It's getting difficult these days to escape the impact of mergers and acquisitions in everyday life. We see it in the products we use at home, the places we shop, in our communication providers, and if you work in the parcel shipping and distribution industry, mergers and acquisitions ("M&A") have probably impacted your business relationships in some way as well.
While major corporate tie-ups like Procter & Gamble/Gillette, K-Mart/Sears or AT&T/Cingular Wireless are probably some of the billion-dollar names that come to mind, in the last 18 months, M&A activity has dramatically risen across nearly all industries and company sizes reaching levels that rival even the dot-com boom-years of 1998-2000. In the first five months of this year alone, there have been over 3,600 announced acquisitions in the US worth more over $460 billion.
Why All the M&A?
Why all the merging and acquiring, be that in mail sorting, parcel shipping or any other industry? There are basically two parties responsible for this surge in M&A activity: growth-hungry corporations and private equity firms both loaded with fists full of dollars looking for the right companies to acquire.
In the corporate world, a "Do Not Disturb" sign hung on the door of many major US companies as they struggled through the economic downturn of 2001-2003. But riding an improved overall US economy, healthy financing markets and other positive macro-economic trends, corporations that were internally focused on cutting costs are now externally focused on growth and expansion, thus swinging wide the door to acquisitions once again.
Why acquisitions? An acquisition is simply the fastest way for a corporation to achieve growth objectives, be that beefing up customer bases, adding new products or services, tapping into high-growth geographic regions or expanding into complimentary business lines to create cross-selling opportunities.
In addition to major corporations looking for acquisition targets, another group of high-caliber buyers has emerged that is the private equity class. Private equity groups raise multi-million (and often times multi-billion) dollar funds from high net worth individuals, corporate pension funds, foundations and other institutional investors. Generally, this investment capital is meant to augment and enhance lower yield stock and bond investments. Private equity funds use the money they raise to provide capital to acquire and invest in companies, hoping to exit their investment with an attractive double-digit return a number of years later. It is currently estimated that there is somewhere between $100 billion and $130 billion of private equity dollars looking for companies in which to invest. Combined with debt capital that often is provided at levels of two to three times equity, the estimated buying power focused on US middle-market companies is as much as $300 billion! With this kind of fire power and some of the smartest business minds pulling the trigger, private equity funds, often referred to as "financial acquirers," have become another major driver of the current M&A activity we are witnessing.
Big Names and Big Deals Mean Big Growth
So now that we can see the backdrop of the overall M&A landscape, let's turn our focus to the M&A game in the parcel shipping and distribution industry in particular. In this space, the need for geographic expansion or increasing product offerings has been the main driver of acquisitions. As businesses big and small increasingly "go global," there is a need for more shipping services to more countries. UPS spokesperson Norm Black said after the company's $1.25 billion acquisition of Overnite Corp., "We want to be able to offer every option to our customers, whatever they need." While no one company can yet cover the whole globe with every service and delivery option imaginable, big names like FedEx, UPS and DHL are using acquisitions to achieve greater geographic reach and broader service offerings. In addition, by bringing more products and geographies in-house, these firms benefit from significant cost savings by not having to outsource. Here are a few examples of recent acquisitions and their specific motivations:
UPS Goes Big for "Heavy" Capabilities: Expanding its products and services via acquisition is what UPS has done not once but twice with big-time acquisitions in the past six months. On May 16, the shipping giant announced its largest acquisition ever, a $1.25 billion deal to buy trucking company Overnight Corp. This deal will allow UPS to handle heavy freight in its own trucks rather than contracting out those services. In addition, last December, UPS added heavy air freight services to its portfolio of offerings by acquiring Menlo Worldwide Forwarding Inc. from CNF Inc. for $150 million in cash plus the assumption of approximately $110 · million in debt. The Menlo Worldwide Forwarding acquisition expanded UPS' ability to give time-definite guarantees on heavy freight.
FedEx Swallows Parcel Direct: Not to be outdone, FedEx boosted its residential delivery services by acquiring Parcel Direct Inc. from Quad/Graphics Inc. for $120 million in September 2004. New Berlin, Wisconsin-based Parcel Direct had approximately 450 people running its business of consolidating and delivering high volumes of lower-weight, less time-sensitive packages. Although it generated $250 million in 2003 sales, Quad/Graphics divested the Parcel Direct unit in order to focus exclusively on its printing business. Less than a month after the deal closed, FedEx rebranded the unit, changing Parcel Direct into FedEx SmartPost. Ironically, it was only a few months earlier when Parcel Direct was on the acquiring end, buying Commerce, California-based PaqFast Inc.
Deutsche Post AG (DHL) Is All Over the Map: More active than even these two industry giants was Deutsche Post AG (owner of DHL). In the last 12 months, the German-based behemoth made 15 acquisitions of mail, parcel and logistics services companies across the globe. In late November 2004 and then again in January 2005, Deutsche Post made two investments totaling $168 million to acquire 88% of Blue Dart Express Ltd, South Asia's leading integrated air express carrier and premium logistics-services provider. With 4,000 employees and a fleet of five Boeing 737 freighters, Blue Dart, headquartered in New Delhi, India, served more than 220 countries and spanned a network covering 13,700 locations in India. In a matter of months, DHL secured its position in one of the fastest growing shipping and distribution markets in the world a perfect example of why corporations are once again hooked on acquisitions to achieve growth.
Mailing Industry, M&A in the
As an investment bank with significant experience in the mailing industry in particular, we have witnessed a trend of increasing consolidation among service providers as well as a significant amount of private equity capital entering the industry. Thanks in large part to growth being driven by the USPS workshare program, the mailing industry is receiving a lot of attention from strategic acquirers as well as private equity firms. Here is a look at some of the deals that are indicative of this developing trend:
Ancora and Pitney Bowes Tie the Knot: In November 2004, a transaction was arranged between Ancora Capital & Management Group, the largest independent mailing services company in the US, and PSI Group Inc, a subsidiary of Pitney Bowes. Ancora provides customers with free pickup of their bulk mail and then pre-sorts and delivers it deep into the USPS delivery system, a process that typically saves clients as much as 7. per piece. In the M&A auction process that ran on behalf of Ancora, the company received broad interest from both companies involved in mailing services as well as private equity groups. In the end, it was Pitney Bowes who found Ancora to be the perfect fit to enhance the growth of its mail pre-sorting operations, Omaha, Nebraska-based PSI Group Inc. Ancora's geographic footprint, which included California and the Mid-Atlantic region, was a perfect complement to PSI's operations. More recently, on May 12, Pitney Bowes announced another significant acquisition, this time agreeing to acquire Imagitas, a Waltham, Massachusetts-based marketing firm. This $230 million deal is intended to expand Pitney's presence in direct mail applications and leverage its mailing services network.
Deutsche Post's Double Dip: Another example of mailing industry acquisitions, Deutsche Post acquired SmartMail Services of Forest Park, Georgia and QuikPak Inc. of Lafayette, Indiana on the same day in May of 2004. SmartMail provides mailing and shipping services, utilizing the USPS workshare program while QuikPak provides catalog fulfillment services. The deals were made to tap into SmartMail and QuikPak's strong US customer bases and provide one-stop-shopping for domestic and international mailings. Interestingly, prior to the sale to Deutsche Post, SmartMail was owned by a number of private equity firms, including Great Hill Partners as well as Monitor Clipper Partners.
Private Equity Deals The Next Big Thing?
In addition to big names like Pitney Bowes and Deutsche Post, private equity firms have also been attracted to the growth prospects of mailing industry companies. A recent example of such a deal came on March 9 of this year when Addison, Illinois-based FP Mailing Solutions was acquired by Quadriga Capital, a
When we look at these types of parcel shipping and distribution and mailing industry transactions (and numerous other examples not mentioned here) against the background of the overall bubbling merger and acquisition environment, it can begin to look like a feeding frenzy. That may be troubling news for those starving for corporate growth via acquisitions at reasonable values or for private equity funds looking for attractive investments, but it is certainly good news for companies looking for growth capital or considering a sale. What's become clear is that whether your company is actually engaging in mergers and acquisitions, the consolidation and globalization of the mailing industry will certainly impact your future, if it has not already done so.
Mike Rosenberg is a Managing Director at Barrington Associates, one of the nation's premier middle-market investment banks. He has spent more than 18 years in investment banking and corporate finance, assisting corporate clients in achieving their financial and strategic objectives. To reach Mr. Rosenberg and Barrington Associates, please call 310-479-3500.
