So Your Provider has Merged. Now What?
A look behind M&A activity in the logistics provider market and how it impacts shippers.
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These days, it seems every company wants to acquire a third-party logistics provider (3PL). Mergers and acquisitions—involving not only 3PLs, but carriers and supply chain IT providers as well—are on the upswing.
A number of factors—from positive cash positions to globalization to the pendulum swing of merger cycles—make this the right time for supply chain players to merge, analysts agree.
Each M&A transaction announcement is peppered with rosy promises such as synergy, breadth, and enhanced customer service.
But while some transactions are textbook examples of how to merge, not every deal proceeds as smoothly as promised, and it's hard to find one without fallout for at least some companies and their customers.
Despite the potential risk, however, analysts do not expect the thirst for acquisitions to be quenched in 2007.
The intent behind M&A transactions is often to buy a company's customers, product/service offerings, people, and sometimes, assets. While the subtleties differ in each deal, several common denominators across the supply chain make this the right time for your carriers, 3PLs, and IT providers to buy or sell:
1. Globalization. Shippers are increasingly likely to source and sell goods outside their own borders. Moving shipments across oceans and continents is inherently more complex than moving shipments domestically, so shippers are required to build or buy international shipping expertise.
"Shippers turn to 3PLs to solve a multitude of challenges, most of which extend their services well beyond the traditional capabilities of warehousing and transportation," says Greg Aimi, research director at AMR Research, Boston.
"But companies today find it difficult to locate service providers with the required competence, capabilities, and proven experience in these new opportunity areas."
Sixty-one percent of U.S. shippers piggyback on their forwarder's or 3PL's online systems to manage the global trade process, according to Aberdeen Group's report, New Strategies for Global Trade Management. In response, freight forwarders and 3PLs are bolstering their global expertise and reach by acquiring other companies to fill the gaps.
2. Big companies, big providers. For many 3PLs, growing larger is essential to match the increasing girth of their customer base.
"Retail is becoming national, so retail suppliers need national solutions," says Dan Sanker, CEO of Santa Monica, Calif.-based 3PL CaseStack Inc., which merged with AtomicBox Logistics in 2006. "Manufacturers, too, are consolidating to better serve large retailers."
Similarly, supply chain IT developer RedPrairie, Waukesha, Wis., bought logistics technology firms MARC Global Holdings, BlueCube Software, and most recently, StorePerform Technologies, to bulk up its services to meet the demands of large, national companies.
"We work with multi-billion-dollar global conglomerates," says Ron Riggin, vice president, RedPrairie. "Why would they put mission-critical systems in the hands of a small provider? We need to grow to be a $500-million company—quickly," he says.
The company plans to reach that goal through continued acquisitions.
3. Cash is flowing. Currently, many large companies—including private equity firms, shippers, and 3PLs—boast of a lot of cash on the books. Investors find 3PLs particularly inviting because they have solid compounded annual growth rates and low market penetration. They are growing faster than the economy, and they compete in a fragmented industry, which investors like.
The same is true of acquisition targets.
"For the first time in a long time, companies have strong balance sheets," says Lana Batts, Arlington, Va.-based managing partner for Transport Capital Partners, a transportation consulting firm specializing in the trucking industry. "It's an advantage to sell when times are good."
4. Retirement wave. The trucking industry, in particular, is experiencing an uptick in retirement interest from company owners who launched their businesses following deregulation in the early 1980s—a trend Batts calls "the graying of the entrepreneur."
"The company founders' sons or daughters are saying the revenue this business generates is not worth the risk," she says. This makes them particularly open to merger or acquisition offers.
5. Relaxed regulation. "Alliances among ocean carriers became substitutes for mergers during the era of tight regulation," says Paul Bingham, principal, global trade and transportation practice, for Global Insight, an economic and financial analysis firm in Waltham, Mass. "As regulations relax, the pace of acquisition and mergers increases."
Politics can also play a role in driving M&A activity, as DP World's recent sale of U.S. port operations illustrates. A political firestorm over port security erupted last year when the Dubai-based company took over operations at several U.S. ports, causing the company to eventually back out and sell to New York City-based AIG Global Investment Group.
Strategic Versus Financial Buyers
Shippers have traditionally greeted with reservation the news that an investment firm, rather than a supply chain company, is acquiring their service provider.
While it's generally true that investors resell their new acquisitions within five to seven years, the tide of opinion on what will now happen during that time may be turning. In the past, financial investors' intent has been to squeeze as much cash from the operation as possible, then get out. But those days are over.
Today, investors buying a service provider need to increase the value of the company within a few years, which often means broadening services and adding technology.
Typically, investors search for large, profitable, non-asset-based providers with 15 percent to 20 percent earnings before interest, tax, and amortization—and they want management to stay with the company after the merger.
They also want to earn money from each customer. "The fact that a company has been a provider's customer for 40 years doesn't matter to investors. They are short-term driven," Batts says.
"Private equity companies are getting a fresh look as owners of logistics service providers," says Dave Kulik.
He speaks from experience: once group managing director at CEVA Logistics, (formerly TNT Logistics), Jacksonville, Fla., Kulik was on the supervisory board that decided to spin off TNT's logistics division, and he was the company's CEO when it accepted an offer from Apollo Management, a private equity firm that buys undervalued companies.
The draw for Kulik was the fact that TNT Logistics' global operations would remain intact, albeit with a new name.
"Being a private company enhances our ability to create better solutions for shippers, and security for our employees," Kulik says. That includes 250 senior managers who are now part owners.
The spinoff means CEVA can avoid rationalization, integration, and other tasks that often are created by strategic acquisitions. It also enables management to continue its focus on helping customers reengineer their supply chains.
Some see this deal as marking a reversal in the trend toward one-stop logistics consolidation.
"Financial and strategic acquisitions are two dramatically different models," says John Sutthoff, vice president of global marketing and strategy for UPS Supply Chain Solutions, Atlanta. While financial investors have increased the value of some providers they acquired, they don't usually implement many changes, he notes.
Meeting Shipper Needs
Change, however, is the mission for UPS as it continues its buying spree, which includes more than 20 companies over the past seven years.
"In most cases, we purchase companies operating in a business we're not currently in," Sutthoff says. UPS added LTL capabilities, for instance, through its strategic acquisition of Richmond, Va.-based trucking carrier Overnite Transportation Company.
"We needed to take a broader view of the business than merely moving small packages. Our customers want an end-to-end supply chain," Sutthoff explains. That way, shippers need only use a few preferred providers, but gain variety of services, as well as reliability, visibility, and customer-enabling technology.
"When fewer companies manage your merchandise, you have more control," he adds.
Similar motives were at work in the Deutsche Bahn AG/BAX Global and BAX/Schenker Logistics deals.
"In the past, Schenker was known as a freight forwarder," says Claude Germain, executive vice president and chief operating officer at Schenker of Canada. "Freight forwarders move shipments from Point A to Point B, similar to a travel agent. Now we operate more like a tour operator, organizing the supply chain for shippers."
BAX and Schenker dovetail well, Germain says, because BAX possesses a strong following among Asian and North American companies, while Schenker specializes in serving businesses in Asia and Europe. The combined international operations of the two companies blend nicely with BAX's domestic air distribution, enabling easy hand-offs for expedited moves.
What Can Go Wrong—and Right
When performed correctly, acquisitions can bring together the disparate strengths of two companies to add benefits to their respective customers. Of course, getting to those benefits requires some initial disruption.
"In general, acquisition is a painful process," says RedPrairie's Riggin. "Several steps always occur: responsibilities transition, staff numbers decrease, and employees and customers worry."
Hallmarks of a good integration include similar cultures between the two companies, minimal overlap in offerings and services, early and clear communication, and conducting the deal at the right pace.
Companies must balance between proceeding slowly enough with the acquisition and integration to not disrupt customers, but fast enough so the providers themselves do not lose momentum.
Of course, many companies can tell horror stories of acquisitions gone bad. Here are some major areas of concern for shippers:
Fewer choices. Without new entrants to balance out the effects of M&A activity, consolidation inevitably reduces the available stable of providers. But those companies should also now be able to do more for shippers—a prospect customers have embraced with supplier rationalization projects.
Riggin calls these shipper consolidation initiatives "10 in 2010"—the idea that by 2010, shippers won't want to deal with more than 10 major IT providers in their supply chain.
Rate changes. Shippers' rates generally increase as a result of a provider merger because the acquiring company tends to bring more resources to bear.
"The sophistication of yield management software for pricing tends to squeeze small shippers," says Global Insight's Bingham. But the combined providers' newfound efficiencies and buying power can also help hold down rates in the long run.
Reduced services. "Just because one company acquires another, it doesn't mean the new owners want to continue the business," says John Gentle, formerly transportation affairs leader with Owens Corning and now president of John A. Gentle & Associates, a transportation consultancy in Toledo, Ohio.
During his transportation career, Gentle experienced mergers where large carriers acquired smaller carriers, "and our capacity literally disappeared while service went to hell in a hand basket," he says.
In successful deals, however, the breadth of services increases.
RedPrairie, for example, hopes to broaden its customers' horizons with its new ability to enable end-to-end processes. The acquisition of BlueCube, a workforce management development company based in Atlanta, fleshes out the company's vision of closely tying retail store operations with supply chain activities.
Integration stumbles. Bringing together disparate processes and systems can be challenging. The cost of changing to a new IT platform can be substantial for all parties, and it can take years to harmonize disparate applications.
Acquisitions are more successful—and less disruptive to shippers—when the providers involved share compatible platforms, or when the larger company brings the smaller company's technology up to date.
Quality of service declines. "For some shippers, a provider's acquisition changes not the product offering, but the services around it," says Global Insight's Bingham. "Shippers may perceive a loss of service quality."
That's exactly what happened to Lanca Sales, a food service disposables distributor located in Hillside, N.J. It has been unhappy with one of its ocean carriers since it was acquired by another company.
"We pay a premium and are forced to deal with rotten service and a 'now hear this' attitude," says Tim Avanzato, Lanca's logistics director. Fortunately, the company fared better when its 3PL, Exel, was acquired by Deutsche Post World Net. "That acquisition has been a non-factor for us," he says.
The loss of local flair that can occur with mergers can also be a problem, says CaseStack's Sanker, who notes the tendency for large operations to lose an eye for detail. Sometimes, one provider's drivers or dock and warehouse employees know how to deal better with the idiosyncrasies of particular markets and customers, he explains.
"The challenge is keeping the necessary expertise. You can't lose that regional aspect," Sanker says.
Support staff changes. "Often, during a merger or acquisition, the best employees leave and fear of change permeates the environment," says Greg Gries, data manager, supply planning systems at Perdue Farms, Salisbury, Md.
Fortunately, Gries says, that did not occur when Scottsdale, Ariz.-based JDA Software Group acquired Perdue's IT provider, Manugistics, Rockville, Md. (See sidebar, below, for more on Perdue's merger experience.)
When companies are in fast-growth mode, the employee overlap that occurs with acquisitions may be offset by the need to expand staff, so workers keep their jobs.
Cultures clash. Companies that have distinctly different cultures, such as centralized versus decentralized, often experience problems when merging.
"Culture drives performance in service businesses," says Schenker's Germain. In the Schenker/BAX deal, the companies were careful to allow their myriad cultures to continue—the culture of international air service, for example, is different than that of warehousing or customs.
Promises are not always fulfilled. Bingham points to the rash of rail industry mergers in the last decade as an example of unkept promises.
"The managers at these rail companies were not prepared to handle the task of consolidating networks adequately, and shippers suffered enormously," he says.
IT integration is among the biggest potential stumbling blocks in any merger or acquisition. "It is important for providers going through integration to minimize the impact to their customers," says UPS' Sutthoff.
Integrating newly acquired companies into UPS requires a careful balancing act—porting them to UPS' platform, while taking the best of the technology already in place, he explains.
Technology integration concerns are particularly pronounced when the IT developers themselves are merging. Sometimes, systems that shippers depend upon are discarded or merged with other products. "You can end up with an orphaned product," says Bingham.
"Shippers concerned with the fate of a software package need to either get the source code or have the ability to support the software while determining a migration path to a supported solution."
Platform conflict is a related issue. While JDA and Manugistics, for instance, share 150 common customers, the two didn't share a development environment: JDA is based on Microsoft .NET, while Manugistics uses J2EE.
Ron Kubera, JDA's vice president of supply chain, and his colleagues, spent a good deal of time assuring customers that it would continue to develop both product suites.
The companies created a special web site mapping out the future of every product to reassure customers.
While the conditions driving merger and acquisition interest persist, opinions have begun to diverge on the best future course for logistics companies. Some embrace the one-stop model and expect carriers to continue to snap up 3PLs to round out services. Others doubt the long-term success of that approach.
For example, trucking companies that haul a lot of business for 3PLs are difficult to sell to investors these days, says Transport Capital's Batts. "Buyers want to be able to touch the customer," she says.
That is harder to do when a large portion of business comes from 3PL middlemen. Now, the stakes have come full circle—3PLs are looking to buy trucking companies to ensure capacity, she says.
The one certainty in logistics M&A, it seems, is change.
Protect Yourself From M&A Malaise
Informed shippers can weather the ongoing storm of logistics provider mergers and acquisitions. Keep these tips in mind:
Know the market and your risk.
"Understand how dependent you are on your providers, and the likelihood they will be acquired," says Paul Bingham, a consultant with Global Insight. When news of a merger or acquisition transaction surfaces, understand how it fits into your logistics strategy, particularly if your provider is the one being absorbed.
"Stay alert to signs of trouble, such as a rotation of account managers or customer service reps, or a lack of clarity on the part of the provider," advises Claude Germain of Schenker. "Stability and reliability should be shippers' overriding concerns."
Devise Plan B.
Always use more than one provider and maintain a list of other companies that offer the specialized services you need. In addition, review contracts and options regularly, and understand the working relationships that impact your shipments, advises transportation consultant John Gentle.
"As business professionals, we are paid not to be caught off-guard, but when the unforeseen happens, we must have a plan in place to protect our company and our customers," he explains.
While large supply chain providers are widely viewed as the answer to increasingly complex supply chain infrastructure, patronizing small, lean providers can also be a strategic advantage. "To balance your portfolio you need to utilize solid-performing small to mid-size providers," says Gentle.
Use service-level agreements and key performance indicators.
Your contract with service providers should clearly spell out service-level agreements and key performance indicator requirements.
Maintain a formal contract review process, and hold off on contract renewal if your provider has a merger pending. Wait until you clearly understand what impact the merger will have on your company before renewing.
Be a good customer.
Companies acquiring service providers often cull customer lists and drop shippers that cost too much—in fees or in hassle, says consultant Lana Batts of Transport Capital Partners.
Other tips to being a good customer include: pay your bills and fuel surcharges, don't nit-pick over minor issues, and don't keep drivers waiting, particularly in today's environment, where there is more freight than capacity.