Large forwarder acquisition activity, advent of AI puts pressure on midsize NVOs

Midsize non-vessel-operating common carriers (NVOs) face an uncertain path when it comes to the future of their businesses, with pressure coming from the top end of the market and the future impact of artificial intelligence (AI).

According to a range of experts in forwarder and NVO mergers and acquisitions (M&A), the challenge for midsize NVOs centers around keeping up with efficiency gains that come from large forwarders consolidating their positions through acquisitions and introducing process automation that keeps operating costs in check.

"The bigger are getting bigger, and [small and medium-size businesses] have to keep up," said Mikael Olesen, managing director of M&A firm Logisyn Advisors. "And AI is coming up. More and more we're starting to see it will have a major impact."

Those pressures mean that midsize forwarders and NVOs have a choice.

"Either they have to make significant investments because they can't grow fast enough organically, so they make acquisitions," Olesen said. "Or they make an exit. And it's a good time to exit now because valuations are reasonable."

Many NVOs are benefiting from still-retained pandemic-era profits, but last year's lean freight market accelerated the market's move to control costs or drive broader economies of scale through acquisitions.

Additionally, forwarders and NVOs are being squeezed on space by certain container lines aiming to develop more direct relationships with shippers and, in some cases, acquiring forwarders themselves.

Missed opportunity?

"A lot of companies are thinking, I should have sold earlier," said Mark Motschmann, a managing partner at Edelweiss Corporate Finance who specializes in logistics M&A. "Now it's becoming a big challenge. Most companies didn't have a good '23 result, and most won't have a good '24 result."

The financial challenge of investing to stay relevant in the market is hefty for smaller NVOs.

"If they want to get to next level, they're likely to have to invest $2 million to $5 million [in technology] which means they need to work for another 10 years because their EBITDA [earnings before interest, taxes, depreciation and amortization] is maybe $500,000," Motschmann said.

There is more scope for NVOs catering to lucrative niches, like pharmaceuticals or high-tech, to remain profitable with a defensible business model, he added. Those companies will struggle if they only work in general cargo because larger forwarders have the economy of scale, "and size matters."

Additionally, Olesen said larger forwarders have the free cash to invest in AI to automate processes and reduce headcount to improve their efficiency per file handled. They also have the financial buffer to fail at such projects and still prosper, whereas midsize forwarders and NVOs generally don't have that luxury.

Rate revenue dependency

The extent to which the current state of the market matters to midsize NVOs when it comes to their valuation and viability is underscored by how dependent most intermediaries are on freight rate revenue.

Mayur Bawa, an independent M&A consultant and former DHL and Seko Logistics executive, estimated that forwarders generally derive about 80% of their revenue from freight rates and 20% from accessorials or ancillary services. Around 70% of their profitability comes from freight rates, since those ancillary services are more profitable.

"Every company is different, but the profitability will be higher on accessorial changes than on freight," Bawa said. "But you won't have those without the linehaul. The heart of this business is still the linehaul."

Bawa said that midsize NVOs are "always under pressure, no matter the market, from an M&A perspective."

"They're either commodity- or relationship-driven," he said. "And if it's the latter, there's a limited period of time post-closing that the seller will be with you, so you can lose those relationships."

Additionally, midsize NVOs just generally carry risk, from a valuation standpoint, due to the typical makeup of their customer base.

"It's really difficult to value these companies right now," Bawa said. "Bigger companies, you can price in churn. Most of the mid-sized companies have a top 10 client profile that covers 50% and maybe even 75% percent of their revenue. So there's a big risk if you lose a key client."

Olesen, meanwhile, said he also sees the mid-market turning to each other to navigate the challenges.

"I do think there will be consolidation in the mid-market, some by joining forces, but being relevant enough to get attention from carriers and where you get economies of scale and value prop to clients who don't want to deal with the big guys," he said.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.