A conversation with Benjamin Gordon, managing director of BG Strategic Advisors, a supply chain investment bank headquartered in West Palm Beach, Florida.
BG Strategic Advisors focuses on putting deals together for transportation and logistics companies, including raising capital, mergers and acquisitions, sales or other transactions. The company has performed such work for at least 30 companies over the last eight years, Gordon says. SupplyChainBrain caught up with him in June at eyefortransport's 3PL Summit / CSCO Forum in Atlanta.
Q: The industry has seen quite a bit of M&A activity recently. What's driving that?
A: Gordon: We're seeing an upsurge in M&A activity in a number of areas. First, you see private acquisitions like Genco, which just bought ATC, and TransForce buying Dynamex. Second, you see it in corporate divestitures. So, Supervalu just sold TLC to Ryder. We see rumors of Caterpillar selling Cat Logistics. Third, you see it in IPOs, like Echo Global Logistics and Roadrunner recently going public - and more coming soon.
What's driving all this activity is a combination of three factors: buyers' appetites, sellers' appetites and market change.
So, buyers are more intent than ever in buying and for a number of reasons. Over the last two to three years, buyers have built up a lot of capital. Corporate balance sheets today have $2tr in cash. Private equity firms have half a trillion in cash. Lot of money out there. They're finally starting to feel confident to start spending that money. Buyers are eager to put that money to work.
Sellers are the second factor. After a two-year period where only distressed companies were selling, sellers are now in a position to get full value for their businesses. Performance is back up, unlike in 2008 and 2009, and the multiples of the profit that they can get paid is back up. So, if they want to sell, they can take advantage of those positions.
The third change is in the market structure. Basically, the tax environment is more favorable for sellers really than at any other point in human history. We have a low capital gains environment, which we will have for this year and next year. That's likely to be up significantly in 2013, so sellers want to take advantage of that.
Customers are asking their suppliers to do more and more. That puts pressure on logistics companies to combine. That causes companies like Jacobson to buy Wilpak to combine warehousing and packaging. That puts pressure on other companies to buy and expand services. That customer demand for fewer suppliers and customer demand for a broader combination of suppliers is what's driving this current wave of M&A. And we see this happening this year and next year.
Q: So, can you give us a laundry list of good reasons why a logistics company might want to consider selling or merging?
A: Gordon: One reason would be financial. A logistics company would consider selling if financially they thought they could get an attractive outcome. If the average logistics company two years ago got valued at four times profit and today might get six times profit, there's a significant bump up in what they can get paid. It's not just about the multiple, but how good is their business, how strong is their profit, the sustainability, a whole lot of factors.
Reason number two is strategic. A seller might simply decide their business makes more sense in the context of something bigger. Example: We worked out a deal with RayTrans, which does truck brokerage. It was successful, but thought it would be more successful as part of something bigger. It was sold to Echo Global Logistics before Echo went public. Now, strategically the business is in a position where they can give customers a broader, national solution.
The third reason is for taxes. The low-tax environment won't continue. It's likely to spike up in January 2013, which means timing is very favorable.
The fourth is psychological. Sometimes a seller decides it's time for the next guy to carry the water. A great example of that is when Eric Wilhelm built the Wilpak business. He did a great job, but he knew the next step would be to be part of something global. The decision he made was that it was time for the next guy to do the work to take that business [higher].
Q: It would be instructive if you could walk us through a recent deal you put together. Can you do that?
A: Gordon: One of the most interesting deals in the supply chain sector last year, in my view, would be of our client Converge and Arrow Electronics. Converge specialized in reverse logistics for high-tech companies. They would take companies like Google and the IT departments of CVS and Exxon and say let us solve the problem of what to do with your end-of-life computers. Bring them back, collect the data and resell them.
You would have thought a business like that would be bought by another logistics company. In fact, that's not what happened. The buyer was in the electronics distribution arena - a $19bn company. Why would a distributor buy a reverse logistics company like this? And why pay a very strong double-digit multiple for that business? Number one, a lot of people think value is simply about doing a mathematical calculation. It's not. Different people come to different calculations of value. The real driver was the strategic fit between Converge and Arrow.
Arrow concluded that, ultimately, buying Converge's business would allow them to cross-sell their distribution with Converge's reverse logistics. And if all they could do is sell reverse logistics to a few of their customers, they could pay for the entire deal.
The big lesson in it was all about figuring out the growth strategy of a buyer to enable them to pay a great price to a seller and still be able to make money on the part of the buyer. The second thing from that deal is that it reflected the theme of convergence. Customers are looking for logistics partners to do more and more. This is a great example. Arrow Electronics figures that by owning Converge, it can now go to customers and offer them distribution and reverse logistics and end-of-life services, and integrate all that under one roof. It's much like Wilpak and Jacobson combining warehousing and packaging. It's a win-win for buyers and sellers.
Q: You've referred to Jan. 1, 2013, when new tax increases are expected to kick in. Do you believe we will we see a flurry of M&A deals in the 2011-2012 time frame to avoid that?
A: Gordon: I do, and here's why. If you look at the math, a company that sells while tax rates are low stands to make and keep a lot more value than someone who waits until after the increases. Take a small company doing $5m a year of EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization] profit. That company, in 2013, from a net profit standpoint, after taxes, may keep less than half of the $5m. Why? Well, 35 percent ordinary income tax goes to 39.6, and then when you add on various premiums and surcharges for Medicare, medicaid, Social Security, the so-called Obamacare premiums, plus state and local taxes, 35 percent will be, in some states, over 60 percent. That's a huge delta.
As a consequence, that company making $5m of EBITDA may only be keeping $2m of bottom-line profit after all is said and done. If that same company sells for six times profit, or $30m, it may only have to take capital gains of 15 percent. That, minus whatever their cost basis is, they could be keeping $25.5m. So people who sell in 2011 and 2012 will keep a much higher share than will otherwise be the case.
Some people say, maybe the tax rates won't go up that much. To that I would say, if you look at what's happening with Greece and others going through a crisis because of budget deficits, my view is that it doesn't matter whether Republicans or Democrats are in power, at the end of the day we will eventually see those taxes go up. So 2011-2012 is attractive no matter what your political view is.
