Q&A: Jett McCandless, CEO of CarrierDirect

Consolidation within the freight transportation and logistics sectors is, if not rampant, clearly still apparent these days. It cuts across myriad modes and is a way for companies to grow quickly to add a new service component or make an existing one more fluid and stronger in order to leverage it as a competitive advantage. CarrierDirect, a Chicago-based transportation and logistics consultancy that provides advisory services to 3PLs and carriers has a ground-floor perspective on what companies are doing to separate themselves from the pack and the underlying themes driving consolidation and related M&A activity. LM Group News Editor Jeff Berman recently spoke with CarrierDirect CEO Jett McCandless about consolidation trends in the transportation and logistics sectors. A transcript of that conversation follows below.

Logistics Management (LM): There is a lot of consolidation happening these days within the 3PL sector, specifically those that have a heavy focus on brokerage, like TQL, Coyote, Echo, XPO, and others. What are some of the trends and related activity you have seen on this front, especially when compared to a few years ago when things were relatively quiet on the acquisition and consolidation front?
Jett McCandless: It is not a secret that consolidation is happening and will continue to happen. We are not going back to a fragmented, non-asset or asset-side environment. You are also seeing a different class of broker and even carrier now compared to the past.

LM: How so?
McCandless: There is a different level of sophistication as operations grew over generations. Usually if you talk to a guy that is a third-generation carrier, he may tell you they used to move chicken eggs and moonshine. Then one truck became 200 and 200 became 5,000 in the second generation and then the third generation came in and went to a better school and might have an MBA and also grew up around the industry. They also might have more professional management and use better and more analytics than in the past. As those types of people come into the market, they typically are set up to be more successful in this space.

LM: What about on the brokerage side?
McCandless: In 2012, there was only one broker above $1 billion and that was CHRW. Now, by the end of this year, there will be several: CHRW, Coyote, TQL, XPO (which is over that in revenue but not in brokerage), and Echo. There are companies getting close like Worldwide Express coming up on $700 million in revenue. Freight Quote is not far behind either. Companies like this want acquisitions to happen so they can have a “big event” like an IPO. A company with an agent-based sales model, though, is the worst possible situation to be in right now.

LM: Why is that the case?
McCandless: I was talking with a CEO from a company like this recently. His company does not have $40 million in EBITDA and he only has $15 million or so with $250 million to $300 million in the top line. The big players won’t make a play for a company like this because it is agent-based and cannot have an IPO.

LM: In terms of the agent-based model being a non-starter, why is that less attractive to a buyer?
McCandless: A company like that can sell, but it would likely be at a very low multiple and investors typically are expecting a higher return on their investment. There is usually not at much value. Also, if an agent leaves a company to join another one, the book of business, which is typically sticky, usually follows. There can be loyalty to the agent than the actual company.

LM: In the truckload market capacity is still pretty tight, and there is still a regulatory drag as well, which could get worse. That said, with these headwinds, is it more advantageous to focus on deals involving non-asset based carriers than asset based ones, is there more upside?
McCandless: It really depends on how you are keeping score. If you are going off of ROIC, then non-asset is probably going to be the right side of the coin for some time, especially on the truckload side.

LM: What about the LTL side?
McCandless: On the LTL side, you might get clipped a little bit. It depends on your relationships with LTL carriers, as well as their freight mix and how well they are operating.