COVID-19 travel curtailments major block to robust 3PL M&A in 2021

Next year should be a bountiful one for mid-market mergers and acquisitions in the third-party logistics (3PL) segment, providing people can get out and meet one another to get them done.

Travel restrictions that the COVID-19 pandemic has placed on prospective buyers and sellers will be the fly in the ointment of what is otherwise shaping up to be a strong 2021 for 3PL M&A, according to panelists Wednesday at the Armstrong & Associates 3PL Value Creation Summit, which was held virtually. Armstrong, based in West Allis, Wisconsin, is a research and consulting firm specializing in the 3PL industry.

Panelists said it will be difficult to perform adequate due diligence on potential acquisitions without the ability to meet face to face. The lack of in-person interactions could stunt the development of relationships that often lead to successful transactions, they said. 

John G. Larkin, operating partner at private equity firm Clarendon Group, noted that his former employer, investment firm Stifel, has held a well-attended annual conference in Florida that would “spark many M&A marriages.” That event, typically held each January, is likely to be conducted virtually in 2021.

The lack of personal mobility notwithstanding, the stars are aligned for what Larkin said could be “one of the best M&A environments of all time” for 3PLs. Capital is abundant, interest rates are at historic lows, pent-up demand is strong, and the pandemic has accelerated changes to supply-chain ecosystems that will be favorable to startups and established firms, according to the panelists. 

What’s more, earnings should be more normalized coming off of a volatile cycle that included the second quarter of 2020, arguably the worst quarter anyone has ever seen. This should give clarity to the outlook for profitability and free cash flows, the panelists said. Freight markets have been red-hot in 2020, but even if demand next year decelerates to “stable,” it still should be good times for M&A, said Bob Bianco, operating partner at Calera Capital, a mid-market private equity firm.

“It’s going to be a very busy year in 2021,” added Paul Jones, a managing director at Stifel specializing in logistics M&A.

Strategic buyers are today focusing on firms with e-commerce strengths, in particular platforms that can address challenges in last-mile capabilities, according to Bianco. Panelists said there is healthy demand for “platform companies,” firms with strong IT capabilities. Starting in 2020 and accelerating into 2021, so-called bolt-on deals will be commonplace as buyers look to fortify specific areas of weakness that were exposed by the pandemic, they said.

Buyers will also focus on platforms run by nimble executives who understand how technology needs to be migrated to address fast-changing needs, panelists said. Those who put technology ahead of management may find they own outdated systems when they mull their exit strategies five to seven years out, they said.

What there isn’t much appetite for is what Larkin referred to as the “57th load-matching platform” to automate freight broker transactions. Aside from the uncertainties of investing in a well-worn model, buyers would be confronted with strong newer players like Uber Freight (NYSE:UBER) and Loadsmart Inc. that have a massive head start on the newbies, not to mention established firms like C.H. Robinson Worldwide Inc. (NASDAQ:CHRW) and Echo Global Logistics, Inc. (NASDAQ:ECHO) that continue to invest heavily in automation to augment their in-house staff.

One of the challenges facing buyers are lofty valuations across the transport and logistics spectrum. Valuations have been inflated by an attractive industry macro environment and low interest rates. Larkin expressed astonishment that he would see the day when a trucking company like Old Dominion Freight Line Inc. (NASDAQ:ODFL), would ever be trading at nearly 40 times forward earnings, regardless of Old Dominion’s well-deserved reputation as one of the best, if not the nation’s best-tun trucking company.

With valuations appearing rich, it is imperative that companies with venture capital or private equity funding focus on transitioning to profitability and free cash flow, the panelists said.