Consolidation in the LTL Industry€¦ · Sources: Yahoo Finance, Hoovers. 6 Merger & Acquisition...
Transcript of Consolidation in the LTL Industry€¦ · Sources: Yahoo Finance, Hoovers. 6 Merger & Acquisition...
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Consolidationin the LTL Industry
SMC3 Summer Meeting
June 17, 2004
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier ImpactShipper ImpactCritical Success Factors
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Merger & Acquisition Overview
Merger/acquisition announcements make big headlines
Recent M&A Bids
Comcast’s bid for Disney
JP Morgan’s bid for Bank One
Cingular’s bid for AT&T Wireless
Oracle’s bid for PeopleSoft
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Merger & Acquisition Overview
When successful, M&A transactions can bring considerable benefits
New marketsNew productsImproved revenue mix
Revenue Benefits
Costs BenefitsImproved asset utilizationOperating efficienciesDecreased back-office/ administrative costsIncreased buying scale
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Merger & Acquisition Overview
Bank One grew from a community bank in Columbus, OH to a banking leader during the late 1980’s and 1990’s
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Geographic expansion through acquisitionsAdding new services (e.g., credit cards)
Sources: Yahoo Finance, Hoovers
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Merger & Acquisition Overview
Tyco became a conglomerate with $35 billion in annual revenue through “serial” acquisitions…
1997 1998 1999ADT ($6.6 b)AT&T’s submarine cable unitKeystone Intl. (industrial valves)
Wells Fargo’s alarm businessUnited States Surgical (surgical products)
AMP (electrical and electronic connectors)Raychem (electronic components)
Source: Hoovers
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Merger & Acquisition Overview
…And achieved strong stock price growth during the period
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Source: Yahoo Finance
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Merger & Acquisition Overview
However, expected benefits are not always achieved
Market opportunitiesCost savings
Flawed Synergy Assumptions
Integration Complexity
Sales & MarketingOperationsPeople/culture
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Merger & Acquisition Overview
It is estimated that more than half of business combinations fail to produce value
Value from Mergers
M&A failure rate of 60% to 70% (Chairman, Bain & Co.)M&A failure rate of 60% to 80% (CEO A.T. Kearney)
Neutral30%
Added Value17%
Destroyed Value53%
Source: KPMG, 1999
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Merger & Acquisition Overview
AOL/Time Warner has suffered through considerable turmoil since their merger
2000 2001 2002 2003 2004
Chairman Steve Case Steps Down
COO Bob Pittman Resigns
$166 Billion Merger Announced
Company Reports $45b Quarterly Loss
CEO Gerald Levin Retires
AOL/TW Merger Approved
AOL dropped from name
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Merger & Acquisition Overview
AOL/Time Warner’s stock price has suffered as well
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Source: Yahoo Finance
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Merger & Acquisition Overview
The Daimler Benz - Chrysler merger has also not achieved the benefits expected from the global marriage of auto makers
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Source: Yahoo Finance
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier ImpactShipper ImpactCritical Success Factors
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LTL Consolidation
As the U.S. economy recovers, strong freight volume is benefiting LTL carriers…
Economic RecoveryHOS ImpactsInterest Rates
FuelInsurance
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LTL Consolidation
…And is driving improved carrier stock performance this year
Source: BigCharts.com
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LTL Consolidation
Continued growth is important for above-average stock appreciation
Impact of Growth on Shareholder Value
0%
4%
8%
12%
16%
20%
Shrinking UnprofitableGrowth
Cost Cutting ProfitableGrowth
Mar
ket V
alue
Ann
ual G
row
th
Source: Grow to be Great 1995
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LTL Consolidation
Bigger may mean better…Operating Ratio to Size*
80%
85%
90%
95%
100%
105%
110%
$- $500 $1,000 $1,500 $2,000 $2,500 $3,000
Revenue (Millions)
Ope
ratin
g R
atio
But is this really true or just a function of the smallest carriers?*All LTL carriers reporting with the DOT in 2000Source: ATA Motor Carrier Annual Report, 2000 data
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LTL Consolidation
The benefits may still hold when carriers under $100M are removed from the analysisOperating Ratio to Size*
Regional and Multi-Regional Carriers
85%
90%
95%
100%
$- $400 $800 $1,200 $1,600 $2,000
Revenue (Millions)
Ope
ratin
g R
atio
*Regional/multi-regional carriers with $100 million or greater in revenue reporting with the DOT in 2000Source: ATA Motor Carrier Annual Report, 2000 data
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LTL Consolidation
This may be due to a cost advantage for larger LTL carriersOperating Cost/Employee by Size*
-
50,000
100,000
150,000
200,000
250,000
$- $500 $1,000 $1,500 $2,000
Revenue (Millions)
Ope
ratin
g C
ost/E
mpl
oyee
*Regional/multi-regional carriers with $75 million or greater in revenue reporting with the DOT in 2000Source: ATA Motor Carrier Annual Report, 2000 data
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LTL Consolidation
Carriers can grow either “organically” through internal growth or through acquisitions
Internal G
rowt
Low risk
erationally
High ris
competitively
Acquisition
Low risk
mpetitively
High ris
operationally
k k h
op co
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LTL Consolidation
Within the LTL industry, there are 2 general types of consolidation opportunities
“End-To-End”“Side-By-Side”
+ +
Gain operating efficiencyGenerally cost-driven
Open new marketsGenerally service-driven
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LTL Consolidation
Mergers that are successfully executed will challenge competing carriers
No change or decreased
Improved or gain share
Profit Impact
Regionals: Worse vs. merged carrierCross-region: Worse due to new entrant
Improved vs. regional competitorsNew entrant in cross-region market
Competitive Position
No changeLower costCost Structure
No changeImproved Service Offering
Competing CarriersMerged CarrierCharacteristic
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier Impact- “Side-by-Side” Consolidation- “End-to-End” Consolidation
Shipper ImpactCritical Success Factors
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Carrier Impact – “Side-by-Side” Consolidation
“Side-by-side” combinations can provide significant cost reduction benefits
Potential Cost Benefits
Improved terminal efficiencyImproved equipment utilizationImproved line haul efficiencyIncreased capacity
Decreased administrative costImproved purchasing power
Increased Density Benefits
Back-Office Benefits
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Carrier Impact – “Side-by-Side” Consolidation
Service benefits from a side-by-side combination are driven by increased density
Potential Service Benefits
Greater geographic area for 1-day or 2-day serviceImproved service to mid-sized or small cities where density is gained
Increased Density Benefits
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Carrier Impact – “Side-by-Side” Consolidation
Princeton Optimization ran an LTL Side-by-Side merger scenario
Example TerminalOperating Savings (per Day)
25Head Loads
13Direct
816Primary
919Total Loads
125250Bill Count
Acquired Carrier
Acquiring Carrier
Source: Princeton Optimization Inc.
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Carrier Impact – “Side-by-Side” Consolidation
Acquiring Carrier: North Carolina Terminal
Source: Princeton Optimization Inc.
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Carrier Impact – “Side-by-Side” Consolidation
Merged Carrier: North Carolina Terminal
Source: Princeton Optimization Inc.
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Carrier Impact – “Side-by-Side” Consolidation
The networks are similar because we went from 19 daily loads…
Total Loads = 19Source: Princeton Optimization Inc.
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Carrier Impact – “Side-by-Side” Consolidation
…To only 24 loads, with more direct and head loads
Total Loads = 24Source: Princeton Optimization Inc.
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Carrier Impact – “Side-by-Side” Consolidation
Merger Benefits to Acquiring Carrier
50%
Revenue20%Costs
Financial Benefits
Operating Benefits
26%Loads
200%
Directs Head Loads
20%
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Carrier Impact – “Side-by-Side” Consolidation
Improved revenue mix comes from improved service offerings, not a decrease in the number of carriers
Revenue Mix Benefit
Improved service offeringImproved capabilities to service customersBroader customer base
Decrease in number of competing carriersDecrease in industry capacity
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Carrier Impact – “Side-by-Side” Consolidation
Yellow Roadway achieved improved financial performance in its first quarter as a merged company
$1.3
$1.4
$1.5
$1.6
1Q 2003 1Q 200495%
96%
97%
98%RevenueOperating Ratio L
TL
Operating R
atioL
TL
Rev
enue
(Bill
ions
)
*LTL business onlySource: Yellow Roadway First Quarter, 2004 Press Release
1Q 2004 Performance
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier Impact- “Side-by-Side” Consolidation- “End-to-End” Consolidation
Shipper ImpactCritical Success Factors
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Carrier Impact – “End-to-End” Consolidation
“End-to-end” combinations can improve a company’s service offerings
Potential Service Benefits
Improved service to mid-sized or small cities where density is gained
Increased Density Benefits
Larger service territoryIncreased number of lanesGreater geographic area for 1-day or 2-day service
New Service
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Carrier Impact – “End-to-End” Consolidation
A secondary benefit of an “end-to-end” combination can be decreased costs
Potential Cost Benefits
Improved flowing of traffic over the existing regional networksFewer intermediate handlings
Decreased administrative costImproved purchasing power
Increased Density Benefits
Back-Office
Benefits
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Carrier Impact – “End-to-End” Consolidation
FedEx Freight has successfully grown following the AF acquisition, even during the slow economy
Performance
$11
$12
$13
$14
2001* 2002 200391%
92%
93%
94%Revenue/CWTOperating Ratio
Rev
enue
/CW
T Operating R
atio
*Fiscal Year 2001 did not include a full year of FedEx Freight East performanceSource: FedEx SEC Filings and Annual Report
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Carrier Impact – “End-to-End” Consolidation
SCS is lowering its operating ratio while integrating several carriers acquired during the 1999 – 2001 period
Operating Ratio*
90%
92%
94%
96%
98%
100%
1998 1999 2000 2001 2002 2003
*Annual O.R.s include performance of separate carriers prior to being acquiredSources: SCS financial filings; ATA Motor Carrier Annual Report, 1998 - 2000 data
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Carrier Impact – “End-to-End” Consolidation
Other LTL industry deals did not result in the intended benefits
End-to-endGreat strategic fitOperational combination failed“Side-by-side” dealNo longer in business
Ryder – PIE
Helms – Burns
3-way end-to-end dealCompany went bankrupt
ANR
End-to-end dealPenn Yan was liquidated
Con-Way –Penn Yan
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier ImpactShipper ImpactCritical Success Factors
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Shipper Impact
There is plenty of opportunity for consolidation in the regionaland multi-regional marketplace
ConWay8%
AAA Cooper2%
SEFL2%
USFC7%
FedEx Freight8%
Overnite5%
Estes/GI4%
SCS3%
ODFL2%
Averitt2%
All Other57%
Estimated Regional/Multi-Regional LTL Market Share*
*Based on Stephens Inc. estimate of $27 billion in regional LTL revenue
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Shipper Impact
Going forward, there may be more limited consolidation within the long-haul LTL segment
Estimated Long-Haul LTL Market Share*
All Other25%
Watkins8%
ABF17%
Yellow Roadway
50%
*Based on Stephens Inc. estimate of $12 billion in long-haul revenue
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Shipper Impact
Shippers should benefit from service improvements following consolidation
Fewer carriers with:Broad service offeringsStrong capabilities
Many carriers with:Limited serviceLimited capabilities
TODAY PREFERRED
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Shipper Impact
Consolidation among regional/multi-regionals won’t eliminate competition, and could actually lower shipper rates
AAA CooperAverittCWSSCS - SAIAEstesFedEx Freight EastODFLOverniteR&LSEMFUSF Dugan
SE Region Carriers
Competitive rates with 1/2 as many carriers
Carriers with lower costs
Fewer expensive 1-off shipments
Consolidation Impact on Shipper Rates
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Consolidation in the LTL Industry
Contents
Merger & Acquisition OverviewLTL ConsolidationCarrier ImpactShipper ImpactCritical Success Factors
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Critical Success Factors
How does a merged company ensure that the pieces of the puzzle fit together properly?
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Critical Success Factors
Successful mergers are well conceived,…
Assess merger fit with company strategyCompare merger to other optionsUnderstand the potential synergies- Revenue enhancement- Cost take-out
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Critical Success Factors
…well planned,…
Assess potential merger partners- Network- Synergies- Culture
Analyze potential competitor responses
Plan the post-merger integration
Difficult
EasySmall Large
Benefits
Ease
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Inte
grat
ion Sales
Force
Insurance
Purchasing
Inventory Management
Systems
Illustrative
Difficult
EasySmall Large
Benefits
Ease
of
Inte
grat
ion Sales
Force
Insurance
Purchasing
Inventory Management
Systems
Illustrative
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Critical Success Factors
…and executed according to the planDifficult
EasySmall Large
Benefits
Ease
of
Inte
grat
ion Sales
Force
Insurance
Purchasing
Inventory Management
Systems
Illustrative
Difficult
EasySmall Large
Benefits
Ease
of
Inte
grat
ion Sales
Force
Insurance
Purchasing
Inventory Management
Systems
Illustrative
1 2 3 4 5 6 7Identify Best PracticesIdentify Impact on SuppliersCommunicate with SuppliersImplement System ChangesImplement Process Changes
WeekTask
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