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The past six months have seen a flurry of big-name acquisitions in the road haulage sector, including Stobart Group's capture of James Irlam & Sons, DSV's takeover of Roadferry and Hanbury Davies' sale to Wincanton. However, other firms have warned that acquiring a company does not automatically spell increased growth and prosperity. Indeed, Ramage Distribution, which was forced to call in the administrators in April, blamed the problems it inherited following its acquisition of UFD Group  in July last year as a contributing factor to its financial woes.

And, even more recently, Rentokil pointed the finger at difficulties surrounding the integration of Target Express, the parcels business it acquired in 2006, with its core City Link operation. You might also point at Innovate Logistics, a company that has driven rapid expansion through acquisition, and has now been put up for sale by its owner, Eimskip, following poor trading performance. Insiders point to poor integration of the businesses it bought as a reason for the below-par financial performance.

Looking back further, perhaps one of the trickiest acquisitions appeared to be Somerfield's takeover of Kwik Save. The move put strain on the company's supply chain and stock availability and weakened sales in both chains. Somerfield went on record at the time to say it had "experienced many difficulties as we sought to rationalise the Kwik Save and Somerfield systems".

Of course, despite all the negative  publicity there are, as the likes of Stobart, Wincanton and DSV (which was back on the acquisition trail last week with its purchase of ABX Logistics) prove, some that are prepared to dip their toe into the market. But is it really such a good time to buy when the trade press and national newspapers are filled with stories about credit squeezes, spiralling fuel prices, collapsing companies and job losses?

Fewer deals

According to business and financial adviser Grant Thornton, merger and acquisition activity in the UK has slowed dramatically in the first quarter of the year, with the number of announced domestic deals dropping to their lowest level in more than a decade. Overall, announced UK domestic deals in the first three months of the year amounted to just over £7bn - a drop of more than 40% on the same period in 2007 (£12.5bn) and the lowest quarterly value in more than four years. It was also the first quarter that domestic deal numbers fell below 400 for more than a decade, with just 377 merger and acquisition (M&A) deals announced in this period.

David Brooks, head of mergers and acquisitions at Grant Thornton Corporate Finance, says the weakness in announced M&A numbers in the first part of 2008 was an inevitable consequence of a protracted credit squeeze, as the lending environment for all but the most risk-light deals became a much more convoluted environment. "Analysing announced deals allows us to gain a strong indication of the year ahead, and unfortunately it is a far more subdued M&A environment than the past three, bullish years," warns Brooks. "After a small M&A bump caused by the change in capital gains tax, it seems the companies that have in the recent past pursued an aggressive acquisition strategy have become much more circumspect, while those that had been toying with the idea of acquisition for expansion are now shelving plans, particularly in those sectors that are struggling."

However, Brooks says that it is the case that in times of downturn there are would-be bargains, and several sectors have seen increased activity as consolidation plays are set in motion, with cash-rich trade buyers snapping up undervalued targets. Consolidation has certainly been the name of the game in road haulage over the past few months. The Stobart Group's takeover of rival James Irlam & Sons was just one big-name deal. A spokeswoman for the group says that Irlam was an ideal takeover for Stobart, based on its similarity of culture, background and the way it operated.

Irlam and Stobart had experienced a long working relationship and had already established alliances with some of their bigger customers, adds the spokeswoman. Not only that, but they had built up respect for each other's companies and the directors knew each other very well on a personal level. The acquisition of Irlam immediately gave Stobart an experienced management team. Irlam's managing director David Irlam is now one of only four executive directors at Stobart - a move which makes Irlam integral to the organisation's success.

Understanding the business

"We have someone in David who knows what makes the drivers tick, who understands haulage and doesn't just float around and talk about leadership," says the spokeswoman. Job opportunities for Irlam staff could also increase as Stobart continues its transformation into a multi-modal operator. "It could give them more opportunities for growth and to change career with us," adds the spokeswoman. In the future it might even consider giving staff the opportunity to become shareholders.

A continuing appetite for acquisitions in the distribution industry seems to be still very much in evidence. Wincanton, which took over a number of companies in the last six months, including the container logistics business of Hanbury Davies, is now looking at further acquisitions both the UK & Ireland and mainland Europe, the group has said. It made no mention of the credit crunch and falling levels of confidence in the economy. Wincanton chief executive Graeme McFaul says: "We continue to see attractive opportunities for Wincanton both in terms of organic growth and further acquisitions."

Time for trade buyers

Paul Zimmerman, partner in corporate finance at Deloitte, says that until the credit crunch started to bite, merger and acquisition activity was driven by the private equity sector. But now he thinks the tide could turn in favour of the trade buyer. Firms that have little or no gearing on their balance sheet could find sound opportunities to take on bank debt over a long period in order to acquire a company, says Zimmerman.

But anyone thinking of an acquisition should do proper due diligence, he warns, as there are potential pitfalls. Zimmerman says there are lots of reasons why acquisitions do not succeed - anything from trying to integrate different systems to opting for a firm with an incompatible company culture or business fit. Paying too high a price could also come back to haunt an acquiring company, adds Zimmerman. "Spending time with the target company before the deal is done is a good idea - in this it is a bit like dating!" says Zimmerman.

Tips on assessing whether to acquire a company:

• Work out the vendor's objectives. For example, does the vendor have to sell? If the answer is yes, what time pressure is it under?
• Make sure that the business has no major problems. The vendor's sales memorandum usually glosses over the weak areas.
• Research its market and its main competitors.
• Meet the vendor. Try to visit the business.
• Assess the key risks associated with the business's future trading.
• Ask industry experts for their views.
• Make your own profit projections. Do not rely on the vendor's figures.
• Identify where savings can be made, and where there is scope to increase profits.
• Consider your level of risk - heavy borrowing to finance the purchase could increase your risk. Conversely, the lack of adequate finance may have been all that was holding the company back.
• Carry out detailed due diligence, including seeking customers' and suppliers' opinions.
• Analyse historical information and trends (eg sales growth, profit margins).
• Compare the business' financial projections with other evidence you have. Does it reflect the outlook for the industry and the whole economy?
• Check up on major balance sheet items (how large are the business's bad debts?).
• Consider doing an employee audit, if you are allowed access to the business.
• Check for any past, current or pending law suits.
• Examine all contractual obligations.

If due diligence checks have been thorough, companies should be in a stronger negotiating position. The problems and weaknesses uncovered may lead the company to lower its offer, or to ask for tougher warranties and indemnities.

© BHP Information Solutions Ltd 2007