Merger and acquisition activity may slow this year as freight conditions normalize and the cost of borrowing increases, but dealmakers are still gonna deal. Organic growth — one truck, driver or customer at a time — is nearly impossible for asset-based trucking companies, especially as supply chain disruptions make it difficult to procure new equipment, let alone human capital.
“It’s going to be a very active M&A year,” Spencer Tenney, president and CEO of Tenney Group said of his 2023 transportation merger and acquisition expectations. “What will be different compared to 2021 and the first half of 2022 is that there’s very different risk in the market. This will be reflected in the size and shape of transactions that get done. We won’t see as many transformational-type mergers and acquisitions as we did in 2021 and 2022. But small- and mid-sized transactions will be abundant.”
Sellers may have missed the peak of the M&A cycle, but they shouldn’t be discouraged. Mark Groulx, president of AIM Group Canada, said sellers shouldn’t try to time the market.
“You shouldn’t be selling your company based on macro economics. Sell your company because it’s the right time to sell your company,” he advised.
How do you know when it’s time to sell? “A large part of it has to do with just having an honest conversation with yourself and your leadership team,” Tenney said.
It’s a personal decision. A 45-year-old business owner may see tremendous opportunity in the current market conditions while an entrepreneur who’s 10 years older may have a completely different appetite for risk. How willing are you, as an owner, to continue investing in your business in an environment of softening demand, recessionary risk, and hyperinflation? Not everyone has the appetite, energy or finances needed to continue the battle.
“Our pipeline has never been fuller,” Peter Stefanovich, president of M&A advisors Left Lane Associates told Today’s Trucking. “On both the buy and sell side. What has changed in the market is, expectations have come back in line with reality.”
The M&A landscape – not unlike the housing market – defied reason in 2021-22 as valuations soared. “We are now seeing people get back to what reality is from a valuation standpoint,” Stefanovich said.
The big, cash-laden traditional buyers such as TFI International and Mullen Group have largely sat on the sidelines over the past year as sellers looked to cash in on margins inflated by soaring demand and an inability for fleets to add capacity. But Stefanovich said new buyers are stepping up to fill the void. “There have been a lot of players in the market looking at getting involved in M&A that typically weren’t,” he said.
This is also true in the U.S., added Tenney, where more first-time buyers than ever before have been wading into M&A despite record inflation. These new buyers can range from private equity, family offices, private fleets looking to increase control over their supply chains, or even traditional truckers that have until now grown organically.
“If you pay more to borrow money to finance acquisitions, the price decreases.”
Mark Groulx, AIM Group Canada
“It could be a 50-year-old trucking company that has never integrated an acquisition growth strategy and now they have to,” Tenney said.
Groulx added international investors are increasingly looking at safe jurisdictions, such as Canada, in which to invest. However, while buyers remain ready and willing to reach into their pockets, higher interest rates will have an impact on how much they’ll be willing to pay. Simply put, higher interest rates generally mean lower purchase prices. “If you pay more to borrow money to finance acquisitions, the price decreases,” he reasoned.
Not only does the cost of making the initial acquisition increase, so too will the cost of replacing outdated equipment. And cap-ex requirements are receiving additional scrutiny as most fleets have been forced to extend trade cycles due to an inability to procure new trucks and trailers.
“Given the inflationary impact of higher interest rates, one would expect that, particularly for asset-heavy businesses, the cost of replacing [equipment] will increase. That will likely cause some downward purchase price pressure,” Ted Daniel, CEO of high-profile buyer Titanium Transportation said. “Additionally, purchasers looking to finance part of the deal structure will have to justify a required higher rate of return on the transactional investment.”
As valuations become less frothy, what are prospective buyers looking for in an acquisition?
“Titanium is always looking for the right fit,” said Daniel. “We will continue to explore the right transactional opportunity in 2023.”
In Canada, most won’t touch a company that’s structured using the controversial Driver Inc. business model that classifies company drivers as independent operators, Groulx warned. AIM recently represented a buyer that walked away from an opportunity to acquire a trucking company that utilized Driver Inc.
“It’s such a risk,” he said. “We are selling a company that is 20% Driver Inc. People can swallow that. It’s still a risk and [the buyer] will get a discount on that 20%, for sure. Personally, if you told me you’re 50% Driver Inc., I’d say ‘Good luck, we can’t help you.’”
Stefanovich said owners who specialize in a niche are always in demand. The appetite is especially strong for those who participate in the cold supply chain, or use specialized equipment to haul chemicals. Such companies have stronger defensive positions as there’s typically a greater barrier to entry into those specialized segments.
He also sees an increased demand for intermodal carriers as Kansas City Southern merges with Canadian Pacific, offering a more fully integrated North America-wide rail network.
“Anybody in that space is going to be highly sought after and very accretive,” Stefanovich said of trucking companies in the intermodal, drayage and rail segments.
Always be ready
Anyone thinking this may be the time to sell should not be swayed by media reports on the general economy, Stefanovich warned. “Do not let commentary about recessions stop you from growing your business or exiting when the time is right,” he said of clickbaity headlines that may exaggerate economic risks. “They’re more noise than substance. Look internally to see how you’re doing.”
Tenney said the best approach is to always be ready when an unsolicited offer materializes.
“Sometimes the best thing to do is make [your company] available when the right buyer has a pronounced need and is willing to pay a premium price to address that need,” he said. “This business is for sale at any time for the right price to the right buyer. Be in a situation where you’re open-minded to exit at any time, regardless of how inconvenient it may be. You have to have your house in order, know your business, know what it’s worth, and be open-minded when opportunity knocks on your door.”