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The Last Mile: Can global logistics services measure up to shippers' demands?

March 9, 2005
Manufacturers and retailers have had to go global to survive. In the process, they face significant logistics challenges. Whether you're a U.S. manufacturer

Manufacturers and retailers have had to go global to survive. In the process, they face significant logistics challenges. Whether you're a U.S. manufacturer sourcing in Asia or a European manufacturer trying to reach the lucrative U.S. market, chances are your home-market logistics provider won't have the same capabilities once it's off its native soil.

Logistics companies have expanded into overseas markets at their customers' direction. In many cases, they do so by alliance, but often they expand by acquisition. The alchemy of acquisition is an inexact science at best. You never get the perfect mix of ingredients, but you may still approach the desired result.

The logistics market moves more cautiously than some other industries (e.g., telecommunications), but real and rumored pairings are in the works. The most intriguing rumor resurfaced in early February. A market analyst suggested UPS would buy Exel, the U.K.based third party logistics company and, by most measures, the world's largest pure play 3PL. Rather than issuing denials, both companies elected to make no comment on the rumor. To give you a sense of the order of magnitude, this would be a $7 billion deal.

If the deal is real and it does go through — and again, there's no hard evidence that the companies are even in negotiations — the move would run counter to the trend of the last few years where 3PLs have been buying their way into the U.S. market. Exel was, in fact, well ahead of the curve on this, entering the U.S. market in the 1980s when it acquired a couple of small trucking companies and then Distribution Centers Inc. Since then, Dutch logistics giant TPG acquired CTI in Jacksonville, Fla., through its TNT Logistics group; Switzerland-based Kuehne & Nagel acquired Connecticutbased USCO; and the former GATX Logistics fell under the ownership of Singapore-based NOL.

Meanwhile, Exel has just completed its acquisition of Tibbet and Britten, which helps balance its portfolio between retail and industrial clients. UPS acquired CNF's Menlo Worldwide Forwarding group, but it left behind the 3PL component. CNF had made a big show of the combination of the former Emery Worldwide assets and the 3PL a couple of years ago, saying the two business units would complement each other and provide a better global reach for the 3PL and a strong client base of global companies for the forwarding operations. What CNF had put together, UPS took apart.

Transportation companies are a little more open about the fact they entered the 3PL business to put more freight through their network. Transportation mergers are easier to understand than logistics combinations. When the former Roadway Services group spun off its less-than-truckload (LTL) business, FedEx was rumored to have an interest in the resulting Caliber group that included B2B package service provider RPS. Rumors of an impending acquisition died down for a couple of years, then, suddenly the deal was done.

FedEx has a notable gap in its global network on the ground in Europe. It pulled back from Europe about 10 years ago, though signs indicate FedEx might be interested in filling this gap. Exel would provide a good fit for FedEx. The rivalry between FedEx and UPS is fierce, but $7 billion is a lot to spend just to keep your competition at bay.

Both UPS and FedEx need to meet customer demands for a more robust global network of transportation and logistics capabilities to complement their domestic capabilities. Will they get the right formula before global players like Deutsche Post/DHL build or buy enough U.S. domestic capability to be a force?

In the end, mergers are about chemistry. Are the physical properties compatible? Does the corporate culture provide a catalyst for positive change? Does the combination produce gold or lead? This particular pot may have to simmer for a while before we know the answer.

Perry A. Trunick,
[email protected]

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