Transportation and logistics M&A summary
In the 12 months ended November 15, 2022 (LTM Nov-22), both deal value ($195 billion) and deal volume (264) in transportation and logistics (T&L) declined when compared to full year 2021 (FY21) by 16% (value) and 24% (volume), respectively.
An acceleration in e-commerce and pressure on global supply chains had driven up demand for T&L services and freight prices during the pandemic years, and M&A followed. Sellers were lured by growing valuation multiples, and buyers were attracted to the sector because of the significant changes occurring, the magnitude of which could reinvent the sector. However, in the latter half of 2022, the easing of freight prices, the stabilization of supply chains, increased capital costs and economic uncertainty have cooled the red-hot deal activity of the past 24 months.
Transportation and logistics outlook
As noted above, certain factors have conspired to temper M&A activity in the sector — particularly during the second half of 2022. Total deal value declined 69% in the second half of FY22 compared to the first half, with Q3 deal value ($29 billion) falling to the lowest levels since Q2 FY20. This decline has continued into Q4, which is trending lower than the previous quarter. Deal volume also began to drop in Q3 of this year, and Q4 is moving in the same direction. Despite this recent softening, we believe the overall environment will continue to support robust dealmaking into 2023 and beyond.
Global players whose results were boosted during the pandemic are using this time as an opportunity to vertically integrate and expand onshore capabilities in foreign locations.
Participants who suffered in the battle for capacity over the past two years are taking steps to reduce their exposure. Technology innovations in the sector continue to drive deals and support integration synergy opportunities. Labor shortages and the inexorable advance of e-commerce are encouraging companies to explore inorganic growth agendas despite the overall economic headwinds. Financial investors would seem to be taking advantage of these dynamics in the sector. They increased their deal value activity from $110 billion in FY21 to $124 billion in LTM Nov-22, despite the decline in the overall market.
Evaluating divestiture opportunities
The pandemic disrupted the T&L sector more than most. The past two years have brought considerable new capital to the sector, along with technologies, new players and an updated, somewhat defensive view of capacity and supply chain. Participants are currently projecting and anticipating the post-COVID logistics environment. They’re deciding where to compete and where to drop back, and they’re mapping out divestiture plans accordingly. Smaller players are evaluating the cost to compete in that future state — whether that comes in the form of technology, labor or capital — and are weighing that against today’s valuations and divestiture opportunities. These drivers will sustain the flow of assets to market as the sector recalibrates after a couple of years of unprecedented valuations and corresponding deal activity.
Sub-sector outlook: Logistics
Growth in overall demand, supply chain instability and increasing freight rates generated a wave of new solutions providers in the logistics space, and that brought a wave of M&A activity at valuations that anticipated generational changes in the way the sector operated. While sellers remain attached to these valuations, buyers are digesting the recent softening of freight rates, combined with increasing interest rates and a range of cautionary economic forecasts. Unsurprisingly, deal volume was down 46% in the LTM compared to FY21, and deal value is down 49% over the same period. Once the market recalibrates, we expect technology innovation and the increased importance of supply chain in the overall customer experience to continue to sustain deal activity in this space.
Sub-sector outlook: Shipping
Generally a subsector with relatively light deal activity, shipping has seen an uptick in recent years — most notably a growth in deal value of 46% in the LTM over FY21. Some of the large global players enjoyed unusual profits during the pandemic and have been using those earnings to expand their reach — either from a geographic, industry sector or customer service offering perspective, and they’re doing so through M&A. Similar to logistics, shipping activity in the second half of FY22 has slowed as participants grapple with projections of lower global container demand for FY23. However, they do expect a trickle-down impact of infrastructure spending as it relates to US ports and related services.
Sub-sector outlook: Trucking
The trucking sector saw a decrease of 15% in both deal volume and value in the LTM period. Deal value in Q3 FY22 ($922 million) reached its lowest level since Q2 FY20 ($864 million). Nevertheless, the underlying factors driving consolidation in the sector remain strong. Capital demands continue to grow, and driver shortages and labor costs continue to put pressure on the operating model. At the same time, the battle for capacity continues, and the rewards are there for those who can afford to invest in and leverage technologies. An overall tougher economic environment will make it harder for the smaller, less capitalized participants to survive and withstand acquisition approaches.
“Deals activity in T&L softening in FY22 as participants recalibrated expectations for the impact of COVID-driven changes to the sector and digested the prospect of a more challenging economic environment.”— Darach Chapman, Transportation and Logistics Deals Leader
Key deal drivers: Navigating Uncertainty
The uncertainty caused by the current global macroeconomic environment and geopolitical events has encouraged companies to reassess their supply chain structure and exposures. One of the consequences of these evaluations has been a growing trend of deglobalization and onshoring. This has resulted in an increase in within-border deals — from $132 billion to $146 billion in FY21 and LTM Nov-22 — while cross-border deals declined from $101 billion to $49 billion over the same period.
In addition, many participants still have fresh memories of losing out in the battle for capacity, both lanes and warehousing, during the pandemic-induced growth in demand, and they are evaluating partnerships or acquisitions to mitigate that risk going forward.
Increasing Resilience and Security
Historically, supply-chain automation was viewed as more of a cost-saving initiative with a focus on expected future returns. Since the onset of the pandemic, automation is now more focused on alleviating risk and improving customer service by providing greater information and visibility to the supply chain, thereby enabling quicker and more proactive decision-making. Investors are aware that in today’s competitive environment, the advantage goes to companies that not only have the means to collect data but also have the technology to turn data into insightful information that will allow them to make timely, effective decisions. This increased focus on technology is driving M&A in the T&L sector in several ways. Pure-play technology solutions are trading at a velocity that reflects the sense that there remains a lot of opportunity for disruption in the sector. Meanwhile, sophisticated acquirers see significant synergy opportunities from introducing emerging technology solutions to less sophisticated targets.