Smaller independent logistics firms will be the target of Europeans looking to expand in North America

Acquisitive European logistics organizations still have the North American market in their sights despite tough economic conditions and the challenges of finding suitable targets. As economic conditions improve, analysts expect merger and acquisition activity to pick up fast.

The pool of top targets is smaller after the acquisitions of the last two years or so. "Most of the prime U.S. candidates have been taken," said Dick Armstrong of Stoughton, Wis.-based logistics management consulting firm Armstrong & Associates Inc. For buyers to come into this market "and make a dramatic impact," they would have to go after companies the size and caliber of Schneider Logistics or Ryder System, he suggested.

Regg Jones, managing partner of Greenbriar Equity Group LLC, based in Rye, N.Y., an investor in the logistics market, still sees a lot of possibilities in the highly fragmented domestic U.S. market, particularly among small to midsize independents with a strong presence in vertical markets. "Once the economy picks up there will be plenty of fodder for renewed activity," he said.

Potential buyers in Europe have been digesting recent deals and assessing their strategies, he believes, and many have financial pressures of their own to deal with in the weakened market for logistics services. "The (acquisition) trend is dormant but will re-emerge as the economy picks up," driven by the relentless pressures of globalization, Jones predicted. When that happens "my guess is that the multiples will be lower" and company hunters shopping around will be more selective.

As the dance resumes the race to find compatible partners will heat up. Deutsche Post has made no secret of its intentions to expand in North America and has been associated with various potential buys. Armstrong sees air freight companies such as Eagle and Forward Air as good candidates for the German logistics group, particularly as these operators do not bring owned assets to the table that complicate acquisition deals. "I see these companies as better deals for Deutsche Post if it is going to be an air-freight-related play," Armstrong said.

One company that has followed the acquisition route is Swiss-based logistics provider Kuehne & Nagel. Last summer K&N acquired USCO Logistics, Hamden, Conn., for $300 million. USCO, with more than 15 million square feet of warehouse space in North America, provides warehousing and distribution management services primarily to pharmaceutical, retail and high-tech companies, including GlaxoSmithKline, AstraZeneca, Sun Microsystems, Wal-Mart and Target. Prior to the USCO acquisition, K&N entered an alliance with Singapore-based SembCorp, extending its reach in the Asia-Pacific region.

Last August K&N acquired 60 percent of Canadian company Virtual Integration Associates, a provider of global supply-chain management and vendor management inventory programs for the electronics industry. The other 40 percent of KN VIA is owned by Rusgen Holding. KN VIA operates vendor hubs in the United States, Canada, Mexico, Thailand and China with an annual material value throughput of more than $4 billion.

Earlier this year K&N acquired the in-house logistics operations of Nortel Networks, Canada's largest technology company. K&N took control of Nortel's supply-chain activities in 160 countries, operating as a fourth-party logistics provider, the company said.

In April Kuehne & Nagel opened a logistics facility in Guadalajara, Mexico. The logistics center will serve high-tech companies in the region and will be supported by USCO and VIA. "As a result of the acquisition of USCO Logistics and VIA, we are able to offer the complete range of logistics services to our customers," said Ferdinand Kurt, managing director of Kuehne & Nagel de Mexico.

Another expansion vehicle in the United States is strategic partnerships. This is the route taken by Hellmann Worldwide Logistics, USA, a wholly owned subsidiary of Hellmann Worldwide Logistics GmbH & Co. KG, based in Osanbrück, Germany. "We think it is better to arrange alliances and partnerships than to buy other companies because integration is much more complicated," said Joerg Frommeyer, head of contract logistics and consulting at the parent company. In October 2001 Hellmann announced a strategic alliance with Schneider Logistics. Under the alliance, Schneider Logistics provides technical, engineering and supply-chain solutions, and Hellmann Worldwide Logistics brings its expertise in global freight forwarding, customs, warehousing and distribution to the table.

"We augment what they do in Europe," said Bob Laird, senior vice president of supply-chain services at Hellmann Worldwide. In the United States the services offered by the respective organizations are different enough to enable them to dovetail, he maintained. "We are a global forwarding entity that offers warehousing and distribution, and they are a technology solutions provider and freight manager," he said. To reinforce its U.S. warehousing network, Hellmann recently finalized an agreement with Standard Corp., a 3PL headquartered in Columbia, S.C., that operates more than 10 million square feet of warehousing space.

Any European major with designs on the U.S. market eventually will bump up against cash-rich United Parcel Service. For its part the American giant has tended to make relatively small, strategic purchases in Europe. Armstrong sees rumors linking it with European freight forwarder Schenker as off the mark. "My feeling is that Schenker is a bad match for UPS," he said.

Another U.S. logistics organization that has taken measured steps into Europe is Philadelphia-based BDP International. On May 1 it announced a strategic purchase agreement with TI NV, a logistics and transportation firm based in Antwerp, Belgium. BDP has taken an equity stake in the company.

With its substantial presence in the chemicals market – TI's customers include Bayer, Degussa and Exxon Mobil – this family-owned business is a good match, according to BDP President Richard J. Bolte Jr. Having built a network in Asia, BDP is turning to Europe, and its stake in TI represents the first step in what he described as a "methodical" expansion strategy on the other side of the Atlantic. "We needed to be in Europe because globalization is not just a word," Bolte said. As part of that strategy BDP has set up a holding company in Luxembourg called BDP Europe. The ultimate goal is to establish a global infrastructure that will provide a platform for winning lead logistics outsourcing contracts. The next transatlantic deal is likely to be in Germany. "After that we will take a breath," Bolte said.

In Europe logistics is dominated by postal services that are flush with cash and looking to establish global businesses, explained Bolte. "The middle market is disappearing," he observed, as companies the size of BDP are gobbled up by major players.

There also are important operational differences. Frommeyer said a logistics provider such as Hellmann could reach more than 68 percent of all inhabitants mainly in western Europe within 24 hours. In Europe there is a preponderance of consolidated, small-package movements.

There also tend to be more outsourcing implementations in the United States, "but the more sophisticated IT solutions in warehouse management systems are in Europe," he said. And, of course, there are language and cultural differences.

Wild cards in all this are the major logistics players in Asia. Although the Japanese economy is still in the tank, it remains the world's second largest and includes some powerful companies. In the logistics space Yamato and Nippon Express have strategic relationships with UPS and FedEx, respectively, and are both large, profitable organizations, Armstrong said. "If the Asian economies improve and China opens up, that has much greater potential than fighting over what's going on in Europe," said Armstrong.