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Will UPS’s acquisition of TNT cause FedEx to under deliver in Europe?

China counterfeits

UPS acquires TNT and the global big four logistics companies are down to the big three. A corporate strategy article by Thunderbird students Jeffrey Karlsson, Lauren Liberto, Gregory Pijal, Hugo Riquelme and Kenneth Wallace

The largest express-parcel company in the world, UPS, recently announced the intent to purchase Dutch company TNT Express on March 19, 2012 in order to expand its reach, resources, and customer base primarily in Europe where TNT already has a significant ground business.  The transaction is expected to close in the third quarter of 2012.[i] TNT Express started in Australia in 1946 with meager beginnings having only one truck in its fleet[ii], however, since then the company has expanded worldwide. In 1996 Dutch company KPN acquired TNT, and in 2005 TNT became the official merged company name. Although TNT operates around the world, UPS’s main focus in the merger was to boost its European presence. Today TNT Express UK & Ireland employs 11,000 workers, delivers 100 million items a year for its UK customers, operates in 70 hubs, and has a fleet of 3,500 delivery vehicles, which will aid UPS in gaining greater access to European businesses.[iii]

China counterfeits

UPS acquires TNT and the global big four logistics companies are down to the big three. A corporate strategy article by Thunderbird students Jeffrey Karlsson, Lauren Liberto, Gregory Pijal, Hugo Riquelme and Kenneth Wallace

The largest express-parcel company in the world, UPS, recently announced the intent to purchase Dutch company TNT Express on March 19, 2012 in order to expand its reach, resources, and customer base primarily in Europe where TNT already has a significant ground business. The transaction is expected to close in the third quarter of 2012.[i] TNT Express started in Australia in 1946 with meager beginnings having only one truck in its fleet[ii], however, since then the company has expanded worldwide. In 1996 Dutch company KPN acquired TNT, and in 2005 TNT became the official merged company name. Although TNT operates around the world, UPS’s main focus in the merger was to boost its European presence. Today TNT Express UK & Ireland employs 11,000 workers, delivers 100 million items a year for its UK customers, operates in 70 hubs, and has a fleet of 3,500 delivery vehicles, which will aid UPS in gaining greater access to European businesses.[iii]

UPS was prepared to acquire TNT due to its long-term strategic vision for international expansion specifically targeting to increase its European presence. Although the proposed purchase price of $6.77 billion (€5.16 billion) plus integration costs, is the largest in UPS history and is at a premium of 54% to TNT’s current stock price of $12.51 per share (€9.5 a share); the future benefits to UPS are significant and worth the investment.[iv] UPS has had the advantage of having a lot of capital compared to its competitors and therefore used its competitive advantage of size to expand its presence in Europe. The combined synergies that the two companies are projected to create along with TNT’s existing ground business, made it a very attractive fit.[v] Scott Davis, the chief executive of UPS, believes that the merger creates an opportunity to expand complimentary products to customers. UPS estimates that it will create pre-tax synergies of €400m to €550m ($525m to $722m) in just four years.[vi] The merger is also estimated to give UPS a 25% to 30% market share, which will be comparable to European small package delivery market leader DHL.[vii]

FedEx had some initial interest in acquiring TNT, but ultimately believed that it made the right decision not to counterbid. Fred Smith said FedEx did not pursue TNT due to a company strategy for Europe that would be inconsistent with a TNT merger, plus the company wanted the ability to use its resources for expansion in other regions of the world, particularly in Asia.  Smith’s responded to the UPS/TNT merger by saying, “In recent years, we have made significant investments throughout Europe, greatly expanding our network coverage and improving service to customers”…“We have an excellent strategy that has steadily advanced our position in the region, and we are well positioned for profitable growth as we increase the number of direct-served locations in Europe.” Many analysts agree with Smith’s assumption, that FedEx has a good presence relative to the market. [viii]

In the rest of this article we will examine FedEx’s strategy past and present in the European market and how it fits into their global ambitions.  With regards to immediate responses to the TNT acquisition, FedEx came back firing with a recent acquisition of Opek, a Polish company, to expand its ground delivery network in Europe. In addition to this action, we believe FedEx should focus on increasing its customer base by acquiring other existing regional domestic trucking companies, expanding its European sales force, and considering whether to open another hub in Europe depending on the growth in the market.  However they need to carefully manage their needs in Europe and not hamper their ability to grow in Asia. [ix] With this factor in mind, we believe that FedEx made the right decision not to use their financial resources to acquire TNT because of the lower projected growth rates in Europe and the freedom to focus on its strategy of utilizing resources for higher future growth regions, such as Asia. [x]

FedEx European Strategy in regards to acquisitions

Frederick W. Smith, chairman, president and chief executive officer of FedEx Corp stated, “Our presence in Europe is backed by strong leadership and management and dedicated team members. We have an excellent strategy that has steadily advanced our position in the region, and we are well positioned for profitable growth as we increase the number of direct-served locations in Europe.”

Over the last several years FedEx has been making its presence known in Europe.  In 2006, FedEx purchased ANC Holdings Limited a UK domestic express transportation company, and in 2007 it began solely owned operation in Hungary after acquiring its service provider Flying Cargo Hungary.   In 2009, FedEx Express broadened its presence by expanding its European hub at Roissy-Charles de Gaulle Airport, Paris, France, making it FedEx’s largest hub outside of the United States.  In 2010, FedEx reallocated its Central and Eastern European hub from Frankfurt to Cologne, Germany, and opened 26 new stations across France, Germany, Italy, the Netherlands, Northern Ireland and Sweden.  FedEx Trade Networks has greatly expanded its presence in Europe, adding 22 locations in recent years to complement the portfolio of express services.  Nonetheless, FedEx still has a small presence in Europe with only a 3% market share, compared with industry rival UPS, post-TNT acquisition, at a market share of 16% which matches the market share of current European leader DHL.[xi]

FedEx had expanded its presence in Europe both organically and through purchases of smaller companies.  Most recently, FedEx acquired Opek, a family-owned Polish company founded in 1994.  Opek had established a structured network that covers all of Poland by operating 44 stations throughout the country. Opek operates an automated hub in Lomianki, near Warsaw, and additional hubs in Lodz and Katowice; and employees more than 1,200 workers and contracts over 1,300 drivers.  FedEx’s subsidiary, FedEx Express, expects the acquisition to provide approximately $70 million in annual revenue with an annual shipping volume of 12.5 million shipments.[xii]

FedEx European Strategy in regards to future European investments

The European Market is predicted not to have significant growth in the near future (much lower than 3.6% per annum estimated in a global sense for the period 2012-2016[xiii]) and for this reason FedEx does not expect to have a huge increase in European sales volume. It is important to note that because FedEx does not treat FedEx Express subsidiaries with a UN model mentality, with all decisions made at corporate, each subsidiary has the freedom to research where the growth is and act on its findings. However, it is possible for FedEx to increase margins in some particularly profitable and strategic customer segments in Europe by doing the following:

  • Put focus in idiosyncratic aspects related to FedEx services in Europe to develop customized services that focus on national customer preferences and their new trends.
  • Use social networks to market its services and to develop marketing research, for example Facebook, Twitter or LinkedIn. Through this it is possible to do promotions, to develop segmented products, to analyze new trends and better pricing strategies.
  • Improve its logistics network by buying or to developing a partnership or strategic alliance with a global or strategic leader in air freight, such as Air France-KLM or Deutsche Lufthansa, or with a ground freight transport company.
  • Develop common research through potential associations with local or global players, but take care of its potential inconveniences; In other words they need to develop a more win-win relationship with their business partners.
  • Focus on recruiting talented people locally to increase the value of the human capital of FedEx in Europe and to tap into innovative ideas about local needs and new trends.
  • Recognize that FedEx’s European business is heavily weighted to delivery of long-haul packages (US to Europe or Asia to Europe) which is not expected to be negatively impacted by the UPS/TNT synergies.

FedEx’s European Strategy in context of their Global Corporate Strategy

As stated above, FedEx elected to pass on the opportunity to counterbid for the TNT acquisition for several reasons:

1. The price would have put a strain on their cash flow due to the high purchase price and the debt assumed (UPS was better positioned with stronger cash flow to be able to fund the acquisition at the significant premium paid above TNT’s market price).

2. Europe is not growing as quickly as Asia and other world markets (with Asia being an area of strategic focus for FedEx).

3. FedEx is pursuing a strategic and focused growth path (not being big to just be big).

When evaluating the above three points, FedEx chose its preferred path and many analysts in the market tend to agree[xiv].  Additionally, if we look back to the 2002-2004 time frame, and re-visit when UPS acquired Mailboxes etc. it was approximately one year later that FedEx followed with a better acquisition and integration of the Kinko’s copy centers[xv].  Although large strategic acquisitions do not become available as frequently as smaller ones, and they are more difficult to fully integrate and therefore more risky, FedEx is very well positioned to advance in Europe and in other international markets including BRIC regions.  FedEx is also in a more nimble position to acquire smaller key assets throughout the world due to regulatory issues that UPS will currently be facing with the TNT purchase.  An example of one of the issues UPS is facing is due to EU regulations; UPS is being forced to spin off TNT’s airline division as no foreign company can own a European airline.[xvi]

FedEx has not been sulking or complacent in the marketplace since the UPS/TNT announcement.  As noted previously FedEx has just acquired the Poland-based courier company Opek Sp.z o.o. (Opek) to continue its European expansion through “smart, strategic investments”.[xvii] Analysts indicate that Opek will better position FedEx within growing sections of Europe and because of its smaller size will be easier to integrate.[xviii] Additionally FedEx has accelerated the updating of its global air fleet by acquiring new significantly more fuel-efficient long-haul Boeing airplanes and by improving the use of hybrid and electric vehicles on the ground.  The combination of these events significantly improves the cost structure of their European and worldwide operations and provides an advantage to FedEx over UPS and DHL which is lagging in these areas.  The advances in technology, allowing the pushing of costs to consumers that input and track orders, the high utilization of existing and pending cost-effective air and ground infrastructure , and the clear focus on what types of products and services FedEx will engage in will provide FedEx with a bright well-positioned future.

References


[i] http://www.logisticsmgmt.com/article/ups_reaches_agreement_to_acquire_tnts_express_business/

[ii] http://www.tnt.com/corporate/en/site/home/about_us/tnt_glance/history.html

[iii]http://www.tnt.com/express/en_gb/site/home/about_us/about_tnt_express/key_facts.html

[iv] http://news.yahoo.com/ups-buy-tnt-express-6-77b-081728492.html

[v]http://pressroom.ups.com/Press+Releases/Current+Press+Releases/United+Parcel+Service+and+TNT+Express+to+Create+a+Global+Leader+in+the+Logistics+Industry

[vi] http://www.ft.com/intl/cms/s/0/6e83779e-71d0-11e1-b853-00144feab49a.html#axzz1rpcC8fso

[vii] http://www.investorplace.com/2012/03/ups-solidifies-its-lead-over-fedex/

[viii] http://www.commercialappeal.com/news/2012/mar/16/why-dutch-delivery-firm-tnt-better-fit-ups-fedex/?print=1

[ix] http://search.proquest.com.ezproxy.t-bird.edu/financialtimes/docview/935459157/135E9F9592A53E5660A/2?accountid=31734 (only accessible through being logged into Thunderbird’s IBIC database system)

[x] http://www.reuters.com/article/2012/02/23/tnt-fedex-idUSL5E8DN3P120120223

[xi] http://www.zacks.com/stock/news/72634/fedex-expanding-in-europe

[xii]http://finchannel.com/Main_News/Business/107169_FedEx_to_Acquire_Polish_Shipping_Company_Opek_Sp.z_o.o./

[xiii] IBIS world estimation http://clients.ibisworld.com.ezproxy.t-bird.edu/globalindustry/summary.aspx?indid=1660 (only accessible through being logged into Thunderbird’s IBIC database system)

[xiv] http://www.commercialappeal.com/news/2012/mar/19/fedex-rival-ups-cinches-677b-deal-tnt-express/

[xv] http://www.clickz.com/clickz/column/1703489/the-rebrand-challenge-ups-mbe-vs-fedex-kinkos

[xvi] http://online.wsj.com/article/BT-CO-20120323-709996.html

[xvii] http://investors.fedex.com/phoenix.zhtml?c=73289&p=irol-newsarticle&ID=1680469

[xviii] http://www3.valueline.com.ezproxy.t-bird.edu/vlquotes/quote_news.aspx?symbol=FDX&viewoption=news&storyid=1246d4918%2