Cheaper by the dozen
Third-party logistics provider XPO paves a path forward through acquisitions.
XPO Logistics, a third-party logistics company that has seemingly made a business of acquisitions over the last two years, started 2014 by buying the third-largest intermodal player in the market, Pacer International.
This step into the intermodal arena is somewhat new for XPO, which has concentrated mostly on trucking brokerages during its two-year buying spree. In 2012, the company purchased BirdDog Logistics, Kelron Logistics, Continental Freight Services and Turbo Logistics; last year, it acquired six companies, which included NLM, 3PD and Covered Logistics.
Pacer is by far the largest company XPO has acquired so far, and the company had been in the sights of XPO Chief Executive Officer Brad Jacobs for a couple of years. Jacobs said Pacer’s management had kept rebuffing his offers, and then a few months ago, everything changed.
XPO wanted to get into the intermodal market for a while, he said, and with Pacer — the third-largest domestic provider and the largest provider of cross-border services into Mexico — his company has now done that in a big way.
In fact, Jacobs said that buying Pacer may have pushed some other intermodal companies off his list of potential acquisition targets. When he came on at XPO in June 2011 after working to consolidate the waste management and car rental industries, he enumerated a list of 100 acquisition targets and a goal: XPO would generate $5 billion in revenue by 2017.
After a little more than two years, Jacobs is already 11 companies into that list, and noted he’s having continuing conversations with many others. He said the company will likely average three to four acquisitions annually. At that pace, it means only a shadow of all the companies on the list would be XPO properties by 2017, but Jacobs views the $5-billion-revenue threshold as more of a mile marker than a period at the end of XPO’s biography.
“We’re going to continue to build up the company to be a full-service provider, a one-stop shop for customers,” he said. “If a customer wants to move from point A to point B, they only have to call us.”
The majority of the acquisitions list, he said, includes truck brokerages, but “a good number of them” are last-mile providers. He has also included expedited companies on the list.
Pacer was an important piece of the XPO puzzle because a strong intermodal company is needed to fulfill Jacob’s one-stop-shop goals for XPO. He said intermodal is one of the fastest growing transportation segments, “and we’re a growth company, so we’re attracted to growth.”
One of the main aspects that stuck out about XPO’s acquisition of Pacer, aside from its size, is the intermodal company’s ownership model. In the past, XPO has primarily dealt with private companies, and Pacer is a public company with more layers than Jacobs had previously dealt with.
“That’s a bit of a different negotiation because you’re negotiating with a board of directors, and they have a full set of advisors,” he explained. “That makes it a little bit longer and cumbersome and energy-consuming process, because you’re dealing with a larger number of people on the other side of the table.”
According to Scott Malat, the company’s chief strategy officer, acquisitions are centered on a “value proposition.” XPO officials don’t just think about the financial side of the transaction, he said, but they try to focus on companies that will help XPO grow its services. Malat said when XPO officials first consider an acquisition, they look at the future growth potential for the targeted company, the strength of its employees, and the overall fit for XPO.
Malat added that while acquisitions garner the headlines, the company is also focused on organic growth by opening new locations, and strives to get a leg up through the optimization of its operations. In the third quarter of 2013, XPO’s organic growth rose 42 percent (brokerage shot up organically by 146 percent), he said.
The push for more acquisitions will continue in 2014, but will be “relatively steady and balanced,” Malat said. He noted recent manufacturing data has provided a welcome boost to the economy and this should help overall industry growth this year.
“We’re taking advantage of the modest improvements in the [economic] environment, and we’re increasing our gross margin,” Malat said. “We’re pricing better, and we’re purchasing transportation better, using the algorithms in our software. We’re currently processing over 18,500 loads a day, and that price data and lane histories are flowing through our systems.”
He said the company this year will focus on last-mile logistics, which is one of the fastest growing areas of business. XPO’s purchase of 3PD pushed it to the top of this industry segment, and Malat said 3PD expects a steady stream of business in the appliance, electronics and building materials industries.
XPO also wants to focus on less-than-truckload growth, Malat said, because “we’re just scratching the surface of this opportunity.” XPO currently sees $25 million in revenue from LTL, which is a $50 billion market.
Echoing Jacobs, Malat said most of the company’s acquisitions this year will focus on freight brokerage, but that managed transportation, intermodal, expedite, last-mile and less-than-truckload are all important segments of growth.
“Our acquisition team is constantly in dialogue with these targets. Many of the companies we're talking to are eager to join XPO,” Malat said. “They like our energy — they know we're going places. For our part, we're being very disciplined about seeking out strategically sound acquisitions that align with our core competency of non-asset logistics.”
In the future, Malat said he think shippers will increasingly move toward dealing with one provider that can handle every aspect of transportation.
“The market is evolving, and larger shippers are looking for ways to become more efficient and minimize supply chain disruptions,” he said. “They want to consolidate their relationships with fewer, larger supply chain partners, and they want these partners to be growth-oriented. Most large customers understand that a supplier’s acquisitions ultimately benefit the customers because acquisitions expand capacity and talent and breed innovation, especially in technology.”
About 15 percent of truckers currently work with a brokerage, he said, and for XPO to capture more of that market, and convince more truckers to outsource their work, technology is going to be key.
To grab more market share, Malat stressed that XPO must be focused on results like on-time pickup and delivery; alerting customers of potential problems right away so they can get resolved quickly; and the elimination of service failures.
“These things don’t happen by themselves,” Malat said. “It takes a big pool of available capacity, cutting edge technology and intensely-trained logistics professionals.”
Jacobs sees himself at the helm of industry-wide change. In the last few months, he said, truck brokerage acquisitions have become a bit more favorable for the buyer because investors are no longer clamoring for these businesses, as they were four years ago. Specifically, he said, companies that he had been pursuing for a while have started to become more amenable to being acquired because of the lack of interest from Wall Street.
“That’s probably going to stay the same for this year,” he said. “Having said that, I don’t predict a big compression in the multiples paid for acquisitions, I just feel like there will be more sellers willing to sell.”
This ramp up in acquisitions will lead to what Jacobs helped push though in the waste management and rental industries: further consolidation. He said the 3PL industry has already started in this direction. Eventually, he predicted, two or three companies will be seeing “tens of billions of dollars apiece and really grabbing a significant amount of market share with the shipper universe.”
The industry is currently spread too thin for this consolidation to happen quickly. In the United States, there are about 250,000 truck brokers, 10,000 licensed 3PLs, and numerous other related businesses.
“There’s a lot of fragmentation here on every side — the customers, the competitors, and the vendors,” Jacobs said. “That’s going to take a while to consolidate.”