July 17 2007 04:10 PM

Making Money the Old Fashioned Way


Most businesses are begun on the premise that great service and great products will win customers. Those customers in turn will provide revenue to build the company organically. However, every business day we find large companies buying other firms to sustain their organic growth. Even the Wall Street Journal has had a takeover offer. 


With so much activity being created with numerous takeovers, mutual funds such as The Merger Fund and The Arbitrage Fund specifically focus on firms they believe have a higher probability of being acquired. The catalog industry in particular has been engaged in the Merger and Acquisition (M&A) fever for years. Headlines such as this one from FORTUNE (May 14, 2007) Buyouts and takeovers are driving the market--- are proliferating in business publications.


Heres how to get in on the Merger and Acquisition activity without any regrets.


Major Parcel Carrier M&A


The three major parcel express/ground carriers (DHL, FedEx and UPS) have been very active in both organically grown market share and acquisition based market share that they have brought into their enterprises. All three have bought USPS workshare providers as well as parcel carriers in other countries. Both FedEx and UPS have bought major trucking firms, international customs clearance firms and pack and ship retail chains. While there are many more acquisitions than those that follow, this listing will give you an idea as to the recent level of M&A activity in the parcel industry:


DHL acquired Airborne, Air Express International, Danzas, Blue Dart (India) and Exel (U.K.)


FedEx bought Caliber (including RPS & Viking), American Freightways, Parcel Direct, Tower Group, Flying Tigers Lines, Kinkos, Watkins Motor Lines and at least 28 logistics companies in Europe


UPS merged in Overnite, Mail Boxes, Etc., Menlo Forwarding, Fritz Co., Challenge Air and several companies to bulk up UPS Innovations


Who else might one of the major parcel carriers consider?


An obvious candidate is a partner they already utilize. For instance, DHL has a ten year $3b+ agreement with Atlas Air, UPS is the biggest customer of U.S. railroads and all three have hundreds of agents in non-US countries. Every country has a postal service (DHL is in fact owned by Deutsche Post, the German Postal Service) and Pitney Bowes and Neopost serve almost all shippers using postal services.  Additionally there are fifteen medium sized regional carriers in North America---some with significant market share and very strong customer followings: Velocity (who bought CD&L last year), Dynamex (a large metro-market network) and Greyhound (services all three countries in North America). There are at least 500 parcel carriers in the USA from small to major.


The major parcel carriers will continue to search for future acquisition opportunities in order to sustain their growth. Theyll primarily look for transportation services to fill perceived gaps in their current systems, and/or services which they currently dont offer, but in which their customers may have an interest.


What if you want to compete with the majors?


To gain an insiders perspective of the M&A market, I interviewed Ronald Lasko, a recognized specialist in the industry. Ron is President of AMERGE (www.amergecorp.com), a Cleveland, OH Merger and Acquisition Consultancy.


1. What is the difference between a merger and an acquisition?


An acquisition indicates a change in control of the acquired entity, while a merger is generally considered a marriage of equals, to a varying degree.


2. What are the key elements used by buyers to evaluate a potential acquisition?


Strategic buyers, that is, those buyers currently in the carrier business, would ask these questions right up front, without trying to be too intrusive. A. What are the gross revenues of the business? B. What is the geographic range of business operations? C. Is the business operating in the black? D. How does the owner(s) evaluate the management team? E. What is motivating a sale? G. Is management willing to stay on through some transition period? H. Are the owners willing to stay involved at some level of ownership? I. Who are the competitors in the marketplace? J. Any buyer will be very concerned about customer concentrations, but theyll save that question for later. Answers to these questions will provide a good general picture of the potential seller.


3. How should a seller prepare their company in advance of selling their firm?


Be prepared to answer those initial questions posed above and: A. How do we compare financially with the rest of the industry? B. Do I have an accountant that presents my company fairly and in the best light? C. Will a buyer be interested in my key management people? D. Am I too dependent on a few customers? E. Do I need to diversify further before showing my company for sale? F. What is driving my thoughts of selling? G. Who are in the class of potential buyers? H. What will they be looking for: my location; my customer base; my people; my operational efficiencies? I. What kind of growth opportunities can I demonstrate for my business? J. If I had $3,000,000 or even $300,000 at my disposal to fund growth, how would I make the investment?


4. In the current environment of considerable M&A activity taking place, how long does it generally take to close a sale?


The process has several layers to it: A. Analyze the market for potential buyers. B. Prepare and present the company for sale (very discreetly-no names please) C. Identify the most interested buyers. D.  Enter into the negotiation of price and other essential terms. E. Paper the deal. F. Complete due diligence. G. To close the transaction will take anywhere from three to twelve months, but probably somewhere in the middle.


5. What is the difference between the sale of a manufacturing company and a service company?


There will be a more careful analysis of the customer base for a service company. Top line growth is important. Service business are not very leveragable, meaning using debt sources to acquire the business will be more difficult.


6. Do any particular laws come into consideration for transportation company mergers and acquisitions?


It varies from state to state, but nothing particularly troublesome stands in the way.


7. Weve been reading about multi-billion dollar deals. What are your thoughts on smaller deals?


Amerge Corporation works exclusively in the middle market, so we are very familiar with smaller deals. There are a number of strategic and financial buyers looking for smaller deals. It is our job to find the right fit, to maximize sales price, and if there is some partnering after the closing, some kind of carried interest. The personalities need to be a good fit.


8. What size deals are you seeing having the most activity?


The entire scope of the merger & acquisition market is seeing a lot of activity.


9. What are some of the best steps a seller and a buyer can take now to begin to pave the way towards a merger?


We want to know the market, and our client, before we ever write a letter or speak on the phone with any prospective buyer. We need to begin with a little careful introspection. What are the most interesting and saleable aspects of my business? What is the universe of potential buyers for my particular business? How do I best display my business to the market (always discreetly)? The buyers will appear if the seller does his or her homework. Somewhat like a build it and they will come concept. The market will even price it for you.



In closing, you really have to admit, that if our capitalistic free economy has its flaws, they pretty much pale in comparison to the opportunities. As we say in New Orleans, Let the Good Times Roll.


About The Author

Rob Shirley is CEO of ExpresShip (www.xpship.com), a company which markets OnTime, a profit and service focused logistics technology platform for carriers and shippers worldwide. Rob has held senior management positions with several logistics companies during the past 25 years and continues to work with shippers and carriers worldwide. He is a frequent author and speaker on transportation and technology. Contact: Rob@XPship.com.