Another Acquisition for Big Brown?

Feb. 4, 2005
Rumors surfaced shortly after fourth quarter results were released that U.S.-based parcel carrier UPS would acquire Exel, based near London in the U.K

Rumors surfaced shortly after fourth quarter results were released that U.S.-based parcel carrier UPS would acquire Exel, based near London in the U.K. UPS’ core domestic package business was “lagging the market growth rate” according to Legg Mason analysts. The domestic business accounts for 70% of UPS revenues and more than two thirds of its operating profit. On the other hand, international business was growing profitably and in double digits.

Morgan Stanley’s Kevin Carr noted that the rumor has surfaced before. He felt UPS was unlikely to make the move now, though he admitted the rumor seemed to have more staying power this time around.

One of the key reasons Carr believed UPS would not move to acquire Exel at this time is the recent acquisition of Menlo Worldwide’s forwarding operations. There’s still a lot of work to bring that up to UPS standards, he commented. Another factor is the sheer size of the deal. Given the drop in UPS’ stock price following its release of fourth-quarter results. The stock price also plays into another factor, and that is the size of the deal itself.

UPS has plenty of cash, about $5.2 billion, but the deal would likely be somewhere around $7 billion. “To the extent that they were going to do anything with paper, that doesn’t look as attractive now given their stock price,” Carr continued.

Perhaps the most compelling argument Carr offers is that Exel is not necessarily a strategic fit for UPS. “For [UPS] to go out and make a significant acquisition in what’s much lower margin business when they could be growing their international package segment, just seems odd to me.” He argues UPS would be better suited focusing on getting the domestic network back on track and possibly growing the international package business ahead of an acquisition in the forwarding area.

Exel, which became the largest pure logistics company a few years ago when it acquired MSAS, faced some challenges digesting that acquisition. MSAS had only recently acquired the logistics business of P&O Nedlloyd and was still integrating those operations when Exel acquired it.

Exel has also just completed the acquisition of Tibbett & Britten. One of the principal advantages in combining those two organizations was the common ancestry – both were U.K.-based companies. Morgan Stanley’s Carr admits that corporate culture would be an issue for a UPS/Exel pairing. With UPS as the acquiring company, the issue of foreign ownership of a U.S. airline wouldn’t come up, as it did with DHL’s acquisition of Airborne Express. Exel has very little direct involvement in transportation since its predecessor organization, National Freight Consortium was privatized by the British Government. Reports indicated the British equivalent to the U.S. Securities Exchange Commission were considering an investigation into the rumored acquisition.

Stacking up the Exel acquisition of Tibbet & Britten and the UPS acquisition of Menlo Worldwide’s forwarding operations and adding in the domestic performance issues at UPS, perhaps the best analysts could come up with was that this is not necessarily a good time for an acquisition on this scale. The lack of denials from the two companies could keep speculation alive for some time to come.

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