Supply Chain Mergers & Acquisitions 2021 Outlook
Featuring TJ Lynch, SVP Finance and Marketing at NFI
What do you think will be in store for the market in 2021?
The pandemic has had a pretty significant impact on M&A during this time period and there’s a couple of things that happened. Number one, companies that may have been ready to sell probably had to buckle down and try to figure out what 2020 meant to them because an M&A process takes several months to go from start to finish. When the pandemic hit, a lot of companies had a look inside and figure out what they were going to do internally before they even thought about selling, so that created a little bit of a blip. Also, simply getting a deal done was hard because everything was virtual, so a lot of sellers pulled back to try to figure out what was going to happen in 2020. Going forward though, with hope that a vaccine comes out and the U.S. opens up a bit more, we can get back to reality and more of what deals used to look like. I think that kind of demand is going to flow through and we’re going to see a lot of activity because sellers out there are thinking about how hard it is to manage through these types of situations. Depending on where they are in their careers or where they are from a maturity perspective, we may see more sellers in the market over the next couple of months to years.
How do you think the new administration will impact M&A activity in 2021?
I’ve heard that question a lot, and I think people are trying to figure out what’s going to happen with a new administration and what that will mean for the M&A market. There’s so much going on in the United States right now. I think from an M&A perspective, investors and sellers are trying to make decisions by looking at financial issues, infrastructure bills, taxes, and what the Fed is going to do about the cost of money. I don’t know what’s going to happen over the next couple of months, to be honest with you.
What I’m hopeful for is that interest rates will continue to stay low. That would prove well for buyers out there and will help to keep M&A activity up. There could be an infrastructure bill that may get passed which is good for logistics and to keep money flowing into the system. All that being said, I think that at least in the logistics space, there’s enough demand that the change in administration won’t push the market down and we won’t see a decrease in deals being made in the space. There’s a lot of cash out there and people are looking for a place to put it, and logistics is a great option for investors.
Do you think virtual deal-making is going to continue at all as a result of the pandemic?
When it comes to the way deals get done, I don’t know if it’s going to change completely, but I don’t think it’s going to revert back to the way it used to be done. I look at it like how we’ve been working in the virtual environment with our own jobs, it will be a little bit of the best of both worlds. With the adoption of virtual meetings becoming so natural, I think we’re going to see a higher use of virtual meetings. Where I think we used to spend a lot of time building relationships or flying places to have two hour meetings, a lot of that can be done virtually now. But at the end of the day, when it comes down to diligence, trying to figure out cultural feel, and meeting the people involved in an acquisition, I don’t know if that can really be done virtually. From a technology side, in terms of data sharing and online data rooms, M&A was always ahead of that anyway, they’ve been used for a long time.
I’m not sure the pandemic is going to change the actual process other than that we might be more efficient in how we use our time. So there will be an impact on how deals are done, which is a good thing because it will be helpful to save time for both the buyers and the sellers out there.
What was it like completing the acquisition of CAI Logistics in 2020 and what were some lessons learned?
It’s really interesting that NFI was able to make an acquisition in the summer of 2020. We purchased a company called CAI Logistics which we’re very excited about and there were a lot of lessons learned. There were some positives that came about and some things that we had to really think through when we were doing that acquisition. The acquisition started pre-pandemic with initial phone calls and discussions, but we have never actually been to any of the sites and everything has been done virtually.
I think it’s an amazing feat for both the CAI team out there and also NFI. There wasn’t one consolidated place where we all went to do our due diligence and meet people, there were multiple offices with employees spread out across the country. In a positive sense, I think it worked well in that we were able to meet people virtually through Google Meet, develop relationships that way, understand the business, and vice versa. Their team was probably able to meet a lot more of the NFI side than they would have in a more traditional setting. I also think it really goes to show the culture of the company you’re buying. We felt confident that they had a great culture and I think we also offered an exciting platform for them, being a full-fledged 3PL, and an environment where they are able to thrive. Because of that communication I think a lot of the feelings that sometimes accompany an acquisition — feelings of anxiety and people wondering what’s going to happen — were eased and they were able to see NFI as a great home for them and a place that they’re going to be able to grow.
A tough part about the acquisition was that it’s hard to integrate remotely, whether it’s systems, technology, processes, or implementation. I think where historically we might have condensed a lot of that work into a short timeframe, we’re approaching it more patiently and working through things together. I do look forward to the time when we’re able to get into the field and meet all of the people, but the whole process was definitely different. As anyone in M&A will know, every situation is different and there’s no cookie cutter approach, no matter whether it’s virtual or in-person.
What does NFI look for in an ideal acquisition?
NFI’s M&A strategy is pretty simple and has been the strategy for a number of years. Led by our CEO, Sid Brown, it’s his words and his motto as to why we look at M&A opportunities in a twofold approach.
Number one, we look for acquisitions where the target company either has a service offering that we don’t provide or they provide a similar service offering at a larger scope and scale. As many people know, NFI is a full service organization that offers a suite of services, so the idea is that we can take that new service offering and sell it into our existing customer base. A great example would be our Cal Cartage acquisition. We purchased an unbelievable company that had a core presence and expertise that we didn’t have, so we were able to add another service offering to the suite in the port drayage and the transloading aspect, and get great talent along with it.
The second thing is looking at a target company and figuring out what customers they do business with. We look at a company’s industry diversification and customer verticals, asking if they do business with some of these large, well-known brands, and go after those that help fill out our industry vertical pie chart and overall diversification strategy. NFI has always tried to be a diversified company so that we don’t have just one service. If any of the acquired customers do not do business with NFI, we are able to provide them our suite of services whether it’s warehousing, port services, our dedicated transportation fleet, or our non-asset transportation solutions. Similarly on the customer side, we feel that adding more customers and diversifying helps with our stability. If we get some geographic diversity along the way, that’s even better. We’ve been very North American-focused because we think there’s a ton of market share still to be had.
At the end of the day though, even if a company may have one of those things, the most important aspect when we look at an acquisition is cultural fit. To us, that means the mindset of that company is aligned with the mindset of NFI. The intangibles — the fabric of the company, the culture — is sometimes really hard to figure out in diligence. We spend a lot of time uncovering that because a majority of acquisitions that fail, or ones that may have struggled, likely had a cultural misalignment, and we care about retaining the people during our M&A deals.
That’s what our strategy has been in the past and will continue to be our strategy moving forward. I wish I could tell you it’s super sophisticated, but we like to keep it simple at NFI.
What are the benefits of working with NFI?
We do fairly well with companies that are founder- or family-owned, where they may not have a succession plan, but they want to do right by their employees and their customers. I think they look at NFI as a solid buyer because we’re in it for the long haul, we’ve been around for almost 90 years. We don’t sell, we don’t have a five-year timeline where we buy something to go sell it, and we look at things in multi-year terms as opposed to quarterly. For certain buyers, that’s important, and that is reflective of the way NFI does business.
I think that as we integrate, we probably do it a little bit slower than other companies. Our view there is that we need to try to pick the best of both worlds, and we also need to make sure we retain the employee base. Everybody has trucks, real estate, warehouses, a WMS; at the end of the day the people are what makes the acquisition work. Those are the things that a lot of sellers may be looking for in a buyer and I think that’s where NFI succeeds. We’re a family-owned business and pride ourselves on being one of, if not the largest, family-owned 3PL out there. Although we’re big, we treat our people and our customers the way we always have in the past.
NFI has been steadily acquiring companies over the past decade. How have these acquisitions benefited our customers?
Over the past couple of years, NFI has been pretty active in the M&A market. As a strategic buyer, we do a couple a year which we believe is about right for a company of our size. In most cases, the companies that we are acquiring are a little bit smaller than us, and we offer a larger, national platform for their customers. We’re able to go in and provide a service in two or three more locations with the same speed of service.
In other cases with the company that we acquire, we’re able to provide another service offering to their customers. They may already be doing some dedicated fleets for the customer, but we’re able to come in and offer warehousing solutions and create synergies where we can do both out of the same facility. We’re offering opportunities that may have not been available previously.
I do see a large number of shippers consolidating the number of 3PLs that they’re working with, so having a North American platform is helpful for a lot of companies, too. We are able to provide scale for them to grow their business.
With customers on the NFI side, if the company we’re bringing in has a new competency, we’re able to transfer that knowledge or those solutions over to their business. There’s been examples where we’ve been able to take certain service offerings from the acquisition company and sell that into the NFI portfolio. With the G&P acquisition in December of 2019, we were able to do a lot more in the Southeast for our customers. With NFI’s most recent acquisition of CAI Logistics in August 2020, some of the global, intermodal, and brokerage offerings that they provided created a whole new type of service offering for NFI, and we’ve been able to take that to another level. That’s pretty exciting for our customer base.
What enabled NFI to acquire a company amidst the volatility of 2020?
A couple of things come to mind when thinking about how NFI has been able to steadily acquire companies, whether it was in 2020 or previous to 2020.
Number one, we’ve really worked hard to develop an M&A competency within our organization. There’s so many people that I partner with within the organization that know how to get a deal done. We’re a little different in the sense that we do everything ourselves because we are in the business, and we should know the business. Not only that, but it helps with integration to have the people who do the integration be a part of diligence and start developing those relationships. We find that the competency and the talent of our people is huge. I would put our extended team, who have their regular day jobs and are asked to pitch in on the M&A side, up against any team in the industry. That is very helpful.
The second thing that comes to mind goes to our financial stability and having the capital and the wherewithal to be able to complete a deal. For NFI, we look at our acquisitions as large bolt-ons, we don’t have a “bet-the-ranch” mentality, so we don’t ever want to overextend ourselves. We have stability, and really have it for two reasons: we’re aligned with unbelievable customers and we never want to become overleveraged. We have amazing customers that we do business for, and their success ultimately transitions to our success. We’ve been very thoughtful about the customers we do business with, and during these times in the pandemic, our customers were the ones that were considered essential. That’s been helpful for NFI and I think it’s provided some financial flexibility for us. NFI has also been known as a company that’s been conservative and doesn’t ever want to be overleveraged. Again, we’re not looking at what we need to do in the next quarter in order to make the street happy. We have our own benchmarks and hurdles that are very aggressive and we go after, but at the end of the day, we’re conservative. We’ve learned a ton of lessons over our 89-year history to get us to this point. Those two things have allowed NFI to get deals done and will continue to get deals done in the future.
What areas of business is NFI looking to potentially make additional acquisitions in?
NFI continues to look at various areas to invest in and to acquire. We feel very strong in the competencies of our four pillars: distribution, warehousing, and fulfillment; dedicated transportation; non-asset logistics; and port services. We’re going to continue to look for acquisitions in all four of those buckets, depending on the size of the company, and continue to invest in those areas.
One thing I’d like to call out though is that we get super excited about companies that are in the warehousing business. One of the things that we offer that some other 3PLs may not is our real estate competency, and a lot of the warehousing deals out there have a real estate competency or they own real estate. We are buyers and developers of industrial real estate so sometimes we get even more excited about some of the warehousing deals because it helps two different areas of NFI, not only our warehousing and fulfillment competency, but also our real estate competency.
What are you most excited about in 2021?
I’m excited about a lot of things in 2021, the first thing being getting the vaccine out there and life getting back to whatever we think is normal. I am optimistic about the future of logistics. It’s crazy to think back when I was in college they didn’t even have supply chain majors, now there’s a whole logistics section in the Wall Street Journal. This industry is booming and whether it’s because of the Amazon effect or people now realizing how hard it is to get products to your door in two days, there is this excitement around supply chain and logistics. When we compare supply chain to other industries across the U.S., there’s a sophistication and technology component to logistics that I’m very excited to be a part of. We’re also hoping that we get to see more deals out there, get some good deals in, and develop relationships along the way. And when the timing’s right, we’ll be there to provide a great place for companies to land.
TJ Lynch, SVP of Finance and Marketing, has been with NFI since 2010. Lynch leads a corporate team focused on finance functions including mergers and acquisitions, financial planning, and business analytics, as well as oversees NFI’s marketing department focusing on branding, demand generation, digital marketing, and communications.