because if it ’ s a small amount of revenue , there ’ s too much more risk to get involved . Private equity groups have a responsibility to deliver competitive returns to their funds . They must have a certain size target company for the risks and rewards to make sense . From a supply and demand standpoint , a relatively small number of qualified targets can fit that criterion . So that trend is advantageous to sellers considering the broader challenges in the current M & A market .”
The Deals That Are Getting Done
Over the past five years , over 85 % of deals Tenney Group has completed have involved strategic buyers or private equity-backed strategic buyers . While many private equity groups and strategic buyers have had a “ wait and see ” posture over the last 24 months , Tenney expects that to change and is already seeing some evidence of that . “ These companies must put their money to work . That ’ s the whole reason for existing . They must invest in some form or fashion ,” he says .
Among smaller companies , Tenney is seeing renewed interest in mergers and acquisitions . “ Companies are saying , ‘ We need to work together to become more competitive to adopt the right technology , to increase our value proposition to the customer , to acquire and retain the right talent ,’” points out Tenney . “ So that whether it ’ s a true merger or an acquisition between two smaller competitors , I think you ’ ll see a lot of that .”
Larger companies are also looking to acquire companies to address holes within their supply chains . “ These companies want to have their own end-to-end supply chains , but they have no interest in figuring it out on their own . They want the best experts in the market that they can grab , so they are acquiring companies already in that space ,” he says . “ All kinds of companies are looking for any type of advantage synergistically via acquisition . They are looking for help to make this process more efficient to meet escalating consumer demand .”
Some Rough Waters Ahead
Tenney forecasts that things could be challenging for some players in our sector . “ For small operators , I ’ m expecting a challenging market over the next six to eighteen months ,” he cautions . “ Unfortunately , I ’ m expecting to see a culling . This has to do with a very soft freight market , rising interest rates , and rising expenses , particularly labor expenses . Consequently , many companies will not survive this cycle . This culling will elevate more established , sustainable companies and help them capture more market share .”
Tenney sees environmental , social , and governance ( ESG ) goals from customers and investors influencing future acquisitions and the overall competitive landscape . “ The intent around ESG goals is good , but it is very challenging for small logistics companies to satisfy varying definitions of ‘ good corporate citizen ’ to provide a quality service and still make the economics work . It ’ s not an overnight process . Consequently , in the near term , we will see companies that don ’ t have an appetite to evolve to meet corporate ESG demands exiting the space through a business sale . Rapid consolidation of good businesses in this space will play a major role in helping logistics companies position themselves to address this challenge effectively and to be a more viable company in the future .” Tenney shared that ESG is already playing a significant role in the due diligence of acquisitions in this space . “ Especially for large acquirers and private equity groups , they can ’ t afford to have any public relations crises resulting from an ESG issue that surfaces post-transaction ,” he points out . “ We are seeing much more emphasis being placed on examining ESG policies and performance earlier in the transaction due diligence process . Severe offenses directly affect whether a deal can be done .”
Tenney also believes that ESG goals are creating unhelpful conflict with some of the initiative ’ s greatest advocates . “ I have friends and clients in this space that are fierce defenders of the environment . Still , you can ’ t protect the environment without profits or satisfy investors ,” he points out . Eventually , business owners , customers , and investors will find the right balance of innovation , profits , and corporate
14 customized logistics & delivery Magazine I summer 2023