, Dalton Timmis Insurance, Daimler Truck Financial and NAL Insurance, Transportation Media editorial director Lou Smyrlis moderated a session on mergers and acquisitions.

Experts Doug Nix, vice-chairman of Corporate Finance Associates, and Doug Davis, independent director with Pro-Trans Ventures, offered advice on the topic to prospective buyers and sellers in the transportation industry, with an in-depth discussion of potential opportunities and the risks involved.

Post-recession, it appears the climate is ripe for mergers and acquisitions activity on the Canadian scene.

“We saw great uncertainty during the last recession. Businesses were struggling for survival. People just hunkered down and conserved cash. The idea of taking on someone else’s debt and problems just wasn’t part of anyone’s plans,” said Nix.

“The desire (for consolidation) was there but the recession created such a devaluation of companies. Anyone who didn’t have to sell was best to wait. I think the lending community was really patient, much more than they’ve been at other times. They must have thought that trucking is a core business, and it’s not going away. They were spending time elsewhere, giving the transportation industry a little more rope,” Nix added.

Now, demographics will play a role in future mergers and acquisitions prospects, with the older contingent of the baby boomers contemplating retirement prospects or at least lifestyle changes.

“What we’re seeing is that there are more buyers than sellers. But there are people who are coming out of the doldrums, who are saying ‘I’m not going to be at this forever.’ I think a number of people are moving to that point. While you might not be able to say what the average company looks like, the average sellers are probably baby boomers thinking about exiting. In many cases they have had a great deal of success; some have been tarnished by the recent recession,” said Davis. “I’ve had a few conversations where they’ve said they wanted their business to get back to a certain level, but the last time they were at that level they were working 60-hour-plus weeks with their cell phones going off constantly. Now they may have gotten comfortable and may lack the energy and interest to put the dog days back in again.”

There’s also a ton of cash in the marketplace today that needs to be invested, said Nix.

“If I was just looking at financial statements I wouldn’t know there was a downturn in the economy. I don’t think it will be a feeding frenzy like it was in 2006-2007 but it will be astronomical compared to the last few years. We’re getting a number of inquiries on doing proactive acquisition work,” he said.

The financial sector in Canada, also appears more optimistic about lending.

“The moving parts are starting to fall into place. Lenders see that they can back some of these industries, especially in Canada,” said Nix.

“The investment banking sector outlook over the next few years is a lot rosier. They may be both more cautious and aggressive in terms of putting their deals together,” added Davis.

Many large companies today started off small and got bigger through acquisitions. When is it a good time to make a move?
If you have a fairly aggressive, progressive management team, or if you want to take your organization to the next level, mergers and acquisitions is a key component of that, noted Nix.

“To start any proactive acquisitions work, we start with helping clients figure out where they are trying to get to,” he said.
“At the end of the day all businesses are the same: it’s either grow or die before overhead creep diminishes your returns,” added Davis.

But you should also look closely at your current business and your management team to figure out, if you were twice the size, would management’s skill sets still apply?

“The key thing is to understand the underlying business risks of acquisition, the underlying contracts, operations processes, and once you outline all the business risks you have to attach the right kind of folks,” Davis said.

When it comes to a “bolt-on” merger, the advantage is you may already understand the business. The risks, however, could be that these companies are “usually run by two or three people that understand the risks and just a few major clients. Who’s to say that those clients and executives don’t go somewhere else?” asked Davis.

While “overmanning” the process for awhile is probably not a bad thing, Nix said that at the start, if you have too many people it gets complicated.

Both he and Davis noted that having a transaction lawyer, banker, and your operations people on the team at the outset is a good idea.

Keeping your core business running in the background is another factor to consider.

“Do you have the bandwidth to do the acquisition? If you don’t have the people you will have a difficult time later,” said Nix.
“Your extended team for the acquisition later becomes some of your middle management. Your existing business can end up being run sideways – it helps to give your management team a heads up about the possible need for them to take on a little more,” said Davis.

It may make sense for some buyers to go out and look for companies that may not already be for sale. Many companies will be flattered by the interest, even if they are not interested in selling at that point.

“If we create our profile of the perfect acquisition, we can figure out which ones are going in the yes and no bins pretty quickly,” said Davis.

For asset-based operations 3.75xEBITDA (earnings before interest, taxes, depreciation, interest and amortization), applied to normalized earnings, is a common valuation, he said.

But the market value of a business is ultimately what someone is willing to pay for it.

“You can use all kinds of multiples. But it’s based on what the market can pay,” said Davis.

“One of the malaises of Canadian trucking companies is that a number of people who are in the business are bargain-focused as opposed to buying a better business and paying the premium for it, but buying a stronger business in the longer term,” said Nix.

Specialized markets
Purchasing in a specialized market, without enough knowledge of the market, could spell trouble, unless you aim for proper knowledge transfer by offering the current specialists a retention bonus, for example.

According to Nix, the specialized knowledge aspect may be just on the key parts of the business, and not necessarily on the entire business.

“How we define specialty markets is by ‘buried entry.’ It can be specialized knowledge, permits, long-term contracts, equipment, anything that makes it difficult for someone else to come in off the street. You have to pick up the people who have that specialized knowledge and in the end it’s about transferring that knowledge as a group,” said Davis.

“People talk about acquisitions for specialized markets. But trying to find the kind of specialized markets that appeal to people, something they will actually pull the trigger on, is tricky,” Nix added.

And don’t assume that you can impose new conditions or less advantageous conditions on any of your “acquired” staff.

“They are human beings and if they are good, they have options,” he said.

“If you use your same people principles you’re using to keep your key people, you’ll be just fine,” noted Davis.

Avoiding critical mistakes
In the run-up to an acquisition, Nix has observed that some buyers become so nervous, they try to build in a series of protections that no seller would ever accept.

“So they start stacking the cards against themselves right away. I don’t think you should ever bet the farm on an acquisition. Take it in reasonable sized chunks,” he said.

It’s also critical to apply a high level of planning around the execution post-close.

“It’s about ensuring that you get the juice out of the deal that you expected. It’s a balance of interests between buyer and seller. Somewhere in between there will be an appropriate balance,” said Davis. He said that when it comes to all Canadian businesses trying to get into US markets, “they go to the US and they just trade dollars. They don’t often realize the importance of local expertise. There are so many different nuances territory to territory, region to region. Before you go to look in the US, in your checklist, you have to have a local understanding of the marketplace,” said Davis.

Maximize your company’s value
If you are set on selling your company, the right time to sell is when you’re ready to, as long as you have a good quality business.

“If you have a business that’s a bit of a dog, you probably need to get that fixed up,” said Nix.

“Clean your offices, wash your fleet once in a while. Get your books and records in order, and get personal stuff out of the corporation. To the extent you can cut down on this stuff makes it easier for buyers to see what the business is. I’m a big proponent of the competitive bidding process, inviting well-qualified buyers into a controlled process. Sometimes if there’s just one offer on the table it’s a leap of faith to say that’s the best offer,” noted Nix.

“Get planning right now if you intend to be a buyer or seller over the next few years. If you’re a buyer then start to determine what you need to fix in your own business,” said Davis.

“The one thing about mergers is that it’s rare to have a merger of two equals. Very early on somebody’s on first base. And safety is a key business risk. Generally poor safety means poor culture,” he added.

“Do all acquisitions live up to original expectations? No, but that means they just didn’t hit all the objectives. This means we live in a turbulent, competitive world. If you’ve bought a bargain you probably have a higher risk versus if you did a proactive search,” concluded Nix.

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