Time To Buy, Sell?
Many fleets will be doing both in 2005.
The bright dawn after the "Perfect Storm" has arrived in the trucking industry with promises of a new and invigorating future. Those carriers that survived the storm in the early years of this decade are in a good position to thrive in the years ahead.
Freight is plentiful and the nation's truck fleet is growing slower than demand, with the constraints of driver availability and the hesitancy to take on debt levels at a rate deemed normal in the 1990s for trucks.
Rail service level deterioration in freight - which is truck competitive - further reduces effective capacity. Freight rates have reflected this new supply demand equation with gains of almost 8% by publicly held carriers in the third quarter of 2004 over the same quarter last year. And that's excluding fuel surcharges.
The price of used trucks has rebounded sharply from the storm, and no longer are carriers "underwater" with book values compared to market.
So what is the outlook for mergers and acquisitions in the trucking industry - especially the truckload industry? Most analysts and financial sources believe that there will be a lot of activity this coming year.
With everything looking so rosy, why would anyone want to sell? The fact, is the trucking industry is dominated by individual entrepreneurial owners who have myriad motivations and circumstances for selling at this time.
More important, there are buyers on the scene for the first time in years.
ON THE SELL SIDE
Although the industry is no longer in a deep economic hole, some carriers are still trying to climb out. The ones wanting to sell are the ones that can't get adequate fuel surcharges fast enough. For these companies, there still is a relationship between diesel price and bankruptcy.
Other sellers haven't improved their safety programs enough to earn lower insurance premiums. Still others missed a trade cycle during the recession and they have older trucks with higher maintenance costs, along with a shortage of mechanics And finally, there are those executives who are on the hook for too much debt, and selling is a way to solve that problem.
Another group of carriers in the sell category have reached a size where they need to grow or get out. Quite simply, they can't meet the demands of their shippers for additional capacity and they can't add any more trucks with their current management or technology.
To keep their customers, they need to make significant investments in both. And with all the effort they made in the last few years, coupled with many sleepless nights, they're not willing to make the personal financial commitment to add management and technology. More often than not, they simply don't have the energy or drive needed to grow the company.
Another group of carriers seeking to sell are those pioneering executives who worked for regulated carriers and saw an opportunity to start their own trucking companies with deregulation in 1980.
They had to learn a new free market industry and succeeded against all odds. Many of these executives, now in their 50s and 60s, look at the changes that are taking place in trucking today and have concluded they need to gain personal financial liquidity. Or, they simply don't want to learn the business a third time.
And finally, we see executives wanting to sell their companies because the next generation doesn't want the business.
Their sons and daughters have witnessed first-hand just how frustrating trucking can be. They see other new and challenging opportunities in other industries that are more attractive to younger adults.
ON THE BUY SIDE
So are there any buyers for these companies? Over that last five years, there have been very few active buyers. In essence, they concluded that, (1) customer retention was uncertain after buying a carrier with the surplus of capacity environment and, (2) they still faced driver issues, so why buy trucks even at low prices?
Instead, these carriers were focused upon efficiencies and cost reductions, not revenue growth. Reflecting this trend, 11 large public truck load carriers reported company trucks increased less than 1% at the end of Q3, compared to a year earlier. They also said they had fewer owner-operators in their fleets.
With capacity tight in terms of supply/demand fundamentals, and a limited number of drivers and owner-operators, acquiring capacity might come via acquiring fleets - but certainly not at the pace of the 1990s, with "price per driver" metrics prevailing.
Recently, however, we have seen a real increase in carriers seeking to buy the "right" companies. As noted above, this environment has brought forth some very interesting and profitable trucking companies for sale.
If these trucking companies fit within a carriers market or lanes, potential buyers are willing to look at them. We also see potential buyers seeking out niche players who can round out their specific lanes or fill their unprofitable backhauls. The desirability of "asset" light or "logistics/broker" firms continues to be at the top of stack in potential buyers' offices.
We also are seeing carriers that intend to stay in business but have reached technology or management ceilings. They are at a point where they need to add more technology and management. They know it's too hard to cover the new overhead by adding one truck at a time, so they believe they can buy another company and spread the overhead. Usually the acquisition is an asset purchase arrangement because they fully intend to integrate everything immediately and don't want trailing liabilities both known and unknown.
Finally, we see carriers who want to grow, but are unwilling to buy new trucks to do so. They'd like to add 100 new trucks, but they know they'll have to hire new drivers to fill those trucks. These expansion-minded companies are looking to buy a 100-truck fleet with hopes that they can keep 50% of the drivers and will only have to hire 50-75 more new drivers.
So what is a desirable trucking company today? It's one with superior operating metrics resulting in solid financial parameters for the highest interest level and pricing. And it's run by a professional management team.
Buyers are concerned about retaining key personnel in all aspects of the business, including drivers and maintenance technicians. But we also see a market for unprofitable or marginal firms where the buyer can see a combination of factors.
These include some desirable freight, low driver turnover, owner-operators, equipment that can be sold, operations that can be dramatically improved or integrated, and rates or surcharges that can be raised.
As we look at the next few years, we see a great deal of activity in the merger and acquisition business. It is a natural occurrence following any recession. Mergers and acquisitions also take place in the midst of technology or market changes. Both of these factors are forecast for the trucking industry.
Now is a good time for carriers to look at their hold cards, establish an exit strategy, and determine whether they should be a buyer or a seller.
Once that decision is made, owners should seek unbiased outside expertise to assist in evaluation and execution.
By Lana R. Batts, partner Larsen,
Batts, Welborn & Co., LLC, York, Pa.
&
Richard Mikes, partner Transport
Capital Advisors, Madison, Miss.
