Over the past three years we have seen a marked change in the level of acquisition activity in the Canadian transportation and logistics space. Looking backwards, the reasons are fairly obvious.
Starting in mid 2008 and carrying through 2009, as the US economy softened, most players started to see a significant and accelerating decline in shipping volumes and rates. Year over year, it was not uncommon to see revenue declines of 50% or more. During this time, uncertainty was running amuck, most presidents we talked to had no idea whether their operations had bottomed out or if there was still more bad news coming.
With the falling revenues came tighter credit and less cash availability. Amid this uncertainty, almost all management teams opted for prudence and conservatism. Survival of their business became the watchword in almost every discussion we had with Canadian market leaders.
As it always happens, things change. In early 2010, the North American economy stabilized and a new “normal” business activity level emerged. For the companies that survived the fall out, rates firmed and revenues started to climb.
As we get ready to move into 2011, many companies are now refocusing efforts to both grow revenues and also utilize surplus capacity that was created as they streamlined operations. At the same time, Canadian lenders are demonstrating a willingness to provide predictable financing to transportation and logistics businesses.
Our research predicts that the Canadian transportation and logistics industry will see a strong rebound in merger and acquisition activities over the next 2 years. With this as background, it might be helpful to talk about some of the important lessons we have learned about developing and executing a successful strategic acquisition plan in transportation and logistics.
1. Start your acquisition program with a hard look at your own business. Determine what your customers are asking for that you can’t deliver. Check out what your competitors are doing to set themselves apart from you. Ask yourself, what is required to take this company to the next level? Do you have significant capacity in certain operational areas? Do you have a core competency that can be leveraged? etc. (Contact the writer for a copy of their free corporate assessment questionnaire). From this will emerge a picture of some of the key criteria of an ideal acquisition.
2. Keep in mind that just because a business is for sale doesn’t mean you should buy it. The absolute bedrock question that you must ask is “why”. We have found that if there is not a compelling answer to the question “Why are we doing this acquisition?” then you shouldn’t do it. If the benefits to your organization are not obvious, save your money and keep looking for something that really fits. Finding those ideal targets takes work and time. In those cases where completing a strategic acquisition is absolutely vital to a company, sophisticated strategic buyers will often hire an investment banker to find and contact acquisitions that fit the key criteria.
3. Just because something is a bargain, doesn’t make it a smart acquisition. The old adage that “quality is remembered long after the price is forgotten” rings especially true in corporate acquisitions. When you acquire a company you are making a long term investment, and price should never be the primary criteria if an acquisition is sound.
4. The flip side of this is that paying a reasonable premium to acquire the perfect-fit operation is good business. When looking at the pricing of these rare opportunities remember the saying “extinct is forever”. Once someone else buys that business, you can’t – it is now “extinct”.
5. Learn to differentiate between price and structure. Price means what you will pay, structure means how you will pay it. Reasonable transaction structures can be used effectively to bridge valuation differences or deal with uncertain outcomes (e.g. new customers, outstanding bids, uncertain future earnings). When dealing with structure, complexity is not your friend – keep it simple and understandable.
6. Put a strong acquisition team in place before you start. Acquisitions are always time consuming and complicated. This team should include a senior member of your management team, a lawyer with extensive experience in acquisitions, your chartered accountants and an investment banker. It might seem expensive, but in the end, it always saves you time and money.
Douglas Nix, CA, is vice chairman of Corporate Finance Associates, based in Oakville, Ont., and chairman of CFA’s Transportation and Logistics Industry Group. He has completed many Canadian transportation and logistics transaction over the past 15 years and can be reached at firstname.lastname@example.org