consolidation in the ltl industry€¦ · sources: yahoo finance, hoovers. 6 merger &...

Consolidationin the LTL Industry

SMC3 Summer Meeting

June 17, 2004

2

Consolidation in the LTL Industry

Contents

Merger & Acquisition OverviewLTL ConsolidationCarrier ImpactShipper ImpactCritical Success Factors

3

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

4


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

5


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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k Pr

ice

Geographic expansion through acquisitionsAdding new services (e.g., credit cards)

Sources: Yahoo Finance, Hoovers

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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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…And achieved strong stock price growth during the period

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Source: Yahoo Finance

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However, expected benefits are not always achieved

Market opportunitiesCost savings

Flawed Synergy Assumptions

Integration Complexity

Sales & MarketingOperationsPeople/culture

9


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

10


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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AOL/Time Warner’s stock price has suffered as well

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The Daimler Benz - Chrysler merger has also not achieved the benefits expected from the global marriage of auto makers

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Contents


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LTL Consolidation

As the U.S. economy recovers, strong freight volume is benefiting LTL carriers…

Economic RecoveryHOS ImpactsInterest Rates

FuelInsurance

15

LTL Consolidation

…And is driving improved carrier stock performance this year

Source: BigCharts.com

16

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

18

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

19

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

20

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

21

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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Contents

Merger & Acquisition OverviewLTL ConsolidationCarrier Impact- “Side-by-Side” Consolidation- “End-to-End” Consolidation

Shipper ImpactCritical Success Factors

24

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

25


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


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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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Acquiring Carrier: North Carolina Terminal


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Merged Carrier: North Carolina Terminal


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The networks are similar because we went from 19 daily loads…

Total Loads = 19Source: Princeton Optimization Inc.

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…To only 24 loads, with more direct and head loads

Total Loads = 24Source: Princeton Optimization Inc.

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Merger Benefits to Acquiring Carrier

50%

Revenue20%Costs

Financial Benefits

Operating Benefits

26%Loads

200%

Directs Head Loads

20%

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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

33


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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Contents

Merger & Acquisition OverviewLTL ConsolidationCarrier Impact- “Side-by-Side” Consolidation- “End-to-End” Consolidation

Shipper ImpactCritical Success Factors

35

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


Larger service territoryIncreased number of lanesGreater geographic area for 1-day or 2-day service

New Service

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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


Back-Office

Benefits

37


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

38


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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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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Contents


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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

42

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

43

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

44

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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Contents


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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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Successful mergers are well conceived,…

Assess merger fit with company strategyCompare merger to other optionsUnderstand the potential synergies- Revenue enhancement- Cost take-out

48


…well planned,…

Assess potential merger partners- Network- Synergies- Culture

Analyze potential competitor responses

Plan the post-merger integration

Difficult

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…and executed according to the planDifficult

EasySmall Large

Benefits

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of

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Force

Insurance

Purchasing


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Difficult

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Purchasing


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1 2 3 4 5 6 7Identify Best PracticesIdentify Impact on SuppliersCommunicate with SuppliersImplement System ChangesImplement Process Changes

WeekTask

consolidation in the ltl industry€¦ · sources: yahoo finance, hoovers. 6 merger &...

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