During the morning session at Transparency19 on May 6, Stifel investment banker John Larkin moderated a discussion about mergers and acquisitions between Renee Krug, CEO of GlobalTranz; Doug Waggoner, CEO of Echo Global Logistics (NASDAQ: ECHO); and Mark Yeager, CEO of Redwood Logistics.
Themes of the conversation included the differences between public and private investors’ expectations for companies that are acquiring other businesses and the often-stated but under-estimated importance of people and culture.
All three of the executives on the panel have been involved in numerous acquisitions. Waggoner led Echo through 22 acquisitions; Krug accelerated GlobalTranz’s growth with nine recent acquisitions as both chief financial officer and chief executive officer; and Yeager presided over five transactions that helped launch Redwood into the upper echelon of North American freight brokerages.
Larkin’s first question involved the nature of the deal flows that Echo, GlobalTranz and Redwood were seeing and their take on the current environment for mergers and acquisitions.
“Are you seeing a lot of attractive deals coming across your desk put together by investment banks, and as a corollary, are you able to generate any proprietary deal flow by reaching out to companies that may be a good strategic fit?” Larkin asked.
Because GlobalTranz has been so active in dealmaking, Krug said, she sees a lot of inbound flows from companies that want to see if GlobalTranz is interested in buying them. Some of those companies priced themselves rather optimistically, Krug said, recounting one seller who wanted a 15-17x EBITDA multiple.
Waggoner said that nearly all of Echo’s acquisitions have been proprietary, built on relationships between the two management teams in question. Even Echo’s largest acquisition, the $420 million purchase of Command Transportation in 2015, was in-sourced.
“Our deals are based on mutual respect, culture, personalities and a good business fit. Those are typically cultivated, not bid on in an auction,” Waggoner said.
Redwood Logistics is not yet of the scale to have a staff that can perform thorough due diligence on potential acquisitions, Yeager explained. But that was where Redwood’s private equity sponsor, CI Capital Partners, added a great deal of value and helped Redwood compete in what he called “a very aggressive sellers’ market.” Half of Redwood’s acquisitions went through investment banks and the other half were proprietary.
One of the investment stories in transportation and logistics over the past several years has been the increasing focus on technology. This renewed emphasis on technology has manifested not only in upstart digital freight brokerages and aggressive capital expenditures by incumbents, but also in a proliferating number of venture-capital backed “pure play” tech startups, themselves often targets for strategic buyers.
Larkin pointed out that while freight brokerages and third-party logistics providers (3PLs) trade in high single digit to low double digit multiples based on earnings before interest, taxes, depreciation and amortization (EBITDA), tech companies are typically valued at six to eight times annual recurring revenue. In other words, growth-stage tech company valuations do not take into account bottom line profitability. That poses a challenge for large 3PLs under pressure to build or buy technology because it’s tricky to price targets accurately and justify the prices paid.
Yeager acknowledged the complexities that come from being in the hunt for different kinds of companies.
“It’s a challenge for us to balance that, and there are also different expectations on the East and West coasts,” Yeager said. “But we don’t want to look at revenue multiples – we like profitable companies.”
Krug said that because GlobalTranz considers itself a technology company and has a team of 140 developers, it does not really consider buying pure technology companies. The distinction between 3PLs and tech companies prompted a story about Echo’s pre-IPO roadshow in 2009 from Waggoner. Waggoner and his CFO, David Menzel, were characterizing Echo as “a tech company that happens to make money from freight,” and while they were pitching the company, they met mostly with tech investors. But Echo’s team spoke the language of freight as well as technology. After explaining what ‘LTL’ and ‘truckload’ meant one too many times, Echo was passed off to transport analysts and the multiple likely suffered, Waggoner joked.
Echo does invest in small technology companies, not to acquire them, but to stay abreast of current trends.
“We make small venture capital (VC) investments in companies we think are interesting in the space, not because we’re looking for a return on investment, but because we’re looking for a front row seat and want to be the first to pilot with that company,” Waggoner said.
Yeager said that Redwood’s approach to new technology companies was similar.
Waggoner explained that completing acquisitions as a publicly traded company came with different constraints than buying as a privately held company. While a private equity firm might leverage up a company to five to six times EBITDA, public investors don’t like companies taking on debt much higher than 3x EBITDA.
“You have to think differently about how you finance [deals],” Waggoner said. “VC guys will bet on anything; private equity investors will bet on a sure thing; and public equity investors won’t bet on anything. You have to have a story to tell the investors, and if it doesn’t make sense to them, you could announce the deal and tank your stock.”
The CEOs also talked about the difficulty of integrating acquisitions, especially merging separate technology platforms. Waggoner said that Echo’s integration of Command’s truckload module took longer than expected, and that leadership has to actively manage change and modify employee habits so that the new technology is actually used. Krug said that GlobalTranz has a dedicated, full-time team that makes sure integrations run smoothly. Yeager said that one of the key traits that Redwood looks for in companies is the ability to grow organically in a variety of economic conditions.
The conversation ended with each of the panelists emphasizing the importance of people and culture when considering a potential deal.
“We have a very unique culture at Redwood that has evolved over a long period of time,” Yeager said. “It’s hard to build a culture, easy to destroy it, and bringing two cultures together that don’t get along is extremely dangerous. It’s the hardest thing to do in due diligence.”
“Tech is important,” Waggoner explained, “but you can figure that out – you can’t change the people and culture.”
“The high growth mentality is part of our culture,” Krug said, and that’s what GlobalTranz looks for in companies it may acquire.