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Slow 3PL M&A Activity May Speed Up

The wave of big mergers and acquisitions that swept through the third-party logistics industry in 2015 may have crested, but another wave is expected to rise again in the near future.

This is the view of some of the top financial and logistics executives who spoke at this year’s 3PL Value Creation Summit held earlier this month in Chicago by research firm Armstrong & Associates.

Although the softening in the trucking and rail markets is one reason, another is that the big players who pursued those aggressive M&A strategies are focused on absorbing these acquisitions into their global operations.

The day of the really gigantic deal has probably passed for the time being, but it will come back eventually,” said Keith Prusek, a managing director with BB&T Capital Markets.

He expects that healthy freight growth in 2017’s second half will “turbocharge” the M&A market.

But while some of the large 3PL companies are focusing right now on organic growth, others continue to acquire smaller 3PL companies to such an extent that Prusek characterized the current situation as a sellers’ market.

But pouring cold water on the notion that the merger picture in 2017 will mirror 2015 was Frank Mountcastle III, managing director of Harris Williams & Co., who said of next year, “It will be pretty much more of the same.”

However, Robert Levin, managing director of Republic Partners, asserts that the groundwork is already being laid for future deals.

“I have seen more deals in the discussion stage this year than at any other time,” he pointed out. “There will be more of these conversations in 2017.”

That may be the case, but it doesn’t mean those deals will be clinched soon, according to Nate Brochmann, an equity analyst who works at William Blair & Co.

“More potential deals didn’t go forward this year than in the past,” he observed. “However, the market is still strong from an acquisition standpoint. Valuations are low, except for logistics software providers.”

Where 3PL Warehouses Stand

Value-added warehouse services are generally considered less attractive to investors who prefer non-asset-based 3PLs, like brokers and freight forwarders. But some in the financial community see 3PL warehousing prospering in the new
logistics environment.

This is particularly true for those companies that are well positioned to offer strong fulfillment services and transportation management systems capable of meeting the growing demands of the exploding ecommerce market.

“Ecommerce is setting the standards for cost, innovation and technology,” said John Anderson, advisory director of Greenbriar Equity Group. “However, the biggest challenge in ecommerce is finding a way to play in this space and still make a profit,” he admitted.

And who is the biggest industry disruptor that should be watched continually? “In a word: Amazon,” said Sean Kelly, senior vice president of Geodis (formerly OHL). “They have completely changed what we are all doing.”

Duane Sizemore, senior vice president of marketing and business development for Saddle Creek Logistics Services, stressed how difficult it can be in a world where consumers’ expectations have been reshaped by Amazon.

“These are our customers’ customers,” he noted. “They want it perfect, they want it quick and they want it for free.”

Also reshaping the 3PL warehouse industry is the resulting pressure exerted by customers to come up with fulfillment and transportation solutions for their customers, whether in the B2B or B2C markets.

“The final mile providers are the 3PLs who have their work cut out for them,” warned Dan Gagnon, vice president of marketing for UPS Logistics & Distribution. “They need to find a way to do this and still manage to make a profit.”

For warehouse-based 3PLs to prosper in this environment they need to avoid those customers who fail to appreciate the essential role of logistics in their ecommerce strategies, said Greg Boring, vice president of sales for Kenco Group.

Instead they choose to take a procurement approach and view logistics as just another service they acquire based solely on price, he said.

“Customers say they want innovation and strategic assistance, but their procurement department wants only price, price and price,” Boring observed. “We want to concentrate on value, not price.”

He said Kenco is willing to walk away from these kinds of customers. According to Boring the red flags that 3PLs should look out for are negotiators who refuse to share necessary information or won’t grant access to their companies’ decision-makers.

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