XPO Goes Long with Con-way Play
Merger and acquisition activity in the transportation and logistics sector has been fast and furious over the past few months. Still, it's hard to imagine that UPS's acquisition of Coyote Logistics ($1.8 billion) and Infor's GT Nexus move ($675 million) have become little more than sidebars to this summer's blockbuster feature—XPO Logistics' bookended $3 billion-plus buys.
The Con-way acquisition in early September 2015 sent a shock wave through the supply chain sector and The Street—but not because XPO already made a big splash in June when it finalized a deal to swallow French 3PL Norbert Dentressangle for $3.5 billion. Rather, CEO Brad Jacobs' decision to acquire assets might be a tipping point that triggers even more M&A activity.
Since XPO emerged on the scene in 2011, it has staunchly maintained an asset-light profile. Then, over one summer night, it assumed the mantle of second-largest LTL carrier in the United States—in addition to already being a top global 3PL.
The move raises a lot of questions: Why did XPO suddenly decide to get into the trucking business? How will it integrate Con-way Freight, Con-way Truckload, and Menlo Logistics into its existing portfolio? What's the end game?
Jacobs fielded these inquiries, and more, during a recent conference call with investors to talk about the acquisition. A few years ago, XPO tried to acquire Menlo Logistics, he acknowledged, but the deal fell through. At the time, XPO had no interest in Con-way's assets. That changed after the Norbert Dentressangle move.
Visiting with XPO's new European customer base over the summer gave Jacobs a greater appreciation for capacity. Until you own assets, "you're not sitting at the adult table," he noted.
Not only does XPO now have a bigger seat, it's sitting near the head of the table.
"Our major long-term view is that capacity is ultimately going to get tighter for all the obvious reasons—driver shortage, driver demographics, and government regulations," Jacobs explained. "What do you do if you're going into a market where you see something becoming short? You go long."
Wall Street skeptics have pounced, suggesting the Con-way and Norbert Dentressangle acquisitions are happening too fast, too soon. But Jacobs is equally quick to remind investors that he has successfully managed similar integrations, with considerable asset bases, while at the helm of United Rentals and United Waste Systems. He suggests that controlling capacity as the market tightens is a competitive advantage.
Even with XPO's new configuration, two-thirds of its revenue will still come from the non-asset side of the business. Jacobs likes that balance. "I like the street cred we get with major shippers," he added.
For shippers, the writing is on the wall. Capacity is tightening. Consolidation will continue. At some point in the not-too-distant future, transportation costs will rise.
Says Jacobs: "We're going to skate to where the puck is going, not where it is."