Not every acquisition goes well.  In fact, many times, acquisitions take place for what seems like all the right reasons, and the execution never lives up to the hype.  In some sad cases, an acquisition can even bury a company.  Take for example the recent bankruptcy of Yellow.  This was not the first time that this company has filed for bankruptcy… that was in 1951.  And it’s not any surprise that they didn’t survive their most recent financial difficulties.  Sadly, they filed for relief from the US Government in a Covid-19 relief package, but poor execution, poor union relations, and the decision to be the low-cost provider ultimately doomed the company and it will be liquidated in coming weeks. 

Trucking is not a bad business, but it is a tough business, and it has gone through a lot of change over the last few years.  Some companies were able to become stronger, with much larger competitive moats through this period, while others couldn’t keep up with the pace of technological change.  On some level, trucking used to be a business that any person with enough money to buy a big rig and the time to get a commercial driver’s license could enter.  That reality meant that price wars often dictated success. 

Obviously, it’s very difficult for small players to play the price war game for any length of time, so bigger players were usually most successful.  This concept incentivized many mergers over the years.  There is a lot of history that we could point to as relevant to this discussion, but for the purposes of simplicity, there were three things that ultimately led to the demise of Yellow Trucking:  Too much debt, a lack of integration planning, and a lack of cost flexibility.  All three are great lessons for anyone buying a company.  

First, debt is a wonderful tool.  It is often the lubrication that allows the acquisition machine to work.  Furthermore, because debt is generally less expensive than equity, this source of capital helps increase return on equity when buying anything.  However, how much any one company can take down is often a question of the variability of the business.  Cyclical businesses, or economically sensitive businesses like trucking should keep debt levels relatively low.  Second, Yellow refused to integrate the businesses that they acquired.  By refusing to do so, they failed to take advantage of the benefits of scale, which left overhead costs too high.  And third, their union work force and labor agreement ultimately did not account for the variability in the economy. 

This ends an ugly chapter in trucking history for 30,000 employees.  Thankfully, the trucking industry is very short on people.  Hopefully they’ll all be at new posts soon.  

For us, we look at this case study as an opportunity to remind ourselves of the importance of execution.  Our operating team has experience working in the trenches with businesses as they go through integration to maximize synergy and minimize risk.  When we make an acquisition, it never sits without attention to every detail. 

Source: The Wall Street Journal


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