Those waiting for the consolidation needle to be moved in the deeply fragmented U.S. truck brokerage field need not wait any longer.
On March 18, Chicago-based Coyote Logistics LLC acquired rival Access America Transport (AAT) in what is viewed as a significant first step towards concentrating the $50 billion-a-year brokerage industry into the hands of fewer players. Terms of the transaction were not publicly disclosed. However, an industry source said Coyote bought AAT for $125 million, of which $98 million was cash.
The move blends companies with complementary service lines and operating strategies, which would appear to be a plus so long as the integration is properly implemented. But it also combines disparate corporate cultures, which, if not handled correctly, could cause heartburn for Coyote Founder and CEO Jeff Silver and his team. Though both firms have entrepreneurial bents, Coyote functions in a more aggressive, flashy atmosphere with younger staffers whose drive mirrors Chicago's rough-and-tumble mindset, according to a top industry executive familiar with both companies. AAT, by contrast, brings less sizzle to the table and has a more blue-collar attitude that stems from its smaller-town Chattanooga, Tenn., roots, the executive said.
It will be up to Silver, the hard-charging executive who co-founded Coyote in 2006 after taking a five-year sabbatical from transportation to pursue advanced degrees, including a Masters of Engineering in Logistics from the Massachusetts Institute of Technology, to meld the two cultures without alienating AAT employees. The integrations of Coyote's two prior acquisitions, Memphis-based Integra Logistics in 2008 and Atlanta-based General Freight Services in early 2009, did not go well in part because employees of the acquired firms resisted Coyote's corporate approach, the executive said.
Chris Pickett, Coyote's chief strategy officer, however, said that despite the geographic differences, the Coyote and AAT cultures are more alike than they may seem. Pickett said that the cultural similarities were a key reason for doing the deal, and that Coyote put a lot of forethought into the issue. The previous deals were five and six years ago, and "we've learned a lot along the way," he said.
The deal spells big paydays for AAT's three founders, Ted Alling, Barry Large, and Allen Davis, Chattanooga-based venture capitalists in their mid-30s who launched AAT in 2002. In recent years, the three have drifted away from AAT to focus on other holdings of the Lamp Post Group, their venture capital firm. AAT President Chad Eichelberger, who has been handling the day-to-day business, will stay on to run the new company's brokerage operations.
The Coyote-AAT combination will have annual gross revenues (revenues before the cost of purchased transportation) of $2 billion, 17 North American locations, and a partner base of 40,000 carriers. Coyote generated slightly more than $1 billion in gross revenue in 2013, but its first quarter gross revenue was 35 percent higher than in the prior quarter, according to Pickett. AAT generated $400 million in gross revenue in 2012, the last year information was available.
Coyote's fortes are in dry van—the most commonly used form of truck transport—refrigerated trucking, and to a lesser extent, intermodal. AAT's strengths lie in flatbed transport and in moving outsized commodities requiring special handling. It also has a stronger presence in the less-than-truckload arena, a fertile market for brokers. Coyote's information technology (IT) system, which goes by the internal name "Bazooka," will serve as the platform for the new entity. Bazooka is considered one of the better broker IT networks in a world of largely mediocre systems.
The two companies also have different operating models, according to Evan Armstrong, president of Armstrong & Associates, a West Allis, Wis.-based third-party logistics (3PL) consultancy. AAT works in teams that handle both sales and carrier operations, Armstrong said. By contrast, Coyote uses what Armstrong calls a "split buy/sell operational model," where different groups focus on securing loads and procuring trucks. Armstrong said the Coyote model is more efficient because employees can focus on one task instead of juggling two roles.
Pickett said Coyote is "keeping an open mind" about what it can learn from AAT. However, he added that two elements of Coyote's model will remain untouched: its philosophy of providing a single point of contact for the company's shipper and carrier base and its centralized capacity management structure. The centralized structure has proven to be effective in leveraging Coyote's network to build lane density, the holy grail for brokers. The brokerage model in general is easily scalable because it is sales-driven and operates with significant variable costs, meaning a company can get to critical mass of network capacity without a massive fixed investment.
Armstrong said the deal creates a "megabroker" to rival a select group of firms that preside over a marketplace of thousands of mom-and-pop-like brokers. The market leader is C.H. Robinson Worldwide Inc. with more than $13 billion in total 2013 gross revenue. Of that, $8.6 billion came from the "domestic transportation management/freight brokerage" category, according to Armstrong data. The other major players are Greenwich, Conn.-based XPO Logistics Inc. (which is on a fast-growth track of its own); Cincinnati-based Total Quality Logistics (TQL), and Chicago-based Echo Global Logistics Inc. The biggest potential threat to this tight-knit group could come from traditional truckload carriers, which are muscling in on the action to round out their product offerings and to diversify away from no-growth, over-the-road transport services.
Although there are approximately 10,000 licensed brokers in the United States, only about 28 have annual gross revenue of more than $200 million, according to Armstrong data. Robinson reported net revenue (revenue after transportation costs) of more than $1.3 billion from the domestic brokerage segment last year. The next 29 largest had combined net revenues of $2.2 billion, Armstrong data show.
Kerry R. Byrne, executive vice president of TQL, said he's unsure the Coyote-AAT deal will dramatically alter the brokerage landscape because of the industry's size and continued fragmentation. Byrne said in an e-mail that he wasn't surprised by the announcement because there has been much talk about merger and acquisition activity. (Echo, for its part, in late February snapped up Comcar Logistics, a small Jacksonville, Fla.-based broker primarily serving the Southeast and Rocky Mountain regions.) Although TQL plans to follow an organic expansion path, "growth through acquisition has been, and will continue to be, a popular strategy for many others going forward," Byrne said.
Armstrong takes a different view, saying the transaction will spur "further consolidation within the small freight broker ranks" as larger, better-capitalized brokers seek to beef up their service offerings, geographic reach, and lane density. The industry executive said the broker/3PL market will shrink into a oligopoly of sorts. Under this model, only two or three big vendors will have the necessary physical, technological, and capital resources to reorganize a traditionally inefficient business and to offer large and small shippers the end-to-end solutions they increasingly demand. At the same time, the business itself could easily double in revenue as more small to mid-sized shippers migrate to brokers and larger shippers use more of their brokers' portfolio, the executive said.
Pickett of Coyote said the jury is out as to whether the AAT purchase will be the first big salvo in the consolidation wars. But he is hardly oblivious to the wind's direction. "We hear from more than a few shippers that they're looking to rationalize their vendor network," he said.