Crack the DEAL

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Crack the DEAL

With cost reduction and performance improvement as their focus for a long time, freight & logistics (F&L) companies have started pursuing their growth agendas by evaluating inorganic growth options to achieve their financial targets. In their journey to excel, M&As have today become a critical part of their growth strategy. Yet the economic climate remains challenging and the environment for organic growth is competitive. In lieu to this, these companies need to develop a compelling and credible value creation agenda that will convince investor communities they have the right vision and plan for growth. This article analyzes the current M&A dynamics for Indian companies and their key strategies to drive growth…

In pursuing inorganic growth, companies typically have three routes available to them: joint ventures (JVs), strategic alliances, and M&A. Each has its advantages and disadvantages, and the appropriateness of each varies by context. As reported by Accenture, in the current economic climate, M&A is the most relevant and increasingly attractive option for F&L companies to pursue inorganic growth.

Sudeep Mehrotra

Agrees Sudeep Mehrotra, Senior Director, Alvarez & Marsal, “Logistics industry is close to USD 150bn per annum now. Efficiency is driving share of logistics to GDP come down year after year. Hence, the growth of industry is lower than the economy. However, substitution of organized industry over inorganic is driving more than 20% CAGR for most subcomponents of industry for private organized participants.” PEs have participated in various waves of logistics in India:

  • Early 2000s – Capacity creation led to PE investments in ports and infrastructure. Ports like Krishnapatnam, Gangavaram, Mundra, Pipavav were attractive targets (more than USD 2bn PE investments in ports).
  • Mid 2000s – Privatization of rail services resulted in PE investments in logistics parks and rail operators like Allcargo and Gateway distriparks (more than USD 2bn PE investments in asset heavy companies).
  • Late 2000s – Penetration of 3PL services led to emergence of companies like TVS Logistics, Mahindra Logistics and FSC. All of them have attracted investors (more than USD 1.5bn PE investments in services-led 3PL companies).
  • Early 2010s – Specialized logistics verticals like cold chain, tank farms, coastal capacity, cargo specific services have attracted PE investments (more than USD 2bn PE investments in cargo specific asset class companies).
  • Mid 2010s – Emergence of warehouses as an asset class has attracted investments of more than USD 2bn from PE funds. E-commerce as a segment has created new companies like E-com express and Delhivery, which have attracted more than USD 1bn in the last 4-5 years.
  • Late 2010s – Technology adoption and affordability has led to disruption across the value chain. Companies like Rivigo and Blackbuck have demonstrated impact of new business models on costs and experience for a user of logistics services.

There is still more than 75% of industry, which is unorganized. Also, further wave of privatization is expected in key modes – air, sea, rail. Industry is still well positioned to absorb and attract PE investments for the next few years.

Deven Pabaru

Deven Pabaru – CEO, Patel Roadways (Stellar Group), states that for supply chain logistics companies, their inorganic growth is driven by several needs. He highlights these 11 pointers:

  • Network Expansion to offer reach in hitherto unserviceable or ODA locations
  • Ability to service a wider client base through an acquisition
  • Significantly reduce the time to market and save on client acquisition costs
  • Addition of Brand Goodwill to the company portfolio if the acquired company has a strong vintage and client stickiness
  • Geographical expansion to new territories that have significant impediments to growth for a new player
  • Structural growth in top line whilst retaining conservativism in the asset purchase
  • Aiding profitability by leveraging on the network and client reach to offer complimentary services
  • Creation of new segment offerings within the firm to deliver holistic client services
  • Addition of IP, Software capabilities, etc., to enhance the suite offerings
  • Establishment of new vendor relationships
  • Ability to reduce costs whilst leveraging on network effects and combined large scale of operations.
Dr Arunachalam R

Dr Arunachalam R, CEO, ProConnect Supply Chain Solutions, informs, “M&A in logistics space continues to be buoyant both globally and in India. A couple of years ago, the logistics industry saw a lot of consolidation in the ocean and air transportation. There is no dearth of such consolidation opportunities in the sector, especially in the case of trucking companies. The market is highly fragmented with a mix of large players, innumerable mom and pop shops and those in-between vying to strike the right deal. Also, there is a lot of buzz around some niche sectors like cold chain in pharma & food sector, e-commerce and mission critical services across segments. These high margin verticals are always of interest as they add a lot of value.”

Prasanna Pahade, Chief Strategy Officer, Mahindra Logistics Ltd., validates, “The logistics industry is on the threshold of unprecedented development with various government initiatives starting with the GST in 2017 to various investments in infrastructure like Sagarmala, Bharatmala, Udan schemes, to the dedicated freight corridors and opening up of multimodal transportation within the country. This, in addition to the aim of the government to bring down cost of logistics in the country, has led to supply chains getting redesigned.”

Prasanna Pahade

These changes have impacted incumbents and have also given rise to new opportunities. There are players not able to manage this and therefore wanting to cash out and there are others who are waiting to join the bandwagon. Players, in general, are bullish about the sector and want to expand their territories. This is seen almost all sectors like EXIM logistics, domestic transportation, e-commerce logistics, warehousing, etc. Tech-led disruptions and startups with newer business models are also being actively part of the game. The incumbents are looking up to the startups to fast-track their capabilities and skill sets.


Some of the trends that are emerging indicate certain sectors to be ripe for M&A activities, as highlighted by Puneet Renjhen, Executive Director, Investment Banking, Avendus Capital, are:

Exiting non-core assets: Large corporates and conglomerates have, over the last few decades, built presence in various sectors which have little or no synergies with large group companies. With evolving capital structure and business strategies, we are beginning to see some of the “non-core” assets being divested as they neither meet return metrics nor have market leadership potential. We expect this business churn to continue from the larger business groups especially in industrials and infrastructure segments. The “Big is better” approach will change to “Relentless focus on Return on Equity (RoE) and Return on Capital Employed (RoCE)” across all business segments.

Separation of asset ownership from operating businesses: Indian companies have always believed in asset ownership and management. However, in the last 10-15 years, creating assets across roads, power generation and transmission, telecom infrastructure, hospitality, real estate and logistics entailed significant capital investment, complex regulatory approvals and substantial offtake risks. This led to stressed balance sheets, with limited capital to expand. Holding operating assets for an INR 10-12% yield is feasible for global funds with lower cost of capital not corporates where cost of equity is at least 500- 1000 bps higher than operating yields.

Consumption growth: India is poised to be the fifth largest economy and the third largest consumption economy in the world in next two years. These buoyant macros will drive investment and consolidation activity in the retail, consumer and technology space, driven by both Indian and global consumer players filling up their white spaces in food & grocery as well as the fashion & lifestyle categories because of convergence of digital and brick & mortar models. Many online businesses will need to have offline footprints while several offline businesses will need to jump on to the online bandwagon to capture burgeoning demand, for e.g. Walmart’s acquisition of Flipkart, Future Group’s acquisition of, Amazon’s minority stake in Shoppers Stop and the proposed stake acquisition in Aditya Birla Group’s More are early M&A trends of this sector. Global funds will keep pouring money into Indian technology companies as India remains an attractive battleground given the high growth prospects. Berkshire Hathaway’s investment in PayTM platform, Softbank’s investment in Ola, Uber and OYO and Ant Financial’s stake buy in Zomato signal the intent of the global funds.

Resolution of stress in the system: Arguably, the most important trend will continue to be the resolution of the stressed assets. Thermal power sector, where assets of the value greater than INR 2 trillion are stressed is likely to see strategic players with strong balance sheets and relatively easier access to capital cherry picking assets, which have certainty of off-take and fuel and can be acquired at near replacement cost. Similarly, I see a great deal of M&A activity in the real estate sector during the months and years ahead. Stressed developers will sell land parcels and inventory stuck for last mile finding. Special situation funds are actively scouting the stressed space for quality assets but are more likely to partner with strategics given operational expertise required to turn around the assets.


For Sudeep Mehrotra, scale of operations is still a challenge in multiple sub-segments. Then comes the demonstration of value propositions, which are not people or customer specific and the companies’ capability to embrace technology and leverage it. Adding on these, Dr Arunachalam R elaborates that digitization is a major push in M&A. Technology disruption has begun in many sectors and logistics is no different. However, tech startups are a completely different breed and valuations are different when compared to the traditional logistics players. So, there always exists the challenge of not overpaying for such tech startups, which sell more of an idea than a business.

With growth on the executive agenda at most companies around the world, F&L companies face a considerable challenge, as stated in an Accenture report: identifying how and where to capture growth to satisfy investors’ expectations. They could move into new markets or segments, choose to serve a new customer base, decide to augment their product or service portfolio, or expand into new geographies. All of these actions are potentially viable and could help F&L companies gain access to new revenue generating “white spaces” that would complement their existing core markets and offerings. In many cases, though, organically making these moves would be impractical. Building the necessary assets, technology, expertise and other capabilities to, for instance, expand into a fast-growing emerging market or evolve from an air carrier to an end-to- end supply chain solution provider would be too time consuming, costly and risky for the vast majority of F&L companies.


Given the current and anticipated dynamics in the F&L industry and overall global economy, companies should confirm they have a robust M&A strategy that articulates how and why they will approach M&A. Such a strategy will help F&L companies target M&A deals that strongly contribute to their near- and long-term pursuit of overall corporate objectives and to fulfill their commitments to investors. Agrees Dr Arunachalam R, “There is no one rule that fits all. Each company needs to find answers to some basic questions to develop the right M&A strategy for themselves.” Some key areas that needs to be addressed include: Identifying the right target; Synergy / Cultural Evaluation; Competitor Evaluation; Right decision making at the right time; and Speed in execution and integration.

According to Prasanna Pahade, the right strategy should be based on capability and capacity fit rather than just buying for turnover and profits. Once it has developed its M&A strategy, a company should confirm it has the right capabilities in place to effectively execute the strategy. Accenture has identified three main drivers of M&A success: value-driven target screening, thorough due diligence and effective merger integration. For Deven Pabaru, these are the striking aspects that can help companies in developing the right M&A strategy:

  • Buyer M&A companies should be clear of what they are currently lacking in their own firms.
  • Their understanding of the market should be deep and also before even approaching any prospective seller they should have first-hand knowledge of the advantages / disadvantages that will accrue to them because of such a deal happening.
  • Have a dedicated in-house M&A team that constantly sources and evaluates deals in-line with the company strategy and requirements.
  • For deal to be successful, companies should have in-house post acquisition integration processes / teams for aligning cultures & people to the buyer firm.


With India gearing for a rapid rise in e-commerce business, there is an increased demand for warehousing. Many global players, both strategic and private equity players, are eyeing the Indian market for partnerships and entering in a big way. Especially, the B2B space has invited interest from investors as they are employing cutting edge technologies like AI, ML, IoT, robotics and automation to bring efficiency & gains and disrupt the logistics market. “There is abundant opportunity in both the debt and equity market. 3PLs need to evaluate how much to leverage and how much equity to divest and combine the available capital to strike the right M&A deals. PEs fundamentally look at asset-light quality companies. 3PLs will continue to efficiently run their business and be on the lookout for the right technology to enhance their core offering,” avers Dr Arunachalam R.

For Prasanna Pahade, like in other industries, for 3PL logistics companies as well, there are generally some companies that look promising for M&A than others. These potential companies either have a line of business that one wants to expand to, a geography that one wants to explore to or fill up a gap in certain end-use sectors that one already exists.

Deven Pabaru, offering insights into the promising prospects, shares that in logistics space, there is a lot of fund interest in the fast growing segments of Contract Logistics and Express Transportation. Very few companies of scale are present in India in both these sectors, each of them growing at 15%+ p.a. The returns on investment in each of the above sectors is trending towards 20%+, which is very lucrative for any acquiring firm. The logistics sector, as a whole, is undergoing transformation and adapting digital initiative in a fairly large way by providing opportunities for last mile / always-accessible tracking, warehouse automation services, reduced FTL times by effective technology use, reduction in costs, etc.

In a nutshell, the key to success in this endeavor is having a robust M&A strategy that clearly articulates how M&A supports the company’s overall corporate strategy, as well as the capabilities necessary to execute M&A deals in a way that minimizes risk and maximizes speed and returns. Without both of these elements, a company is at risk of, at best, not fully capitalizing on the growth opportunities before it and, at worst, being left behind as more able competitors make their moves.

Dr Arunachalam R, CEO, ProConnect Supply Chain

“India has always witnessed interest from Private Equity investors in the past. However, we now find a lot of interest from strategic buyers. This adds a lot of credibility to the India growth story. Indian companies have historically owned and managed assets. However, the trend is now changing. Specifically, in the logistics space, global funds are on an asset acquisition spree and will probably own a majority of the assets in the next 5-10 years. Indian companies will probably hold a minority in asset ownership and focus more on managing them.”

Prasanna Pahade, Chief Strategy Officer, Mahindra Logistics Ltd.

Tech-startups are continuing to get investments in the logistics space. In the recent past, we have seen transactions related to capability gaps being filled in. For example, EXIM related companies entering into end-to-end logistics like multi-modal transaction or strategic infrastructure. A trend which is slowly getting momentum is the interest shown by companies from far-east like Japan and China to buy assets in India.

Sudeep Mehrotra, Senior Director, Alvarez & Marsal 

Key Trends in M&A Activities:
  • Significant interest in new companies disrupting business models and achieving reasonable scale
  • More interest in service delivery models than asset heavy companies for conventional PEs
  • Emergence of prop-opco models across the value chain – interest from investors eyeing yields for Propco companies
  • More focus on quality of governance of companies.

Prateek Jhawar, Director & Head, Infrastructure & Real Assets Investment Banking, Avendus Capital

We are witnessing significant interest from global investors in the Indian warehousing space in recent times with major players partnering with developers to create large platforms. The highly unorganized and underdeveloped Indian industrial warehousing sector is expected to undergo an unforeseen transformation owing to rapid changes in business environment such as rise the of e-commerce, GST implementation, changing costs and Make-in-India movement. The anticipated demand-supply gap of Grade ‘A’ warehousing is expected to open up numerous investment opportunities in the future.

Deven Pabaru – CEO, Patel Roadways (Stellar Group)

Challenges faced in striking a deal:

• Deal negotiations can continue from start till the end with both parties stuck adamantly on valuations
• Acquired company refusing to share some key information prior to negotiations that may impact the deal negatively
• Not having designated SPOCs (Single Points of Contact) in the firms to channelize effective information flow
• Constant changes to the Data Room thereby impacting confidence of the Buyer
• Client specific information being withheld by Seller
• Not able to agree to the Deal contours beforehand during Term Sheet stage itself
• Due diligence throwing up some unknown negative surprises that effectively scuttle the deal.

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