Strategic and financial buyers want exposure to e-commerce’s double-digit annual growth rates, but investment bankers at Armstrong & Associates’ 3PL Value Creation Summit in Chicago last week said they advise clients to look for Amazon-proof businesses.
Amazon’s (NASDAQ: AMZN) entry into low-cost digital brokerage and acquisition of trucking assets, not to mention its dominant position in industrial real estate and e-commerce, have transportation and logistics companies looking over their shoulders. Amazon’s strategy seems to be to establish control of multimodal transportation capacity in order to remove freight market-related constraints from its revenue growth.
In-sourcing transportation poses a concentration risk to trucking carriers who have a lot of business with Amazon, but there are other segments of the industry that could under even more pressure. E-commerce warehouse operators now have to compete with the world’s largest company to find square footage and labor. Final-mile carriers, whether crowd-sourced startups or large carriers with a specialized offering, will go head to head with Amazon’s growing network of independent contractors.
A wide-ranging discussion of mergers and acquisitions (M&A) and where to find durable value in an industry that has recently experienced multiple expansion and competition from new entrants stretched across several panels on the last day of the Armstrong & Associates summit.
Broadly, two strategies emerged. Investors are focusing on specialized companies with value-additive customer relationships that dominate their niche, or they have ambitions to roll up a market like expedited freight or last-mile delivery into a player that could replicate Amazon’s service offerings.
“Four years ago with Amazon, it was ‘wait and see’,” said Dante Fornari, chief executive officer at Magnate International, a Chicago-based investment firm. “Now it’s just ‘see’. To try to relate this to M&A operations, we at Magnate try to invest in niche businesses that are high value, less straight down the fairway from Amazon.”
“Amazon is using logistics to a competitive advantage,” observed Paul Jones, managing director at Raymond James. “Amazon’s market cap is $879 billion, nine times the market cap of UPS. We need to be focused on what they’re doing and frankly try to stay out of the way.”
Kristopher Hopkins, head of transport and logistics at Houlihan Lokey, said that companies were already trying to diversify away from the concentration risk of having Amazon as a large customer.
Renee Krug, chief executive officer at top 10 freight brokerage GlobalTranz (GTZ), said that GTZ did not have direct exposure to Amazon’s business but that shippers across the board were raising service requirements and stepping up fines as they tightened their supply chains in response to Amazon’s logistics prowess.
In a different panel, Peter Stefanovich, a principal at Left Lane Associates, a Toronto-based middle market M&A advisory firm focused solely on transportation, agreed that specialization was probably the best way to protect capital in a shifting landscape.
“By carving out a niche in the transportation market, you’ll vastly increase the value to your company at the time of sale,” Stefanovich said. “Find that specialization and stick to it. Eventually, you’ll own that lane, commodity and/or geographic space, increase your margin and ultimately sell for a higher enterprise value.”
Chris Wofford, head of transportation investment banking at Wells Fargo, thought the same logic applied to third party logistics providers (3PLs) who found themselves in competition with new digital entrants like Convoy and Uber Freight. The key is specialization, in finding commodities and customers that need humans to add value to the transaction.
“They’re a massive catalyst for change and platforms funded from deep pockets,” Wofford said. “What percentage of freight is suitable for some sort of matching algorithm? Specialized is really challenging to put in a standardized system. A portion of freight is suitable for algorithmic problem solving, but not all of it.”
Jones argued that well-capitalized incumbents would be able to build the same digital technology and continue earning profits while doing so.
“My money is on operating companies that control the freight now and make money,” Jones said. “They’re going to figure out how to do this. I’d rather have my money there than on the startups.”
In a different panel, respondents were asked how they identify the attributes of a target company.
“Not sure whether I weight customer or team as being more important—both are at the top of the list,” said Kyle Sauers, chief financial officer at Echo Global Logistics (NASDAQ: ECHO).
Geoff DeMartino, vice president of corporate development and strategy at Hub Group (NASDAQ: HUBG), noted that while strategic buyers can often pay more for companies if they see meaningful synergies, either on the cost or revenue side, public companies “have to be tempered in our enthusiasm.” DeMartino said that Hub Group was considering niche deals that could give it exposure to refrigerated and flatbed freight, and that it was selectively looking at some international opportunities.
Ryan Roberts, from Pritzker Private Capital, which he described as a kind of hybrid family office / private equity firm, said that he wanted to get into e-commerce-related businesses like expedited freight and last mile. The catch is finding a non-asset or asset-light company that would be a suitable platform for a buy-and-build strategy.
“For us it has to have enough scale to use as a platform to try to consolidate whatever market they’re in,” Roberts said. “There are many opportunities that don’t have the technology backbone that’s necessary.”