Economies of scale are virtually impossible in trucking at $250 million and above. Instead, it’s about synergies of size—balancing flows, dealing with problems, running in more lanes. New technology allows companies to run much larger operations with the same span of control. Yet only well-run companies can efficiently operate at large scales. And as always, market conditions matter.

Here’s what we predict—and what we’re already seeing—for 2018:

• A surge of M&A activity. There’s plenty of capital out there, but who gets it depends on a number of factors. Buyers want to ensure they can improve upon their investments. Their eyes are on their next 12-month multiple. Many buyers still remember the terrible market of 2016, and are going to be more cautious about what they buy.
• A slow market for big acquisitions, and a mixed market for smaller firms. Investors who started out giddy over the “Trump economy” may have undermined the market. They’ve pushed stocks so high that big acquisitions may now be too pricey. Valuations are high, and economies of scale are low. This means that buyers may now begin to balk at premium prices for smaller carriers.
• Higher market premiums. When things look better, buyers have to pay more. Equities have increased by double digit percentages. So while there may be more bidders and higher cash flow, those bidders must be willing to pay more.
• A change in the market’s appetite for debt. Historically, there wasn’t much debt in this industry. As carriers grow through mergers, there may be greater willingness to take on more debt. We don’t yet know how the market will react to this.
• A strong labor market. This corresponds to greater difficulty retaining drivers. Carriers may have to pay more, and offer more benefits. This translates into a greater appetite for carriers with highly qualified drivers. A trucking firm with a low turnover rate and a committed team suddenly becomes much more appealing to an acquirer.

2016 saw a slow down in production of new Class 8 trucks, with similarly weak production in 2017. But by the end of 2017, production picked up, with several months of 30% year-over-year growth of new truck deliveries. While carriers may be cautious about expanding their capacity, preliminary figures suggest high confidence in 2018. This is rooted in highly favorable market conditions.

The trucking industry has already gone through two boom-and-bust cycles since 2009’s Great Recession. 2010 saw tepid growth, followed by rapid growth in 2011 and a plateau in 2012. The second cycle began with a small contraction in 2013, followed by rapid growth in 2014-2015, and a significant contraction in 2016. This suggests we can reasonably expect one more year of growth in 2018, followed by a contraction. It’s important to plan M&A transactions with this timetable in mind.

About The Hatteras Group

The Hatteras Group is a collaborative team of professional intermediaries and advisors, leading business owners and entrepreneurs as they navigate the complex and often emotional process of selling or buying a business in the Transportation & Logistics industry. We represent owners looking to sell their businesses, lead proprietary acquisition searches, source equity and debt and provide business valuation services, generally working with companies whose annual revenues are $5MM to $100MM.

Transportation & Logistics Practice Group

Contact Bill McBane or Rod Randolph in our Trucking & Logistics Practice Group to schedule a 30 minute call to learn how we can help you explore the M&A market or sell your business.

The post Transportation & Logistics – 2018 Trucking M&A Outlook appeared first on Hatteras Group.

ELD-Induced Chaos
Electronic logging devices seem to have caused thousands of trucks to vanish on December 18. DAT solutions reported growing load to truck ratios that rose to 10:1 in January. Truckers were left dealing with angry customers, with drivers demanding higher pay or promising to leave. ELD has been the source of utter mayhem. Companies that previously hoped to grow through acquisitions are waiting for the market to balance out.

More Chaos: Trump
Donald Trump was long treated as a long shot candidate, so when he won the presidency, everyone was shocked. His ongoing threats to kill NAFTA have sent many buyers and sellers scrambling. This protectionist bent could alter the entire shipping industry. In the wake of this fury, many offers were removed from the table.

Things remain in flux, and it’s unclear what Trump will do next. In Canada, high tariffs could affect other industries, making international mergers more risky. Carriers are waiting to see what comes next as NAFTA negotiations break down and Trump continues to make threats.

The Real Estate Market
Real estate is a major player in trucking M&A. Carriers that own property have wealth tied up in land, not just trucking. So selling a fleet may also mean selling land—a double headache, but also a double windfall. On the other side of the coin are carriers who lease properties. Landlords increasingly demand longer leases. Consider how this might affect owners in their fifties who hope to soon retire.

As demand for commercial real estate skyrockets, many truckers will make decisions more motivated by real estate than by transportation. Some are making their decisions earlier than expected, amid great pressure.

The Broker Landscape
This time last year, carriers were hastily acquiring freight brokers. The world of ELD has changed all of that. Carriers already have too much freight. Now they’re getting even more customer calls than ever, eliminating the middle person of the broker. Carriers are anxious that the broker model may not be sustainable in this new world. Rather than seek deals, carriers may wait until the dust settles on the new world to see who’s left standing, and decide what to do next.

What Hasn’t Changed
While there’s plenty of uncertainty in the market, three things haven’t changed. Truckers are aging and hoping to cash out. They want to know what their companies are worth—and they have high hopes for that worth. And finally, the most important determinant of value is what someone will pay for a trucking company. The market matters, yes, but the needs of the buyer and seller are the major determining factors.

About The Hatteras Group
The Hatteras Group is a collaborative team of professional intermediaries and advisors, leading business owners and entrepreneurs as they navigate the complex and often emotional process of selling or buying a business. We represent owners to sell their businesses, lead proprietary acquisition searches, source equity and debt and provide business valuation services, generally working with companies whose annual revenues are $5MM to $50MM.

The post Key Variables in the Trucking M&A Equation appeared first on Hatteras Group.