FedEx says it has adjusted its attitude towards acquisitions of third-party logistics (3PL)companies, but claims this is due to the market changing rather than the company choosing
independently to reverse its previous strategy.Responding to a question yesterday from investors following the release of the company’s Q2financial results and after announcing the acquisitions of reverse logistics firm Genco andinternational e-commerce company Bongo this week, chairman, president and CEO Fred Smithacknowledged that the company had in the past shown limited interest in acquiring supply chainmanagement and inventory management companies.
“In years past, we were not particularly enamoured with the so-called 3PL business because itwas a relatively low-margin business that saw a lot of loss of contracts on the first renewal. Itwas more of a commodity-type of business and one of the big sales pitches of a lot of 3PLs was thatthey were ‘carrier-agnostic’ in terms of the transport system that they used,” he explained.
“What, of course, has happened over the decades since we expressed those remarks is the entirelogistics and retailing sector has changed, particularly with the emergence of e-commerce and the ‘empowered consumer’, with mobile phones and electronic devices that allow them to order and movetheir shipments around.
“So the attractive part of Genco was that it had sailed directly with those winds into themarket leadership in the reverse-logistics space, and with the substantial market presence that wehave – particularly with FedEx Ground and FedEx SmartPost in that sector – it was just a naturalfit.
“So our view about that business in the main hasn’t particularly changed, but the world haschanged. And this was really a great fit: the culture was perfect; the management team is terrific.And it is very high ROIC (return on invested capital) and asset-light, which complements some ofour more capital intensive businesses.”
Mike Glenn, president and CEO of FedEx Services, commented: “Genco’s expertise andinfrastructure in targeted verticals – specifically in technology, healthcare and retail – allcomplement the FedEx portfolio of services, and those have been industry segments that we have beeninterested in for a long, long time.
“Genco processes more than 600 million return items annually, and that is a critical decisioncriteria when developing relationships with our e-commerce customers. Returns in the e-commercesegment are a more important issue than they are in a typical retail channel, representing a largerpercentage of overall sales. So it is critical we have these capabilities, and Genco is the perfectpartner.”
Glenn described the group’s acquisitions of Genco and Bongo as “transformative in terms of theFedEx portfolio of e-commerce and supply chain solutions”. He said Genco was one of the largestthird-party logistics providers in North America, with a broad range of product lifecycle andsupply chain services “that will significantly expand our portfolio, including a market-leadingposition in returns, test and repair, remarketing and product liquidation”.
He added: “In Bongo International, we have acquired a leader in global cross-border e-commercetechnology and solutions. Bongo’s technology and processes provide a comprehensive end-to-endsolution that helps retailers and e-retailers grow by reaching international e-commerce consumers,delivering cross-border enablement solutions to a base of more than 2,000 retailers to more than200 countries worldwide.
“These acquisitions will transform our global portfolio through the addition of newbest-in-class e-commerce and supply chain management solutions.”
Asked whether the acquisition of Genco signalled a strategic shift for the company towards thelow-asset 3PL part of the business as opposed to the acquisitions in the past at Express targetinginternationally focused smaller carriers in Europe and some emerging markets, Smith said: “Allthings being equal, of course we would rather have things that are non-asset-intensive than thingsthat are asset intensive. That’s basically what most of Wall Street thinks about every day and tosome degree, too much so in my opinion to the detriment of job creation and increased income forour citizens.”
He said the company’s basic criteria for acquisitions remained threefold: “First, there has tobe a compelling strategic rationale and that was certainly the case in Genco. We’ve identified forseveral years in our strategic management committee and at the board level the gaps in ourportfolio that we would like to fill either on a build or buy basis.
“So if an acquisition comes on the horizon, we are certainly interested. And clearly, we likenon-asset-intensive parts of our portfolio because they tend to add to our overall returns oninvested capital, as well as broadening our portfolio – and we are selling a portfolio. We have gotsome wonderful advertising at the moment that makes that point very clearly.”
The second criteria was a good fit in terms of culture and technologies, “because mostacquisitions founder on one of those two. And then the third thing, you can’t overpay.”
He added: “It is basically those three criteria: strategic fit, culture and technology – and aswe said before, that is the case at Genco in a very big way – and, third, the numbers have to makesense.”
Asking about potential revenue synergy opportunities with Genco, one analyst observed that Gencoappeared to have responsibility for about US$3.5 billion related to small package spend.
Alan Graf, chief financial officer, responded: “Of course there are revenue synergies. We lovethis acquisition for that fact and for all the reasons that Mike outlined. We can’t wait to get itclosed and get it working for us.”
FedEx’s share price dropped by around 3.7% yesterday to below $1.68 from an opening price of$1.74 after its second-quarter results announcement failed to live up to analysts’ expectations,although it recovered most of these losses in early trading today.
It reported net income of US$616 million, or $2.14 per share, for the second quarter ended 30November, up from $500 million, or $1.57 a share, a year earlier, although analysts, on average,had expected $2.22 a share, according to Thomson Reuters. Revenue totalled $11.9 billion, up in allof FedEx’s major business segments, but fell short of analysts’ expectations of $11.99 billion.
Benefiting from an on-going profit improvement plan, falling fuel prices and lower pensionexpenses, partly offset by aircraft maintenance costs, the company reaffirmed its expectations ofearnings per share of $8.50 to $9.00 for the year ending 31 May, although analysts hadforecast $9.14, Reuters reported.
Analysts said results from FedEx Ground and trucking unit FedEx Freight, in particular, fellshort, and the company’s full-year outlook was also seen as too conservative. In a note to clientsyesterday, UBS analysts wrote: “We believe that investors were anticipating an upside secondquarter and an increase in (full-year) 2015 guidance.”
In morning trading yesterday, FedEx shares were down 4.9% at $165.77, although they hadrecovered to more than $1.71 by 10.00 eastern time today.
