After years of pursuing cost reduction and performance improvements, freight and logistics (F&L) companies are once again seeking growth. Mergers and acquisitions (M&A) will play a critical role, and as a leading logistics hub positioned at the nexus of major shipping lanes in fast growing Asia, Singapore is poised to benefit from these changes.
Accenture’s research indicates that M&A in the past decade was driven by regional consolidation of global carriers, forwarders and third party logistics companies, with an aim to increase market penetration. As global economy recovery gains traction, M&A activity, which closely tracks the overall economic growth cycle, is set to rise. We have identified four key trends that are likely to unfold over the next few years.
1) Consolidation will continue due to the highly fragmented nature of the F&L market. Due to the current overcapacity on developed trade lanes resulting in poor returns, consolidation among asset owners in ocean freight is expected to accelerate.
2) F&L’s players’ aspirations to attain a strong position in rapidly growing markets will fuel M&A activity in emerging countries. Rising domestic consumer demand and continued offshoring of manufacturing to emerging economies will create a high cargo demand for at least the next decade. We expect high M&A activity among freight forwarders and contract logistics providers from developed markets targeting big Asian consumer markets to boost their share of these increasingly important trade lanes and to capitalise on the growth prospects in these underpenetrated markets.
3) China’s quest to be an influential F&L player is expected to increase competition for Chinese targets especially those with favourable inland accessibility. Since 2008, only a small percentage of deals done in China have been cross-border transactions. As domestic policies, infrastructural improvements and manufacturers shift the location of manufacturing bases inland, the need for domestic transportation networks will grow.
The Chinese government has been actively supporting consolidation, with its investment in logistics infrastructure and state-owned companies involved in significant M&A activity. Domestic F&L firms will grow larger and become more assertive dealmakers. Hence, foreign firms will have to move fast if they want to buy their way into the Chinese market.
4) Specialist providers will become increasingly attractive targets for freight forwarders and contract logistics firms pursuing growth in verticals or complementary growth in value adding services. Recent years have seen increasing competition and commoditisation of the already low-margin forwarding business with players like DHL, FedEx, UPS and SCNF entering the freight forwarding and contract logistics market.
Capability acquisitions are becoming a critical component to increase industry specificity of services, driving innovation in F&L business models. Accenture believes freight forwarders and contract logistics companies will target specialist providers, in a bid to provide end-to-end supply chain solutions. Ocean carriers appear to be diversifying into the oil and gas drilling business or acquiring engineering services companies to offer additional solutions to oil and gas clients. Other verticals such as automotive, high-tech and retail may offer similarly attractive opportunities.
With such anticipated industry dynamics, a robust M&A strategy will help F&L companies target deals that strongly contribute to the pursuit of corporate growth objectives.
A value-driven rather than financial approach for identifying and screening acquisition targets or merger partners yields the best results. Screening criteria needs to be linked to M&A strategy to assess whether the deal will fill strategic gaps, and to quantify anticipated value. A focused yet thorough due diligence will help companies understand what they are buying and create the right strategies to harness the desired value. The ability to effectively integrate acquisitions into the enterprise will then decide if the M&A is a success.
M&A does not create value per se. Value is generated from how well though-out deals are and how well they are executed and integrated. Those who are able to realise the expected synergies will deliver value to their investors while those who fail to execute and integrate will end up with significant costs and headcount redundancies, with the consequent destruction of shareholder value.
By Won-Joon Lee
Managing Director-Automotive, Industrial Equipment, Infrastructure and Transportation (AIIT), Asia-Pacific
Accenture Pte Ltd