M&A Trucking and Logistics Activity to Stay Strong in 2023

“A lot of [merger and acquisition] deals got done in 2022, but it was day and night going from the first to the second half of the year,” said Spencer Tenney, CEO of the Tenney Group, during a Jan. 26 Truckload Carriers Association webinar on M&A trends in trucking and logistics. Franklin, Tennessee-based Tenney Group is an M&A firm serving the transportation and logistics industry.

Tenney explained that in the first half, M&A activity galloped along thanks to a “Wild, Wild West” environment fueled by such key positives as:

• “’Free debt’ in terms of extremely low interest rates.”
• The general drive to expand supply chain capabilities
• “Once-in-a-lifetime increases in used equipment values.”

Together, that “created all kinds of opportunities for both buyers and sellers to get deals done,” he said.

But the tide turned in the second half. For starters, driver pay spiked upward and insurance costs rose 7.4% over 2021. And equipment values fell sharply. By December, Tenney saw 21% reduced value compared to the year-earlier period.

What’s more was the beatdown taken from the Fed’s seven interest rate hikes by year’s end.

Those hikes certainly got the attention of the debt and capital markets, especially in Q4. Many deals we were working on went on pause.” Tenney explained that, “When you increase the cost of capital that much in one period [Q4 2022], it affects the way people assess risks and how they engage in the M&A market.”

Urge to Merge

Yet the urge to merge remained strong. “What’s fascinating is that still a lot of deals got done, even considering 40-year record high inflation as well,” Tenney said.

In discussing some of the firm’s notable deals in 2022, Davis Looney, Tenney Group’s director of Business Development, pointed out a trend toward foreign investment. For example, Austria-based Berger Logistik acquired Super-T Transport, and Germany-based DB Schenker acquired USA Truck. “These were foreign investors making their first transportation investments in North America,” Looney said.

During the webinar, Tenney and Looney referenced the firm’s recently released annual M&A report on the transportation and logistics space. The report is geared toward those interested in buying or selling companies in the annual revenue range of $20 million to $300 million.

In their remarks and spelled out in more detail in the report, the two executives discussed Tenney Group’s predictions of the state of play in M&A in 2023:

Valuations normalize and structures evolve

In 2023, Tenney Group believes we will likely see a normalizing in valuations. This will be especially true for asset-light businesses. According to Price Waterhouse Cooper, asset-light businesses have experienced seven straight years of increased values.

“Still, the fundamental factors that have been driving high M&A activity are still alive and well. We expect valuations to stay competitive and for deal structures to address new and evolving risks in the market… to maximize outcomes, buyers and sellers will have to consider these factors to maximize desired outcomes.”

Strategic shift in acquisition target profiles

“Freight volatility influences the way buyers evaluate transaction risks. We are noticing several experienced industry acquirers modifying their target acquisition profiles for 2023… We expect experienced acquirers to use these next 12 months to diversify their revenue types and to enhance their capabilities through proven winners.”

Tenney also expects to see regional players “reduce the floor size of their typical acquisition profile. “‘Tuck-in acquisitions’ [when a large entity completely absorbs a smaller one] will be pursued to offset growth limitations linked to driver recruitment/retention and to offset the relentless rise of expenses.

“Due to a dramatic increase in first-time acquirers combined with the rising cost of capital, companies available to purchase [operating] with 100 or less trucks will attract much more attention than they have in previous years.”

Higher deal activity but smaller transactions in Q3 ’22

“Tenney Group accepted more new buyer registration profiles in the third quarter of last year than in any other quarter in company history. “This was during a 40-year inflation peak and after multiple interest rate hikes,” they said. “We contend that the reason for this was that many acquirers that wanted and needed to buy in 2021/2022 believed that market value was overinflated. Consequently, many qualified buyers stayed on the sidelines.”

But that is changing quickly. And many potential sellers delayed exiting because of record profits. There were also sellers who attempted to exit but overplayed their non-reoccurring financial performance.

“Now that performance is normalizing to some degree, we believe the environment will be ideal for buyers and sellers to have a meeting of the minds on value and structure.” Also, aging baby boomer owners with no successor and averse to taking on more risk present a “considerable supply” of companies to purchase… “All other factors point to a very active year of M&A. Challenge headlines that say otherwise.”