M&A accelerates in transportation

“The business struggles have been significant for a lot of companies in this sector — especially for the smaller to mid-sized companies — given some of the pricing pressures, workforce issues, lack of growth and skyrocketing costs.”

Russell B. Norris

National Managing Principal, Transportation
Principal, Tax Services,
Grant Thornton Advisors LLC

“The business struggles have been significant for a lot of companies in this sector — especially for the smaller to mid-sized companies — given some of the pricing pressures, workforce issues, lack of growth and skyrocketing costs,” said Grant Thornton Transportation and Distribution Industry National Leader Russell Norris. At the same time, private equity has been keeping its powder dry. A few strategic deals went through, but the low activity also led to decreased valuations.

Recently, reduction in inflation and anticipated interest rate cuts are among the changes pointing to an increase in activity and valuations. The recent Grant Thornton M&A survey found respondents optimistic about the likely trends ahead.

So, which companies will be in demand, and who’s buying?

“The best targets will be those with a compelling value proposition somewhere within the domestic or international supply chain.”

Patrick McAuley

Principal, Transaction Advisory Services
Grant Thornton Advisors LLC

“The best targets will be those with a compelling value proposition somewhere within the domestic or international supply chain. Simply put, where do you contribute to the effective and efficient transfer of freight?” said Grant Thornton Transaction Advisory Services Principal Patrick McAuley. “One leading transportation and logistics company focuses on optimizing transportation from ‘port to porch’. Using this concept, where is the target’s value proposition from shipping port to front porch — and why?” The value proposition could be a company’s specialty of service, like warehousing or final mile transportation. It could be the ability to serve a particular geography within the U.S. or abroad. It could be a business model that’s not as susceptible to the freight rate environment or doesn’t rely on a heavy asset base for growth. 

Some targets can be a point of access to new markets or services. Others can help to provide economies of scale, or an additional component of end-to-end supply chain solutions. 

Ultimately, the best target offers a business model and proven performance that align with the buyer’s needs. “There has to be a match between the acquisition thesis, the art of the possible, what the acquisition target is actually doing in the marketplace and how that is reflected in their financial results,” McAuley said. “It all goes back to perceived value, and strategic acquirers have been at more of an advantage with the recent industry-wide headwinds.” To show that your company is the right target, you need the right preparation.

“They need a clear and concise story behind the numbers, and they need to articulate it with real empirical evidence — specifically for financial results on a reported and adjusted basis.”

Russell A. Daniel

Principal, M&A Tax Services
Grant Thornton Advisors LLC

Even greater due diligence is required for deals that happen in the uncertainty before November’s election. “Target companies need a clear and concise story behind their numbers, and they need to articulate it with real empirical evidence — specifically for financial results on a reported and adjusted basis,” said Grant Thornton Transaction Tax Services Principal Russell Daniel. “That story starts with what the company has achieved as of the most recent financial period. But it also needs to outline the company’s history, going back over the last five years. Much has changed since 2019.”

McAuley added, “If you’re an asset-based provider, it’s important to understand your top-line mix and operating ratio trends. The latter is especially important in a depressed market because you have some level of control — even if limited.” You should be able to identify what is truly a fixed cost and what is variable. That applies to the costs of delivery, but also to the costs of technology, people and processes. By mastering those variable costs, you can demonstrate how you preserve revenue — and that’s very attractive to buyers.  

Beyond controlling costs, you might also need to selectively upgrade your technology to improve the efficiency of your people and processes. On both sides of the transaction, companies need to be aligned for growth.

“Managing cost can be an important short-term strategy, especially if you’re preparing to sell. But, you're not going to cut your way to growth or a transaction. And deal synergies in this industry are often more amplified within top-line revenue than with any organizational cost take-out,” McAuley said.