The financial meltdown and drying up of credit markets put a major crimp in what had been a robust last few years for transportation logistics merger and acquisition (M&A) activity in the United States. But for various reasons, hope is springing eternal that 2010 will be a better year.
For one thing, the M&A climate probably can't get worse than it was in 2009. According to data from BMO Capital Markets, which generally manages three to five transport logistics deals a year, there were 81 transport M&A transactions in the United States and Canada during 2009, a 42-percent decline from 2008 levels.
The culprit, not surprisingly, was the financial crisis and global recession, which sent freight volumes plummeting and hurt the bottom lines of many transportation companies. As a result, the "value expectations" gap—the difference between what sellers expected to get for their assets and what buyers were willing to pay—widened considerably, putting a strain on the M&A pipeline. This caused many prospective transactions to be pulled from the market or put on hold until visibility into future performance improved, BMO says.
As 2010 progresses, the landscape appears to be brightening, experts say. Pent-up demand in 2009 is now being released as prospects for an economic recovery increase and buyers and sellers gain better visibility into operations. Companies that refused to sell three or four years ago only to watch their asset values drop as a result of the downturn may be more willing to cash out at the first sign of an upswing. And the prospect of higher income and capital gains taxes in 2011 may persuade some sellers to get off the fence before year's end.
Currently, the top income tax rate is set at 35 percent, and the capital gains tax rate is at 15 percent. However, Benjamin Gordon, head of BG Strategic Advisors (BGSA), a supply chain M&A advisory firm in Palm Beach, Fla., believes Congress will raise those rates to 40 and 20 percent, respectively, when the current rates expire at year's end. Gordon says his clients are also concerned about possible business tax increases to fund health care reform efforts.
Faced with a possible raft of tax increases, Gordon says, many private owners are "talking with us about liquidity strategies" in advance of any tax law changes. "The conclusion for many is to consider a range of options, including a 'liquidity event' in 2010," he says.
Great expectations
Ed McGuire, head of BMO's transportation investment and corporate banking group, says M&A activity improved in the latter half of 2009 as U.S. and world economies began to stabilize. Of the 81 deals announced in 2009, 47 were completed in the year's second half, he says. McGuire expects first-half deal activity to be 20 percent above the second-half 2009 pace.
McGuire says the first half of last year was marked by relatively small deals involving weak companies that needed to sell healthy assets in order to fix balance sheets damaged by the financial crisis and recession. By contrast, McGuire expects much larger deals in 2010, with more of the activity involving publicly traded companies.
Despite the improvements, McGuire says there is still ample evidence of the so-called expectations gap, where buyers are "frustrated" by a seller's unwillingness to pull the trigger due to inflated value expectations.
The logistics sector was the most active M&A player in 2009, despite a nearly 32-percent drop in total transactions compared to the previous year. Truckload transactions remained consistent year over year, while rail decreased to 9 percent of 2009 deals. However, rail contributed significantly to the total dollar value of 2009 deals due to the $44 billion acquisition of Burlington Northern Santa Fe railway by Berkshire Hathaway Inc. that was announced in November and which closed last month.
"Although the high leverage of 2005-2007 is gone, we see an increased level of targeted 'tuck-ins' and strategic acquisitions," says Gordon. Many of the recent deals that BGSA has advised on "reflect the continuation of M&A as a strategic tool," he added.
While economic and financial pressures have muted M&A activity over the short term, the secular trend that was established years ago augurs positively for a return to historical patterns, experts say. The U.S. transportation logistics market is in a state of near-perpetual consolidation, which began in the late 1980s and 1990s with the larger players and has now spread to the mid-size market. Even today, the U.S. transport logistics sector remains highly fragmented across virtually every form of transport other than perhaps the railroads, making it ripe for continued shrinkage and more M&A action, according to experts.
