Consumer demands driving uptick in M&A activity

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The growth of e-commerce is not only changing retail, it’s leading to more deals in transportation

Earlier this year, the trucking industry saw one of its largest mergers in quite some time when Knight Transportation and Swift Transportation agreed to join forces. But while that merger, valued at approximately $6 billion, was certainly a news maker, it is one of but dozens of mergers in the industry this year.

In early July, flatbed operator Daseke announced a merger with Missouri-based The Steelman Companies. That followed Daseke acquisitions announced on May with Indiana-based The Schilli Companies and Manitoba-based Big Freight Systems Inc. In its latest earnings report XPO Logistics, which in 2015 absorbed Con-way Inc. before selling off the truckload division to CFI last year, said it is looking for acquisition targets, setting aside $8 billion for investments.

And those are just the big moves. Plenty of smaller acquisitions are happening weekly, it seems, and one of the main drivers, according to Gary Silberg, national sector, lead partner of automotive for KPMG, is the changing demands of consumers.

“Consumer B2C transactions will continue to skyrocket, which will create tremendous demand for transportation services,” he tells FreightWaves, adding that technological change is also becoming a bigger driver of merger and acquisition (M&A) activity. “I think the technology, [especially] with autonomous technology vehicles - we are at the beginning of the ways it will change the industry - it will change the economics of the industry.

“When you combine [e-commerce and technology], it bodes very well for M&A,” Silberg adds.

According to PriceWaterhouseCooper (PwC) global transportation and logistics deals soared in the second quarter of 2017, rising 127% over the first quarter and 26% year-over-year. Total value in second-quarter deals was $45.1 billion. Volume was also up, with 5% more deals than the first quarter and 28% more deals than the second-quarter of 2016.

While PwC’s global numbers are somewhat skewed higher because it includes passenger ground deals in its categories, it is still an impressive number when trucking is stripped out. The firm said global trucking deals grew 29% in volume in the quarter and shipping and logistics saw their highest volume of deal activity over the past three years.

“The strong quarter reflected the continued influence of several previously identified trends, along with the emergence of some new dynamics in the sector,” PwC said. “As witnessed over the past three years, robust M&A activity in the logistics sector has been complemented by growing activity in shipping as market participants react to structural changes in the sector.”

Capstone Partners reported there were 112 mergers or acquisitions announced or closed in 2016. Of those transactions, 55 were in air freight & logistics and 44 were in trucking. FactSet reports there were 64 transportation deals in the second quarter already this year in the U.S.

Several factors lead to M&A activity. First, you need fleets willing to invest in additional capacity and personnel – and that typically requires a positive outlook of the economy. Second, you need smaller fleets willing to sell. That could be due to any number of reasons, but increased costs are typically a primary driver. Those can be influenced by regulatory pressures or shipper/consumer pressures.

Silberg says he’s not a big believer in the regulatory environment playing a significant role in M&A activity, but many eyes will be on smaller carriers and how they choose to respond starting in December when the electronic logging device (ELD) rule goes into effect.

Regulatory pressures may not cause a smaller fleet to sell, but it may cause them to look toward larger carriers to form alliances as a way to control costs.

Right now, though, there are plenty of truckload carriers buying, looking particularly at smaller last-mile companies. J.B. Hunt recently acquired pool distribution Specialized Logistics Dedicated, and other TL carriers have acquired more traditional last-mile providers, including “white-glove” service providers. Schneider National, for instance, acquired both Watkins & Shepard and Lodeso last year.

But growth in M&A activity, Silberg insists, will be driven mostly by e-commerce in the next few years. As more consumers buy online, less-than-truckload carriers are increasingly finding themselves becoming a larger part of that home delivery puzzle – especially for oversized items like furniture and appliances, or simply items that are too large for UPS and FedEX to handle.

To navigate local communities, more LTL carriers are being forced to acquire different types of equipment – lower-height trailers and straight trucks. These increased costs are part of the reason more M&A activity could occur.

“The swift and large-scale growth of online shopping is fundamentally reshaping the transportation industry,” Capstone Partner reported earlier this year. “Total e-commerce sales reached approximately $394.8 billion in 2016, according to the U.S Department of Commerce, a 15.1% increased from 2015. This influx in online shopping is not only driving demand for delivery logistics services, but also creating a tectonic shift in consumer expectations for shipping options and delivery times.”

“Mergers and acquisitions and alliances are part of that [solution],” Silberg says. “I think [M&A] is ripe for growth because there is so much change going on.”