Will the millennials meet Mama Brown?
Reports surfacing last night that UPS Inc. is in talks to buy privately held freight broker Coyote Logistics LLC for at least $1.8 billion came as no surprise to some inside the brokerage and third-party logistics (3PL) communities. Private-equity firm Warburg Pincus LLC, Chicago-based Coyote's majority owner, has shopped the company for about a year, but with little success, as potential suitors have shied away from Coyote's lofty valuation—based on Warburg's reported asking price, which, according to industry sources, is at 18 times Coyote's roughly $100 million annual earnings before interest, taxes, depreciation, and amortization (EBITDA). Broker valuations have a wide range, but 18 times EBITDA is considered very high. Japanese firm Kintetsu World Express paid 15 times EBITDA when it acquired APL Logistics in February. Talks with Atlanta-based UPS have been underway for about three months.
As with any rumored deal, it could go nowhere. UPS is a cautious company, and it's possible that it will conclude that buying a truckload brokerage operation—which is Coyote's forte, but largely alien to UPS—is not a good fit at the price being proffered. Satish Jindel, head of transport consultancy SJ Consulting Group Inc., predicted that UPS will not pursue Coyote because of the cost of the proposed deal, the risks of buying into an unfamiliar industry, and post-acquisition concerns of losing Coyote's primary asset, namely its people, many of whom could decide they don't want to join a company whose conservative culture is antithetical to freewheeling Coyote's. UPS and Coyote declined comment.
What is certain is that a transaction of this size would be the largest in UPS' 108-year history, topping its $1.25-billion purchase of less-than-truckload (LTL) carrier Overnite Transportation Co. 10 years ago almost to the day. If the combined entity is folded into UPS Supply Chain Solutions, the company's supply chain arm, the division would become the world's eighth-largest 3PL based on gross revenue, which is revenue before the cost of purchased transportation, according to Armstrong & Associates, a consultancy. It would spell the end of Warburg Pincus' eight-year investment in Coyote, moot Warburg's purported plans to take Coyote public, and provide Jeff and Marianne Silver, the husband-and-wife team who founded Coyote in 2006 and built it into a brokerage powerhouse, with a roughly $200-million payday; they own about 13 percent of Coyote, according to industry sources.
For shippers, a UPS-Coyote deal would likely be a net negative. It would take a big player out of the market and reduce an already-narrow field of the top brokers in an otherwise fragmented market. Coyote is considered an aggressive competitor and generally offers shippers a reasonable price for its services. As part of a much larger company, there would be some question as to whether the fiery style that has been so instrumental in Coyote's success would remain sufficiently stoked.
For the brokerage industry, a UPS-Coyote deal would likely be a net positive for essentially the same reasons. In addition, other brokers could benefit from the customer churn that could ensue if Coyote's people chose not to stay with UPS. There is also a question as to whether the Silvers would remain with an owner like UPS, which has a very traditional way of doing things.
"Traditional" is a word not found in the Coyote lexicon. The company's culture is entrepreneurial and risk-taking. Jeff and Marianne Silver built a workforce around those traits, hiring younger people with an entrepreneurial mindset and encouraging them to work hard and play hard. It might resemble a frat house at times, but it's hard to argue with the results. Coyote grew its revenue at a compound average growth rate of 473 percent from 2007 to 2010, according to Armstrong data. It should exceed $2 billion in 2015 gross revenue, Armstrong projected. The 2007-to-2010 results include the 2008 acquisition of Integra Logistics Services LLC, a rail-intermodal management services firm, and the 2009 purchase of General Freight Services, a North American truck and intermodal services provider.
Evan Armstrong, Armstrong's president, said he would urge UPS not to disrupt Coyote's culture, which Armstrong called Coyote's "secret sauce." However, Jindel of SJ Consulting said it would be almost impossible for a company like UPS, with such deeply rooted internal controls and processes, to "just leave Coyote alone."
UPS' August 2005 acquisition of Overnite is an example of the latter philosophy. Soon after the deal closed, UPS executives descended on Overnite's Richmond, Va., headquarters to begin the transition. It overlaid "the UPS way" on Overnite's business, even though UPS had never run an LTL operation before. UPS struggled with integrating Overnite's Eastern operations with the trucker's Western unit, known as Motor Cargo. It has taken several years, but the operation, which was rebranded as UPS Freight, is finally on solid operational ground.
There are solid macro reasons to explain UPS' rumored interest in Coyote. The segment of 3PL known as "domestic transportation management"—traditional freight brokerage elevated by sophisticated IT systems, and Coyote's stock-in-trade—has grown by 11.5 percent on a compounded basis from 1995 to 2014, according to Armstrong data. The category is expected to experience strong growth in the years ahead as more shippers look to firms like Coyote to optimize transportation modes and routes. Coyote's transportation management system, known as "Bazooka," is considered one of the better broker-owned technologies in the market.
UPS may also want to gain access to a cluster of big accounts, expand its service offerings, and beef up its network scale. That's something other firms have done—for example, Memphis-based FedEx Corp., with its December 2014 acquisition of Pittsburgh-based Genco Supply Chain Solutions, and Greenwich, Conn.-based XPO Logistics, which in April acquired French logistics firm Norbert Dentressangle S.A. for $3.5 billion. So far this year, there have been seven deals valued at more than $100 million, and M&A activity is on track to surpass the record of nine set in 2007, according to Armstrong data. "We are on our way to having a banner year for large M&A deals," said Armstrong.
UPS could also be attracted to Coyote's unique model, which uses split sales and operations teams for domestic transportation management and brokerage. In the split model, Coyote's sales staff focuses on securing shipments, while the carrier-capacity staff focuses on securing carrier capacity to transport the shipments. In traditional operations, the person who secures a shipment from a customer is also responsible for finding a carrier to cover the load. Coyote believes that the split model allows it to arrange transportation for more shipments per employee versus the traditional brokerage operations.