The Fleet Management Paradox: Why Complexity Creates Value

Just yesterday, an announcement was published that has created some waves in the the fleet management industry: Geotab Acquires Verizon Connect’s International Commercial Operations. This is the first major acquisition from the market leader in Fleet Management – and at the same time a realization from Verizon that Fleet Management is difficult to master, especially in Europe. I have been wondering why that is. This post highlights some of my theories that could explain why fleet management is different from other technology sectors – in the most positive way imaginable for me, as I love being part of this industry for almost 20 years now.

Whether you are a member of this industry, a PE firm evaluating a platform investment, a strategic buyer considering a bolt-on, or a founder preparing for exit, understanding what makes this industry tick isn’t optional—it can be the difference between a successful deal and an expensive lesson. Hope you enjoy the ride!

First, maybe the elephant in the room. This industry is fragmented – way more fragmented than most other spaces. It contains lots of players – from small companies with just a handful of employees painting a dot on the map – to multi-national power-houses with 5 million subscriptions and hundreds of millions of dollars of revenues – everything is there and somehow making a living. After-market providers of solutions are competing with OEM’s offering similar services – and even though the OEM’s have an inherent advantage (they can install hardware into the vehicles before the customer even sees them, avoiding the hassle of after-market installation) – the after-market providers are still winning so far. It is a market full of consolidation opportunities—which explains both the M&A activity and the number of advisory call requests I am receiving. So lots of fragmentation, lots of potential to consolidate – and of course a big challenge: how the heck do you value companies in this space? Do the traditional multipliers for SaaS-businesses apply? How do you value companies and future potential in a space that is extremely profitable for some – but where clear role models and market leaders with high market shares are missing?

The second specialty is perhaps the variety of customers and customer needs. Fleet management is addressing a lot of customers, which can be segmented into different verticals – and lots of different use-cases in each one. A logistics customer might use a fleet management system mainly for staying compliant with tachograph rules – or tracking trailers. A construction customer to manage the working time of workers – or to track construction equipment. A government-fleet might want to get better insurance rates by introducing video telematics. A customer in the service-space might want to know about its vehicles maintenance state. A sales representative might use a fleet management system for tax compliance. The possibilities are endless – there is no “most important use-case”, if you ask 10 customers why they are using fleet management, you might be getting 20 different answers. And this is not even kidding – because the CIO, the company owner, the controller, the operations-manager and the repair-center manager of the same company might all be using the fleet management data in a completely different way. Not easy to understand and make sense of for somebody outside of the fleet industry.

This use-case diversity creates both risk and opportunity for M&A. It is easy to overvalue or undervalue a company – because you are focusing on the wrong set of use-cases. Very often, the companies themselves don’t really know or share what features are being used by customers – and which are merely nice-to-have for sales or marketing. Different potential buyers might build their buy-side business models on very different assumptions – leading to potentially big valuation gaps. And of course a big risk that those models come crashing down when reality sets in after a transaction. I don’t see a way out of this – except to diligently do your homework with a buy-side business model that is validated by experts in the industry. Did I mention that our industry is a bit – special? 😉

A third specialty that is not that common across industries is an astonishing ability to reinvent itself – and extend the addressable market. A couple of years ago, the market was significantly enlarged by fleet management players adding trailer-tracking to their solution portfolio – extending the addressable market space significantly. There are a lot of trailers out there, so this move alone more than doubled the number of vehicles that could be equipped with fleet management in the logistics-vertical. The construction segment saw a similar extension a while ago with providers starting to offer small beacon-solutions that allow to track construction machinery. Those beacons are cheap and offer little value beyond a dot on the map – but once again, there are many potential use-cases for them from tracking expensive drills, shovels for diggers to mobile toilets that you find on construction sites. Video telematics once again is enabling a new spin on an existing market – with new hardware to be sold and new value to be created for the existing customer fleets. And fleet management providers are also venturing into more human-centric solutions – like expense-reporting, working-times, vacation-management or driver license checks, extending their scope beyond just vehicles. Whenever the market appears to be slowing down or some kind of saturation appears to come in sight – the addressable market is extended with new products and new technologies enabling new market propositions. This is a specialty that not that many other industries have managed to achieve.

For investors, this reinvention capability is the hidden moat. Unlike saturating SaaS markets, fleet management providers can expand within their existing customer base by 30-50% through adjacent hardware and solution offerings—without significant customer acquisition costs. When evaluating targets, this is an important point to keep in mind and value. However – upselling to customers also does not come for free, sometimes requires new hardware and installation – and generally focus and work, which might impact new sales. How to incorporate both into a valuation is a challenge worth spending some time on!

Beyond that, countless more complexities and specialties are there. A Software-as-a-Service business model that still relies on hardware in large parts is not that common – and adds special challenges around managing installations. But also an extra layer of protection from churn, often leading to high customer retention rates, as taking out the existing hardware and replacing it with new kit from a new vendor is costly. The different go-to-market strategies that have been established by different players in the industry – from sales-representatives of the vendors visiting (big) customers, using resellers as sales-multipliers, telesales over the phone or companies selling directly via online-shops – you have it all – and it all somehow works for different vendors and customer groups.

The complex product portfolios of the vendors – with often more than a hundred different products to sell, if you count the different cables, sensors, telematics control units, driver terminals, cameras – and the apps, API’s and web-based portals they have in their portfolios, the complexity is huge. The different subscription models and bundles that the vendors are using to somehow tame this complexity – all of those topics somehow make our industry complex, special – and hard to understand for outsiders. If you are planning an acquisition in this space – prepare to tackle and understand all of those complexities and what they mean for your bid – it will be an interesting learning period, I can guarantee you that 😉.

After all this text, we have barely touched the tip of the iceberg – and there is still a whole mountain to discover under water. Just a couple of the topics I am looking for when evaluating fleet management companies:

• Hardware upgrade cycles and their impact on cash flow – 2G-migration, anyone? 😉
• Why geographic expansion often fails – and what to look for in companies that can scale internationally
• The customer retention metrics that matter (spoiler: churn % alone is not enough)

And the list goes on – the more time you spend in our lovely industry, the more you can discover that lays hidden under water!

I hope to have shown here that our industry is complicated, challenging – and extremely rewarding to be part of, once you master the complexity. At least this is how I feel about it. Having advised on transactions ranging from just a couple million euro bolt-ons to €100M+ platform deals, I’ve learned that the companies that look complicated to outsiders are often the ones with the strongest competitive moats and expansion potential. The key is knowing when complexity creates value and when it creates risk.

If you’re evaluating a fleet management acquisition or seeking an exit strategy, the difference between understanding these nuances and missing them can mean millions in valuation. I offer confidential strategy consulting to help deal-makers and founders navigate these decisions.

Reach out via LinkedIn or contact me to discuss your specific situation!