Step-by-Step Guide to pursuing Growth Acquisition Strategies in The Logistics Industry

By Jan H. Raymond

There are certain stages to pursuing acquisitions regardless of the industry involved, but each specific industry also has issues specific to that industry that must be considered while pursuing those stages. This article is intended to be a general overview of those stages and issues as they relate to the international logistics industry.

The First Stage is the Definition of the Growth Strategy and How the Acquisition Program Fits into that Strategy.

There are many reasons to undertake an acquisition. It would be almost impossible to prepare a complete list of such reasons, but the most common ones are: adding a new product to the existing product mix, entering a new geographic region, increasing market share in a given product or geographic region, acquiring a presence within a new client sector, acquiring specific intellectual property, acquiring a specific group of personnel (usually management level) and pre-empting a competitor from acquiring the target company.

For logistics companies, some of the industry-specific issues to be considered when defining a growth strategy include: Whether the acquiror is a non-asset based company and whether its growth strategy, and therefore its pool of prospective targets, includes expansion into asset based operations; what licenses are currently held by the acquiror, which ones would need to be obtained to operate the business expansion contemplated in the growth strategy and the difficulty of obtaining such licenses; foreign ownership restrictions in certain foreign jurisdictions; Legal restrictions on U.S. based companies doing business in certain foreign jurisdictions; business ethics practices in certain foreign jurisdictions; availability on the open market of logistics industry-specific software and the cost of developing it internally; market share critical mass necessary to leverage buy rates and assure guaranteed space during high seasons; and employment availability of experienced logistics management within a foreign jurisdiction.

The Second Stage is the Selection of an Acquisition Target. This has Three Sub-stages:

1. The identification of companies that fit the strategy determined in the first stage.
2. The prioritization of the individual companies within that identified target group from the most desirable to the least desirable. This is the most complicated substage as it requires the potential acquiror to make valuation, cost-benefit and future growth analyses with limited information as this substage occurs before contacting target companies and procuring from them data that is not otherwise public information or readily known or available within the industry. As a consequence, this substage is fraught with subjective evaluation based on reputation and partial facts. As this stage necessarily includes a tentative valuation analysis in order to make a preliminary cost-benefit analysis, the incompleteness of the information from which the analysis is performed has an exponential danger. Most of these dangers can and will be minimized by the eventual due diligence but the true danger is that it could result in the overlooking of good acquisition targets at this substage such that if the eventually chosen target does not hold up in due diligence, the acquiror may move on to another target already selected in this substage and never revisit this substage to “rediscover” the missed target company.
3. The initial contacts necessary to determine whether the companies targeted are contacted to open acquisition discussions. This is crucial where the target company is a private company as they cannot be compelled to sell whereas a public company’s management can refuse such discussions but cannot prevent a hostile takeover attempt. There is no equivalent of a hostile takeover for a privately-held company.

For logistics companies, some of the industry-specific issues to be considered when choosing an acquisition target include: whether the target is an asset based company and the integral necessity of those assets to operate the business; potential exit costs for terminating the acquiror’s foreign agent in the country where the target does business; what licenses are currently held by the target and their transferability; the number of owners of the target and their nationality; the availability of nominee ownership where there are foreign ownership restrictions; the business ethics practices of the target; proprietary software owned or in the development process by the target and its scalability; control of high season carrier space by the target; and willingness of key executives to continue employment with the acquiror.

The Third Stage is Due Diligence.

Having selected a target company that is amenable to acquisition discussions, the acquiror will sign a confidentiality and non-disclosure agreement in order to be provided with access to financial, legal and operational information and, to varying degrees, access to management personnel, necessary to validate the previous determinations by the acquiror that the target company does, in fact, fit the acquiror’s strategy, is priced such that the acquiror’s anticipated return on the investment will likely be realized, has no material liabilities that the acquiror would inherit beyond those already factored into the sale price, and various other considerations including the ability to retain key personnel, ability to reap the anticipated synergies and the ability to retain the client base. It is not uncommon for due diligence to unearth facts that, had they been known at the target identification stage, would have resulted either in selection of a different target company or a lower valuation for the current target company. At this point the acquiror faces the difficult task of deciding to terminate the acquisition discussions with the current target company and move on to another target company or renegotiate the terms of the potential acquisition either in the form of a change in the structure of the transaction to address the issues in a manner that will retain the original valuation or by adjusting the sale price down to the revised valuation.

For logistics companies, industry-specific issues during due diligence include: validation that the business operations of the target as currently conducted can be operated by the acquiror in compliance with the acquiror’s legal and ethical requirements without a material impact on the current and anticipated future revenues of the target; identification of individual employee license holders necessary for retention of corporate licenses; identification of which personnel controls the key client relations; tentative negotiations of employment agreements with key personnel of the target; identification of any pending investigations by regulatory bodies and pending fines and penalties by them; confirmation of carrier space guarantees for high seasons; validation of performance parameters of proprietary and licensed software and its scalability; identification of potential foreign agent conflicts and the extent to which revenues are foreign-agent controlled; and profit-share arrangements with agents.

The Fourth Stage is the Closing.

Between the completion of due diligence and the actual close of the transaction, the legal documentation is negotiated between the parties. The process of drafting the acquisition agreement will often bring to the fore issues either not considered or not fully developed to this stage and will also bring to the fore any miscommunications or misunderstandings between the parties. As such, this stage often involves further renegotiations between the parties and is not as simple as just putting on paper what the parties believe they have already agreed upon. While transactions do sometimes fail at this stage, both parties are typically so invested in the process by this point that they are loathe to walk away from the deal and do manage to resolve any open issues. However, sometimes a party’s desire to make the deal and their sense of investment to date is so strong that they delude themselves about the significance of the issues they encounter at this stage and thereby miscalculate the amount of compromise that is reasonable within the business model previously developed in support of the acquisition. These last-minute compromises are often the difference between a transaction proving successful (as defined by meeting the return on investment assumptions in support of the transaction) or not.

For logistics companies, issues to be addressed during closing include: negotiation of non-compete agreements from the owners and key executives of the target; responsibility for transfer taxes; whether to structure the transaction as an asset sale or a stock sale (note that a key consideration here is the typical non-transferability of licenses); jurisdiction and venue for dispute resolution clauses; legal requirements in certain countries that the sale agreement must be in the legal language of the country of the seller; development of a methodology for measuring what revenues are credited to the sellers in earn-out clauses; and price reduction provisions for warranty deficiencies, particularly as to revenue goals and contingent liabilities.

The Fifth Stage is the Integration.

Once the acquisition is completed, the real work begins. In order to realize the anticipated results of the acquisition, the acquired business must be successfully integrated into the acquiror’s pre-existing business. This requires retention of clients, retention of key personnel, integration or elimination of intellectual property (particularly software), elimination of redundancies (personnel, real estate, hardware and software), equalization and normalization of employee benefit programs and compensation structures and, arguably the most overlooked element in the making or breaking of an acquisition, the melding of the corporate cultures.

For logistics companies integration is a particularly difficult step to take. As acquisitions in this industry are typically between buyers and sellers from different nationalities, there are a panoply of divergent legal and regulatory frameworks that must be integrated. It is often impossible to create a consistent structure particularly in the area of employee benefits and compensation systems. The goal must be to create a structure that is consistent within a given country and that is as close to parity inter-country as possible taking into consideration the economic structural differences of the countries and their workplace regulations. In the information systems area, the acquiror must either extend its own systems to the newly acquired business (and modify it as necessary to be compliant in that foreign jurisdiction) or must adopt the target’s systems and adapt them to meet the acquiror’s business. It is not uncommon for an acquiror to just operate separate systems in each country, but that has proven to create software maintenance and interconnectivity problems beyond any justification for the maintenance of multiple systems. As the industry is an international one, both the acquiror and the target will have had a network of foreign agents where they were not previously operating company-owned businesses. Successfully eliminating the redundant agents is complicated by some foreign jurisdictions having “agent for life” statutes which preclude terminating an agent other than for documented legal cause and by the fact that the foreign agent has the ability to hold cargo hostage to coerce a settlement from the company that is terminating its services. (This is one of the reasons that companies often choose their agent as their acquisition target) Lastly, but probably most importantly, is the melding of the style in which the two organizations do business. The international logistics industry is anything but homogeneous in its business practices and styles. They range from centralized to decentralized, incentive based to fixed compensation based, “entrepreneurial” to “process based”, etc. In general, it is not likely that an acquiror with one distinct style of doing business (its business culture) will quickly or effectively change the business culture of the target. Attempts to compel such change will generally result in intracompany disputes and migration of key personnel and, with them, key clients.

In Summary…

In summary, successfully completing an acquisition involves much more than simply buying a business. In order to do so, an acquiror must patiently and diligently follow a step by step route to the finish and must objectively and accurately identify a broad range of issues to assure that its growth strategy will be advanced by the acquisition. In the international logistics industry, due to its multinational nature and broad regulation by governments, those range of issues are more numerous and complex requiring the acquiror to be even more detailed and diligent in its pursuit of a successful acquisition. We founded Logisyn Advisors to help you navigate this tricky terrain, and maximise your return on investment when engaging in m&a.

To learn more about how Logisyn Advisors can help you successfully engage in a growth strategy visit our website logisyn.com.