Smaller warehouse third-party logistics providers have gained newfound respect from venture capitalists and merger and acquisition hunters.
That was the clear message conveyed at the annual 3PL Value Creation Summit, held for the past five years by the Armstrong & Associates logistics consulting firm.
Summit discussions in recent years had been dominated by talks of mega-mergers and the wave of acquisitions engineered by the likes of XPO Logistics, UPS, FedEx Corp. and Amazon Inc. (AA, 10-31-16, P. 1).
Major M&A activity didn’t go completely quiet in 2017. In a surprise move, the asset-light 3PL Hub Group acquired Estenson Logistics, a trucking dedicated contract carrier, for $306 million.
Putting J.B. Hunt Transport and Schneider National on notice, Swift Transportation merged with Knight Transportation, creating a truckload carrier with a combined market value of more than $5 billion.
However, it is true that the number of acquisitions over $100 million plummeted from a total of 18 to only six this year (and that number includes four deals that are pending), according to Richard Armstrong, chairman of Armstrong & Associates.
Ecommerce continues to be the big driver of many of these deals, summit speakers pointed out, including the powerful market-shaping impact of what some called “the company whose name begins with the letter A.”
In addition to larger mergers in the ecommerce high-velocity fulfillment area, there also are many opportunities in the mid-market space, Armstrong observes.
“Regionalization of distribution centers and the need to get products to the doorstep are leading to activity within regional parcel delivery and last-mile companies,” along with a new focus on warehouse-based 3PLs and transportation management firms.
If you dig down beyond the $100 million level, there are plenty of attractive 3PL targets for venture capitalists who are flush with cheap cash, as well as larger 3PL providers who are looking to plug holes in their menus of service offerings.
Also spurring a fresh look at regional players are growing capacity challenges created by a booming economy, already in evidence in truck and air transportation, distribution facilities and labor.
“Smaller 3PLs in certain verticals that do an excellent job will attract attention in 2018,” predicts Nate Brochmann, financial advisor with William Blair & Co. investment bankers, who admits that he previously believed only larger companies could compete for these kinds of investments.
“Clearly, we are in a tight-capacity market right now, whatever is the underlying cause,” says Dennis Anderson, chief customer experience officer at Arcbest Corporation.
“This means winning logistics providers will not just be a strategic planning partner, but also will be able to execute the plan in the face of supply chain disruption or capacity tightness,” he notes.
What are investors and buyers looking for? Top of their list is the potential for organic growth from a strong position in a market niche, skilled application of technological capabilities, and upper management expertise when it comes to managing ecommerce omnichannel supply chains.
“The quality of management is the most important factor. Do they have the vision and the expertise?” stresses Richard Holohan, managing director of Logistics Capital & Strategy LLC.
(The last is why you shouldn’t look for outside investors to allow you to cash out and lie on the beach – at least not until they make their monetary goal and are ready to sell your company to another venture capital firm, usually in three to five years.)
What Technology Needs to Do
Ecommerce growth makes smaller 3PLs attractive if they can do an excellent job operating in certain verticals, observes Jeff Burkett, director of Harris Williams & Co. investment bankers.
Sandy Stewart, managing director, transportation and logistics, for the Stifel investment banking firm, also believes that small and medium-sized companies will drive the next wave of acquisitions. To be an attractive target, he says, “the key is to think more about your customer’s customer.”
For 3PLs to make themselves attractive to potential purchasers or investors, “They will need to have sticky relationships with their customers, which is very important in this market,” says Joseph Saldutti, managing director of Gridiron Capital. “They also must be capable of defending their margins, which is very difficult.”
That’s where advanced technology comes in. Another factor driving 3PL valuation is the ability to solve capacity issues by deploying technology ranging from robots to TMS and WMS programs. “It’s not a matter of whether they are good developers, but whether they are good selectors and implementers of the right systems,” Saldutti says.
Other speakers stressed that being able to create those programs from scratch isn’t really that important – off-the-shelf systems are fine as long as you can get the most out of their capabilities.
“We’ve heard companies boast about having proprietary vs. off-the-shelf technology and my answer is: I don’t care,” says Holohan. The question is, can you select the right software and can you manage it? Relatively small companies can do this now because of some of the systems that are available out there now.”
Both investors and customers expect 3PLs to use technology to maximize efficiencies because of growing capacity constraints in terms of labor, distribution facilities and freight transportation.
“We are looking for a strategic emphasis on human resources and talent management, Saldutti states. “I have never seen it in any management presentation. Private equity investment can help with that.”
Nikhil Sathe, CFO at freight broker Genpro Inc., also says technology is key for “staging” your firm for maximum valuation because “3PL is a labor play – how much do you have to pay for labor?” Technology should help you take some of these costs out of your business.
Ecommerce makes managing through-put more important than warehouse capacity because it has driven up warehouse revenue up from $10-20 per square foot to $80-100 per square foot, according to Vincent Gulisano, CEO of Amware Logistics.
In fact, research reveals that what 3PL customers want most – by a factor of three-to-one – is visibility over the entire supply chain, stresses Benjamin Hartford, managing director of the Robert W. Baird & Co. financial services firm.
“What our customers want is real time data that tells them where their shipments are in the process,” Gulisano adds.
As Hartford puts it, “Those providers who can provide that will survive. Those who can’t will fail because most other kinds of 3PL services are rapidly becoming commoditized.”