C. F. Lynch & Associates

Not a Second Time

By Clifford F. Lynch

DC Velocity, March 2004


In the heady days of the Internet boom, investors hoping to cash in on the dot-com craze couldn’t sign checks fast enough. Even the comparatively staid field of logistics attracted its share of interest. Lured by the prospect of high returns and profitable resales, a number of venture capitalists invested in Internet logistics startups – primarily exchanges of one form or another – while others chose more traditional logistics service providers.

Despite confidentiality agreements, some of the funding details leaked out over time. And when they got wind of the size of these investments, many of those familiar with the companies acquired were left scratching their heads and wondering if the due diligence had been conducted by a team of experts from Mars. Anyone who knew anything about the industry, they agreed, could have warned the investors that there was no way they’d ever achieve the returns necessary to justify these investments, particularly in the warehousing industry.

Unfortunately, when this finally sunk in, the new owners reacted by tightening their purse strings and attempting to jack up prices. The inevitable result was a further erosion in returns and in many instances, massive defections among customers. As a result, many did not survive. Casualties ranged from the 75-year-old Burnham to newer entrants such as Webfreight, Translinx and SubmitOrder.com. Others managed to keep their doors open but are hanging on by a thread. There are some who would say that investment bankers are the worst thing that’s ever happened to the logistics industry.

Of course, not all logistics acquisitions or investments have been disastrous. Some companies have become more stable under the new ownership. Particularly successful have been the intra-industry acquisitions such as Exel/Ocean Group, UTi Worldwide/Standard Corp. and Kuehne & Nagle/USCO. There is every indication that these acquisitions, which expanded the partners’ global and domestic capabilities, were both strategically and financially sound. UTi Worldwide, in particular, benefited from its alliance with Standard Corp., which allowed it to expand into areas beyond its core freight forwarding business.

The investors themselves generally fall into one of two categories of buyers – strategic and financial. A strategic buyer usually is one seeking to serve new markets or new industries and provide different kinds of services that fit its overall corporate logistics strategy.

A financial buyer, on the other hand, is one who knows a good deal when he or she sees it. To me, this is the best of both worlds. Assuming there is some strategic logic to the acquisition, buying a company with good returns at a fair price generally results in a successful, productive transaction.

As the economy continues to improve, there’ve been some signs of life in the acquisition arena. Outsourcing once again is on the upswing, and there appears to be a resurgence of venture capital interest in the logistics industry. Recently, I found myself talking with a representative from an investment group-owned company that is attempting to sell it for the original purchase price, despite heavy losses and serious erosion of its customer base. When I asked who would buy it under those circumstances, he indicated that it would have to be a strategic buyer. Since the strategy of such an acquisition escaped me, I pressed on until he finally admitted that they simply had to find "the greater fool."

In spite of its age, the logistics industry still has plenty of challenges to grapple with, new technology and new customer demands among them. We need wise men and women at the helm – not fools. Let’s hope that as our industry gears up for its long-awaited recovery, it’s not derailed by people trying to make a fast buck.



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