Last week I had the pleasure of participating in a shipper – carrier roundtable sponsored by Motortruck Fleet Executive magazine and Shaw Tracking. Lou Smyrlis, the moderator, raised the subject of industry consolidation with the group that was assembled. The consensus seemed to be that industry consolidation will continue in 2009 as it has in 2008, albeit under a new set of constraints imposed by the current economic downturn.

Bob Costello, Chief Economist of the American Trucking Associations, mentioned in a speech this week at the Canadian Institute Trade and Transport Conference that October freight volumes were unusually weak and reflect the downturn in the North America economy. This is worrisome since October is usually the best month of the year for freight activity. This does not auger well for those transport companies that have been in a survival mode during the “freight recession” of the past couple of years.

Is this the time to buy or sell a freight transportation company? There are several events that are having a direct bearing on the industry at this time. These include the credit crisis that has adversely affected the purchasing of houses and automobiles. Weakening economic fundamentals are causing unemployment levels to rise. In addition, the downturn in the value of housing and the stock markets are causing many middle class folks to feel insecure and fearful and less willing to spend money. The combination of all of these forces is driving down the demand for manufactured goods and retail volumes, the lifelines of freight transportation.

While these forces are at play, shippers are extending payment terms and carriers are facing tougher times borrowing money. Small trucking companies with a limited supply of customers and limited sales resources are particularly vulnerable. The end result is that this is an extraordinarily difficult time to run a transportation company.

We have more struggling transportation companies than ever before and they are cheaper to buy than they have been in many years. Mergers and acquisitions will continue, particularly for those companies with lots of cash on their balance sheets. However, buyers will be more deliberate in their approach. As we are seeing in the stock market, some sellers are simply capitulating and saying that this is the time to get out.

It should be pointed out that a number of studies have shown that over sixty percent of mergers and acquisitions fail. Despite the best of intentions, failure can be a result of several factors. In some cases, inadequate due diligence is done. Some of the assumptions made leading up to the purchase are incorrect. In other cases, no non-compete is signed with the owners. They may leave and form a new entity that competes “head on” with the acquired company. In addition to the owners, some other key people may leave and take some of the business with them.

For a number of mergers, the expected synergies and cost savings don’t materialize and/or the revenue stream does not meet expectations. In certain situations, the merger comes unglued due to poorly planned integration efforts, in sales and/or operations, or due to a culture clash between the employees of the two businesses. Customer affecting service changes, the departure of trusted customer service, dispatch or sales personnel (to a competitor) may drive customers to another transportation company. Many times the old owners find it difficult to function within the new owner’s environment or lose motivation due to the big payday they received.

What can you do to increase the odds of success?

The shipper- carrier roundtable participants suggested that the high failure rate will not stop the freight carrier consolidation movement. The current economic difficulties will likely spur an increase in desperate sellers and interested buyers. Critical success factors include:

• An assessment of the growth that can be achieved organically versus through acquisition, within a prescribed period
• A careful assessment of the synergies that are at play and the integration hurdles that may be faced
• Having a clear focus on whether the proposed acquisition is the right strategic fit
• Performing a thorough due diligence that looks at revenue growth, cost reductions, cultural fit, ROI, risk factors, retention of key employees
• An understanding of the expected competitor behaviour
• Effective management of human resources and customers
• Excellent post implementation follow up
• A thorough assessment of the financial risks and rewards

As has been proven time and time again, even the best due diligence cannot anticipate all of the challenges that lie ahead. Often the post acquisition reality is very different from the picture painted during the period leading up to the purchase. On the other hand, a successful acquisition can fill a void in a company’s service and/or geographic coverage and boost financial results. Therefore the best advice is buyer beware!

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The CBC, American Express and Pacific Newspaper Group are doing it. It’s no surprise that Morgan Stanley, Goldman Sachs and Barclays Capital are doing it too. But so are Viacom, ABC News, Hearst, Enterprise Rent-A-Car and Adidas.

What are all these famous companies, and many others not quite so famous, doing? They’re cancelling their annual company Christmas parties. The Grinch may not have stolen Christmas this year, but he definitely is taking away the Christmas party. (Left unsaid is that other popular company events will also likely get the axe over the course of the coming year.) Cancelled parties or severely scaled-back seasonal events are becoming the norm as companies take stock of the year ahead and decide to cut out any “unnecessary” events as a cost-saving measure.

It’s the responsible thing to do, is it not? Should you not do the same? When you consider all the social events that go on at transportation companies – Christmas parties, staff barbecues, driver recognition nights, sales recognition outings, etc – they do add up to a fair chunk of change over the course of the year.

If you have already cancelled your Christmas party or are planning to do so, you’re certainly in good company. In its survey of 100 companies, outplacement consultant Challenger, Gray & Christmas Inc. found that 23% of companies elected not to host a holiday party this year, compared with only 10% in 2007. New York executive search firm Battalia Winston Amrop found in its survey of 108 firms that 19% will forgo a party this year, the highest percentage in the poll’s 20-year history. And in a separate study of more than 1,200 executives by Towers Perrin, 58% of all organizations polled acknowledge they are somewhat or very likely to scale back this year’s holiday party and other employee events to save money.

The true savings though are dubious. Companies holding the event outside their building don't necessarily save any money when they cancel an event on such short notice. When you cancel within 60 days of the event, you're pretty much on the hook for the venue’s rental.

But that’s not what’s most important here. What is important is the often unappreciated impact of Christmas parties and other corporate social events not only on how employees feel about their company but on how they feel in general.

Let me relate a story I learned from reading Malcolm Gladwell’s newest book, Outliers. Gladwell writes about the residents of Roseto, Pennsylvania. The town was founded more than a century ago by wave after wave of immigrants from the Appenine foothills territory of Italy. No one took much notice of this growing American town built on a rocky hillside in Pennsylvania until the1950s. That’s when a physician and lecturer from the University of Oklahoma named Stewart Wolf accidently discovered while sharing a beer with a local doctor that finding anyone from Roseto under age 65 dying of heart disease was strikingly rare. This was the 1950s remember, years before drugs to lower cholesterol hit the market and any real public awareness about the causes of heart disease.

Wolf decided to investigate. What made the people from Roseto so different? Wolf first thought the Rosetans must have hung on to some dietary practices from their Italian roots that were much healthier than the typical American diet. But he quickly realized that wasn’t true. When their eating habits were analyzed, it was revealed the average Rosetan was certainly not eating as healthy as his relatives back in Italy. The Rosetans were cooking with lard instead of the much healthier olive oil they would have used back in Italy. They had abandoned their native thin-crust pizza of salt, oil, and perhaps some tomatoes, anchovies or onions for bread dough plus sausage, pepperoni, salami, ham and sometimes eggs. Sweets such as biscotti which used to be reserved for Christmas and Easter were being eaten year round. In fact 41% of the typical Rosetan’s calories were coming from fat. Nor were Rosetans avid joggers or into yoga and many smoked and were struggling with obesity.

Were Rosetans the beneficiaries of some really healthy genes? Wolf tracked down relatives of Rosetans who were living in other parts of the US to see if they shared the same remarkable good health. They didn’t.

Perhaps there was something particularly beneficial about living in the foothills of eastern Pennsylvania. That didn’t check out either. The two closest towns, just a few miles away, and also populated with hardworking European immigrants, had death rates from heart disease that were three times that of Roseto.

After pursuing dead end after dead end, Wolf finally realized that the secret of Roseto was Roseto itself. He walked about town and noticed how the Rosetans “visited one another, stopping to chat in Italian on the street, say, or cooking for one another in their backyards…He went to mass and saw the unifying and calming effect of the church. He counted 22 separate civic organizations in a town of just under 2,000 people.”

What the Rosetans had managed to do was create a cohesive, powerful and protective social structure capable of insulating them from the pressures of the modern world. They had, in other words, stumbled on the importance of creating the feeling of “community” as a way to battle through life’s struggles. The effectiveness of this community feeling was evident in Rosetans’ health.

When we really think about it, is that not what Christmas parties and other corporate events really are about? I have to admit I’ve missed more than my share of Christmas parties over the years. But I still understand that the kind of corporate “community” bonds formed at Christmas parties and other such company events not only serve as indication the company appreciates the contributions made by its employees but also create the cohesive glue that helps employees better deal with adversity. I guess it’s just harder to get all stressed out when you feel you’ve got other people pulling with you and for you.

What signal are we sending when we bail out of such events at the first sign of financial trouble?

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There’s been a lot of talk lately on both sides of the border about whether or not we should bail out North American automakers. It’s a fuzzy issue, made clearer recently during a speech by auto analyst Dennis DesRosiers at the Ontario Trucking Association convention.

In a nutshell, he surmised that GM, Ford and Chrysler are likely toast if they don’t receive a government bail-out. (Ford's apparently in a slightly better position, since it has liquidity). He also said the root of the automakers’ problems are cyclical in nature. By offering creative financing and major incentives to buyers, the industry in the short-term postponed any downturn in new vehicle sales. But once that inevitable downturn did occur, it coincided with an unexpected credit crunch, delivering a double-whammy to the ‘Detroit 3,’ who at the same time have been losing market share to the likes of Honda and Toyota.

DesRosiers said GM, Ford and Chrysler have successfully trimmed the fat from their organizations and also reduced capacity. Now they’re in the process of re-aligning their product lines to bring them in tune with consumer demands. They need government help to enable them to weather the current storm, carry their strategy through to fruition and hopefully emerge stronger when car sales pick back up.

Should government let the Detroit 3 go broke? After hearing DesRosiers speak on the issue, it’s difficult not to want to give the US-based automakers one more chance. After all, it’s been reported that nearly three million jobs could be lost if GM, Ford and Chrysler go under. The US and Canadian economies cannot afford such a major blow at a time like this – or any other time for that matter. Furthermore, DesRosiers said Chapter 11 protection is not an option, as consumers would ultimately lose any faith they have left in the products offered by the Detroit 3. A Chapter 11 filing would be the death knell for either one of them.

But on the other hand, there are some ethical questions that still beg for answers. For one, how do you support the Detroit 3 and not Toyota and Honda, which are also struggling yet aren’t knocking on Washington’s door with their hands out? DesRosiers pointed out the so-called ‘new domestics’ have created over 40,000 jobs in Canada alone during the same time the Detroit 3 have shed over 55,000 jobs. Where’s the fairness in that?

Also, the unions – the CAW particularly – appear unwilling to make concessions. As DesRosiers said, there’s an impression that any rescue package would be a bail-out of the CAW and UAW – not the automakers themselves. Before I see my tax money handed over to GM, Ford and Chrysler, I want to see big-time concessions made by the unions.

Thirdly, executives at each of these companies have to demonstrate that they have a shred of common sense if they’re to be trusted to spend the bail-out money appropriately. It’s hard to have faith in them to do the right thing when they show up for bail-out talks in Washington aboard private jets. As DesRosiers said, that was such a major tactical error it is difficult to comprehend how these CEOs can be trusted to turn these massive ships around.

Bailing out GM, Ford and Chrysler will be a bitter pill to swallow. But the North American auto sector is a $2 trillion industry with seven million jobs directly connected to it. At a time like this, can we afford to let them fail?

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According to a report in this morning’s Toronto Star, the province of Ontario is going to get tougher on young drivers. Kudos to the province for taking steps to curb the dangerous driving practices of today’s youth. There’s a startling sense of entitlement among many young drivers, who have somewhere along the way forgotten that driving is a privilege, not a right.

(Wow, what’s happening to me? This marks two consecutive blog entries applauding the provincial Liberals.)

According to the Star article, the new rules will include a zero-tolerance approach to speeding. Just one speeding ticket will result in a loss of driving privileges for young drivers. There’ll also be a total ban on alcohol consumption and only one teenaged passenger will be allowed to travel with new drivers. (Forget cell phones and GPS systems, what can be more distracting than a car full of teenagers?)

These are all great steps, which will hopefully go a long way towards re-establishing the ground rules for on-road behaviour. But once again, the question will be just how much teeth the new rules actually have? Unless there’s adequate on-road enforcement, the new legislation won’t make a difference.

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Patrick Bohan, manager, business development, Halifax Port Authority, doesn’t mince words when it comes to explaining consolidation in the transportation sector. Good times or bad, Bohan believes the only certainty about the transportation sector is that it will continue to consolidate.

Bohan was one of several experts sharing their deep insights on various threats to supply chain in a session I hosted for CITT earlier this month at its annual conference held in Winnipeg. He believes that no matter what fancy justifications are used – improving shareholder value, capturing synergies, improving economies of scale, geographic diversification or providing more well-rounded service solutions – industry consolidation is really about companies going after a bigger pile of money.

“It’s all about companies getting bigger and nothing that I’ve seen convinces me that anything will change. When times are tough there is motivation to take out the weaker players. When times are good there is even stronger motivation to take out competitors,” Bohan said. “Success is judged the same across all industries. Bigger is better. Bigger is more successful.”

You can see Patrick’s comments, as well as the comments of the other panelists, in this month’s issue of Canadian Transportation & Logistics. However, as I wrote in this blog a few weeks ago, mergers and acquisitions in transportation and logistics sector are slowing down – even if the motive for them is still strong.

A report released by PricewaterhouseCoopers this week reports that total deal value and activity in the global transportation & logistics industry is expected to fall short of 2007 levels. Levels of deal activity and total deal value announced during the first three quarters of 2008 are not likely to surpass last year’s totals, according to Intersections: Global Transportation & Logistics Mergers and Acquisitions Analysis – Third Quarter 2008, the report released by PricewaterhouseCoopers LLP.

Deal activity slowed during the third quarter, with only 37 deals (disclosed value of at least $50 million) announced, bringing the total deals through the third quarter of 2008 to 125, which is not on pace to match the 193 deals announced in 2007.

There were a significant number of large deals (disclosed value of at least $1 billion) announced through the third quarter of 2008, with 14 large deals contributing a total deal value of $66 billion, Pricewaterhouse .Coopers reports. However, with only one of the 14 large deals occurring in the third quarter, total deal value declined, reaching only $11 billion in the third quarter.

“Given the current economic and credit environment, deal activity in the fourth quarter will likely not exceed the levels seen in the third quarter and may even decline. Accordingly, deal value in 2008 is not expected to match the levels of the previous two years. In 2007, there were 16 large deals and a total deal value of $81 billion, and in 2006 there were 20 large deals and a total deal value of $161 billion,” the report states.

The report also confirmed a slowdown in deal activity located outside of the U.S. In previous quarters, due to a weakening U.S. economy, the pace of T&L deal activity that did not include U.S. entities was ahead of overall deal activity.

However, when evaluating the third quarter in isolation (with 37 total deals, of which 25 did not include U.S. entities), it is apparent that the decline of the global banking sector and tightening global credit markets have caused a slowdown in deal activity beyond those transactions that involve U.S. parties, the report states.

“Given current economic observations and trends affecting the T&L industry, it is unlikely that the number and total value of deals will match last year’s levels, as M&A activity is likely to slow down in the fourth quarter,” said Kenneth H. Evans Jr., U.S. transportation and logistics sector leader at PricewaterhouseCoopers. “It is now apparent that the faltering credit markets have caused a slowdown in both domestic and international deal activity.”

Consistent with previous quarters, financial investors scaled back on deals involving T&L targets during the first three quarters of 2008, accounting for involvement in only 34 percent of deals, compared with 40 percent of deals in 2007. The tightening economy and decreased availability of liquidity contributed to the continuing trend of well-capitalized strategic investors prevailing in M&A activity in this sector.

In terms of regional distribution, entities in Asia and Oceania (Australia, New Zealand Melanesia, Micronesia and Polynesia) continue to lead all regions in terms of deal targets, accounting for 32%of the 125 deals announced during the first three quarters of 2008. The UK and Eurozone accounted for a fewer number of deals, but claimed 34 percent of the total deal value. Meanwhile, the North America region was only involved in 22 deals (18 percent of total deal targets) in comparison to 55 deals last year, reflecting an overall slowdown in cross-border acquisitions of U.S. entities during the ongoing financial crisis. For every region, barring North America, deal activity announced during the first three quarters of 2008 is on pace to exceed the number of deals announced during 2006.

The BRIC (Brazil, Russia, India, and China) economies continue to attract investors, accounting for 29 deals thus far in 2008, exceeding the number of deals announced in 2006 (25) and on pace to exceed last year’s deals (36) involving targets in these regions. China remains the most active region, in terms of BRIC targets, accounting for 12 deals in the first three quarters, while Brazil and Russia continue to gain foreign investments, acting as target entities for 7 deals and 6 deals respectively.

“Overall, the transportation & logistics industry continues to attract M&A investment amidst increasing turbulence in the global financial markets,” said Klaus-Dieter Ruske, global transportation and logistics sector leader, PricewaterhouseCoopers. “However, cross-border acquisitions for U.S. targets will continue to be weak, given the decreased liquidity of the credit markets and a recent strengthening of the U.S. dollar. We believe this trend will reverse, but it may take a longer period of time than originally expected.”

For more information and to access the full report, visit: www.pwc.com/transport.

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Transportation stakeholders south of the border have long been clamoring for much greater investments in infrastructure. Should the Democrats prevail in bringing a fitting end to 8 years of what many consider the worst presidency in US history with resounding victories in both the Senate and Congress, those investments may very well happen.

Several prominent Democrats, including presidential candidate Barack Obama, have gone on record as supporting a second bailout package which could include investments in infrastructure as an economic stimulant.

Canadian transportation stakeholders who are just as fed up with our own government’s gross negligence of infrastructure often point to the investments made south of the border. Yet the Americans consider their own investments to be way short of the mark.

Investments in infrastructure were at the core of the growth in the US economy from 1950 to 1970. But according to Dr. Peter Ruane, president and CEO of the American Road & Transportation Builders Association, it’s appalling just how much the infrastructure in the US has been neglected in recent decades. I heard Dr. Ruane speak at the recent American Trucking Associations annual conference in New Orleans. He said one quarter of the bridges in the US are either obsolete or structurally deficient while more than 17% of the paving is considered to be of poor to mediocre quality.

Nearly $500 billion would need to be invested just to address the backlog of needed repairs, Dr. Ruane said.

But is spending big on infrastructure realistic considering the financial mess the US is currently mired in with a trillion-dollar deficit? Dr. Ruane counters that the current economic crisis should be seen “as an incentive to do something, not just sit there and do nothing,” emphasizing the stimulative effect infrastructure spending can have on the economy.

He also stressed that the US is falling behind its international competitors when it comes to infrastructure investments. For example, he said, while China will add 53,000 miles of road by 2020 and India 25,000, the US will only add 1,130. And while the emerging markets spend about 6% of their GDP on infrastructure, the US spends just 2%.

Bob Costello, chief economist and vice president of the American Trucking Associations, adds that continued infrastructure deficiencies may lead manufacturers to resort to the costly practice of holding larger amounts of inventory once again because they can’t count on timely deliveries.

Much has been made north of the border of turning to the private sector to fund new infrastructure projects. But Dr. Ruane argues that privatization is not the magic bullet for infrastructure projects but rather only part of the solution.

He characterizes privatization of infrastructure as a “weapon of mass distraction” for politicians who are unwilling to put in the work necessary to find the funds – through raising taxes, charging user fees, etc. – and just decide to hand entire projects over to the private sector.

“We need all the solutions at the table,” Dr. Ruane believes.

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