June 27, 2011

Cash earmarked for logistics M&A sitting idle

In today's logistics M&A world, it's money, money everywhere, and not a place to put it, says BGSA exec.

By Mark B. Solomon

In an environment of tight credit and ample yet reluctantly deployed liquidity, the logistics industry has a problem that other sectors wish they had: Too much money available for buy-outs and not enough places to put it.

Of an estimated $500 billion in cash in the hands of private equity investors, approximately 10 percent is earmarked for acquisitions in the logistics sector, according to estimates made this week by Palm Beach, Fla.-based BG Strategic Advisors (BGSA), a leading supply chain mergers and acquisitions (M&A) advisory firm. Benjamin Gordon, the firm's managing director, based his estimate on the oft-mentioned ratio of logistics historically accounting for 10 percent of the nation's gross domestic product.

Gordon added, however, that because so many logistics service providers have annualized growth rates exceeding the 10 percent threshold, the extrapolated amount of private equity capital allocated to the industry could be as much as $75 billion.

Gordon told the ninth annual eyefortransport 3PL Summit in Atlanta that the industry has a true supply-demand dilemma in that there is a lot of money chasing a relatively shallow reservoir of opportunity. Beyond the private equity sitting on the sidelines, there is an additional $2 trillion in cash resting on corporate balance sheets, according to Gordon.

"There is probably more money earmarked for the [logistics] space than can be absorbed," he said.

In recent years, the logistics industry has been a fertile breeding ground for M&A activity as providers beef up their global capabilities in response to shippers' winnowing their ranks of partners and looking to work with a select group of large partners that offer close to "one-stop shop" services.

According to Gordon, the top 50 providers today control about half the logistics market. In the early 1990s, the top 50 controlled about 20 percent of the total market, he said.

"We are in a period where the big keep getting bigger," he told the group.

Gordon said so-called non-asset based or "asset-light" providers continue to be seen as attractive targets because of their ample cash flows, their expertise and sizable customer bases, and their relatively low cost structures due to the absence of hard assets like planes, trucks, and ships that might weigh down their balance sheet valuations.

More articles by Mark B. Solomon

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