For 106 years, UPS Inc. has been guided by a linear and logical philosophy. It identified a problem or an opportunity, and then developed clear and consistent processes to address it.
Atlanta-based UPS has come to view its strategy as something of an irresistible force, and its long history of success somewhat validates that claim. But as UPS announced yesterday it was abandoning its $6.8 billion buyout of Dutch delivery firm TNT Express, it became clear the irresistible force had met its match in an immovable object, namely the deeply entrenched and byzantine antitrust culture of the European Union (EU).
When UPS agreed last March to acquire TNT Express, it figured it was following a logical path. TNT Express was foundering, it lacked management direction, and its customer service metrics were declining. It was piling up losses in Europe, Brazil, and Asia. Despite having the largest market share of any European parcel carrier at about 18 percent, it faced a future of irrelevance against the well-capitalized likes of UPS, DHL Express, and FedEx Corp.
To many, a buyout was TNT Express' only hope of avoiding a death spiral and a subsequent yard sale of its assets. Enter UPS, and only UPS. No company made a counteroffer for TNT Express. Thus it became a battle between UPS and the European Commission (EC), the EU's regulatory body.
UPS presumed the EC would welcome a nearly $7 billion injection of capital at a time when the continent was facing the worst financial crisis in decades. UPS thought regulators would recognize TNT's dire situation and approve a deal that would preserve its assets and possibly thousands of jobs, while giving shippers a strong alternative for transport and logistics services. UPS also believed it could address any antitrust concerns that would be thrown its way.
UPS may not have foreseen what lay ahead. The EC submitted a list of competitive issues. UPS and TNT Express made three separate proposals in an attempt to remedy the concerns, including the sale of assets and allowing competitors' access to network capabilities in various countries. The EC never gave UPS any guidance as to whether it was on the right path or on what needed correcting. As one source close to the situation remarked about the EC's modus operandi, "They don't tell you what to do."
All that UPS had to go by were public statements by EC officials that they were concerned about the company's ability to create an environment of "equivalent competitive pressure" by ensuring that assets were sold to a viable rival.
The stipulation that UPS sell to a viable rival presented a problem. In an ironic twist, considering that some felt that UPS' bid was designed to keep TNT Express out of FedEx's hands, UPS and archrival FedEx held very informal discussions about asset sales. The conversations, however, never made it up to the CEO levels, and FedEx, which has never been truly interested in TNT Express, continued to demonstrate its disinterest.
UPS also tried to strike a deal to sell assets to DPD, the German parcel unit of French postal firm La Poste. But DPD lacked the infrastructure needed to rise to the EC's ambiguous demand of "equivalent competitive pressure."
Finally, the EC told the companies that it was "working" on rejecting the deal, and UPS did what many long thought it would do when pushed to the limits of its logical thought process: It walked.
UPS will certainly live to fight another day. While it paid TNT Express a $267 million "breakup" fee for terminating the purchase, that's small change for a company that generated $3.6 billion in free cash flow through the first nine months of 2012. There are a lot of other transportation and logistics companies in the world that would welcome a buyout, and UPS has the firepower to oblige.
Indeed, many in the investment community breathed a sigh of relief that UPS would avoid the scenario of committing nearly $7 billion of shareholder wealth to an acquisition only to spawn a messy and expensive integration process on a continent where regulators don't make it easy to execute. UPS' stock price rose 1.7 percent yesterday as the market—for a day at least—reacted positively to the news that the deal was dead.
THE FUTURE FOR TNT
For TNT Express, the future is uncertain at best. In a statement, it admitted the saga had
become a distraction to management, and it would work towards reassuring customers and employees
of its commitment to compete on a standalone basis. It has been reported the company will use the
termination fee to improve its balance sheet.
The failed deal shaved about 40 percent off TNT Express' share price yesterday, though by mid-day today in European trading its share value had rebounded about 5 percent. With TNT Express' shares significantly cheaper today than they were on Friday, it would be reasonable to wonder if that would spark some buying interest.
At an investor conference in March 2011, FedEx CFO Alan B. Graf Jr. said the company would stay away from TNT Express because it was too richly priced. Given that Memphis-based FedEx has since embarked on a strategy to expand internationally through organic growth and smaller acquisitions, a gulp of this size, even at what might be considered a discounted price, seems farfetched.
As for DHL, its silence speaks volumes. Publicly, it has shown no interest in TNT Express. However, DHL harbors hard feelings towards UPS for trying to block DHL's 2003 takeover of Airborne, and it would surprise no one if DHL and its parent, German giant Deutsche Post, used their combined lobbying heft in Brussels to torpedo the deal and drive down TNT Express' share price to levels ripe for DHL's picking.
Jerry Hempstead, who battled UPS for decades as a top U.S. sales executive for Airborne and then DHL, doesn't believe the last word has been written on Big Brown's involvement. "Knowing UPS, I just can't see them giving up and walking away," said Hempstead, who runs an Orlando, Fla.-based parcel consultancy bearing his name.
Barring an acquisition, though, Hempstead sees no future for TNT Express on its own. "I believe that the termination fee will now be insufficient to save TNT from implosion," he said.
Unless a suitor steps up or TNT Express can engineer a remarkable turnaround, the endgame could be a breakup of the once-proud company, a wholesale dumping of assets, and perhaps the loss of many jobs. If that is the case, the EC will have to come to grips with the fact that in the interest of preserving its unique concept of competition, it aided and abetted the immolation of a prominent European company.
