Anyone with even a remote connection to the trucking industry is aware of the challenges that this industry is currently facing. Declining volumes, rate decreases, excess capacity and significant year/year profit declines are all compelling reasons to look at other industries as investment opportunities.

However, recently there have seen some signs that demand has hit bottom and utilization rates have begun to climb again. Freight volume in trucking’s spot market rose 10 percent in October, said TransCore, which reported the first year-over-year increase this year in the TransCore Freight Index. In addition, there is an expectation that there will be consolidation in the industry in the coming year. Lenders, who have been extending payment terms to distressed truckers, are likely to “call in their chips” as the market for used trucking equipment and freight terminals begins to improve.

While the LTL sector has always been an attractive candidate for acquisition, due to the opportunity to consolidate terminals and reduce overheads, the truckload sector presents some interesting possibilities at this time. In a recent white paper co-authored by John Moses and James C. Westphal of the Merge Global Value Creation Institute , these two gentlemen make the case that now is a great time to make an acquisition in this sector.

“Modest continued demand growth coupled with the removal of some of the weaker players, may serve to reduce excess capacity and lead to rate increases in 2010. If capacity remains tight into 2012, truckers may be less likely to invest in new capacity anytime soon while trucks purchased in the 2005-2006 binge years are retired from the OTR fleet. In fact, when new orders for tractors do return in a meaningful way, recent OEM consolidation and rationalization of manufacturing capacity will limit how quickly new tractors enter the market.”

The authors make the case that “in the past, strategically motivated mergers and acquisitions (M&A) in the truckload sector has been relatively limited – particularly when compared to other freight sectors such as forwarding, logistics or less-than-truckload (LTL). There are a number of reasons for this:

• Organic growth options – . . . . growth in the truckload sector lends itself to organic growth, which also avoids the added cost of acquisition premiums.

• The lack of a clear strategic impetus – Traditional rationales for acquisitions – such as rationalization of overhead or horizontal integration of related services – have been viewed as having limited applicability in truckload or at least as being insufficient to inspire potential acquirers to incur the costs and undertake the risks associ¬ated with acquisitions.

• Concerns over integration – In many cases, the founder of a company is a key element of the company’s identity and there are concerns about integration of cultures.

• Unclear value-creation opportunities – Both private and public equity investors have generally not appreciated the nuances of truckload operations and the ability of well-positioned and well-managed companies have to create shareholder value.”

The authors argue that some of the concerns about M&A listed above need to be reconsidered. “Though it is impossible to know precisely how the nascent economic recovery will play out, some believe that there is substantial risk that the industry will be caught short of capacity and experience a strong upcycle in pricing and profitability over the next three to four years. Though trucking management has been focused on cost-cutting and often their very survival, some argue that we have reached an inflection point where the attention needs to shift back to growth and how to best take advantage of the emerging recovery.”

The conversion of private fleets to asset based transportation providers is likely to continue as more manufacturers look for ways to reduce costs. The pressure to restrain capital expenditures and expenses should provide further impetus to the movement to outsource freight transportation.

“Distressed trucking companies have become available for little or no acquisition premiums. While careful consideration must be given to how a target’s portfolio of business fits with the existing business, distressed acquisitions offer prudent buyers the opportunity to rapidly accelerate growth in a single transaction. These valuations are even more compelling when considering what is likely to be an extremely supply-constrained industry over the next several years, as demand recovers.”

Moreover, as more truckload carriers leave the industry, this will further reduce capacity and make the opportunities for financial success in this sector much more viable. Increasing demand coupled with constrained capacity could be a formula for attractive profits for those with the vision and resources to make well planned and executed acquisitions. This could be a classic case of being in the right place at the right time.

The authors also argue that there are opportunities for synergies through effective use of technology. Advances in information technology can enable “more efficient analysis of customer profitability and linking tactical dispatching decisions to advanced yield management systems. While the fixed costs associated with these IT systems aren’t large enough to offer significant operating leverage, they are often out of reach for small and medium-sized trucking companies. And in a business where enhancing a company’s margin per mile by a couple pennies can increase profitability (and value) by 20 percent or more, the benefit of such sharing is significant.”

Cultural integration issues have long been a concern in mergers across all industries and have played a key role in the high failure rates that have been experienced. The owners of trucking companies founded in the 60”s, 70”s and 80”s are now in their 60s and 70s. Many are seeking to reduce “their involvement in day-to-day operations (and looking for options to monetize their life’s work), and relying increasingly on professional managers in more corporatized environments. Integration of asset-light (or human resource-heavy) brokerage or intermodal operations can also be successfully accomplished, as long as buyers understand the incentive structure and ensure that employees are motivated following an acquisition.”

The authors conclude by stating that “we believe that the truckload sector remains misunderstood. Superior management teams can create value through well developed growth strategies with strong execution. While growth requires capital (considerably less for brokerage), incremental improvements go a long way in creating value. Given the likely magnitude of a supply-demand imbalance in an upswing, acquisitions can be a particularly potent strategic tool for growth in the current environment for those who are bold and capable.”