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Walking in the Giant’s Shadow

Less than a year after the collapse of Consolidated Freightways, the LTL market has been hit by another shocker: Yellow Corp. and Roadway Corp. - two of the largest and most recognized names in transp...

Less than a year after the collapse of Consolidated Freightways, the LTL market has been hit by another shocker: Yellow Corp. and Roadway Corp. – two of the largest and most recognized names in transportation – are looking to merge.

Under the terms of the definitive agreement, Yellow, which is headquartered in Overland, Kansas, will pay $966 million or $48 per share to acquire Akron, Ohio-headquartered rival Roadway (all figures in U.S. dollars). Yellow will also assume an expected $140 million in net Roadway debt, bringing the total value of the deal to about $1.1billion.

The combined enterprise, which will be known as Yellow-Roadway Corporation, will be one of the largest transportation service providers in the world. The combined revenue of both companies for the 12 months ending the first quarter of 2003 was nearly $6 billion.

Reimer Express Lines, the Winnipeg-based subsidiary of Roadway and one of the largest carriers in Canada, is part of the deal. So too is Roadway’s Next Day Corp., which owns New Penn Motor Express, a next-day, ground LTL carrier of general commodities serving Quebec, twelve states in the northeastern U.S. and Puerto Rico.

Bill Zollars, currently chairman, president and CEO of Yellow, said the back-office operations of Yellow and Roadway would be merged but the operations in the field would remain the same. The two companies have about 600 terminals between them.

“There will be no change in the way these brands go to market. ..Initially we are not going to change the operations of either company. ..The customer interface will stay the same as it is,” said Zollars. He likened the future relationship between the two companies as that between Pontiac and Buick for General Motors.

Some industry analysts, not to mention competitors, have their doubts, however, about whether the Yellow-Roadway merger won’t touch operations.

Zollars will head the new company. James Staley, currently president and CEO of Roadway, will continue to lead his corporation, which will become an operating entity under the Yellow-Roadway holding company. Three members of the Roadway board of directors will also be joining the new Yellow-Roadway board.

The announcement is strong evidence that, despite the collapse late last year of the third largest LTL carrier, Consolidated Freightways, and the fact many small carriers here and in the U.S. have exited the market in the last two years, this sector remains plagued with too many carriers chasing not enough loads. Zollars and Staley estimated both of their operations are running at 90% capacity right now.

“Consolidation is going to go through another wave in the trucking industry. It’s still over fragmented,” predicted Sam Barone of Transportation Partners International, a consulting firm specializing in the transportation market. So far, trucking has largely been immune from the aggressive consolidation seen in the rail, air and marine sectors over the past decade.

The dynamics in the Canadian LTL market are similar, with companies looking to consolidate their market position, according to Barone, former president of the Canadian Trucking Human Resources Council. He expects increased consolidation north of the 49th but not to the degree it could happen in the U.S. That’s because few Canadian carriers are publicly traded and thus don’t have access to the funds necessary to carry on major acquisitions strategies.

“When you are doing that in Canada you are doing so likely through additional leveraging or additional debt, so carriers don’t have the liquidity to do these acquisitions.”

But Barone says what may push consolidation, despite the problems Canadian carriers have in finding the money to fund mergers, is the need to deal with stagnant rates and over capacity.

“The only way for the industry to be able to glean better pricing from shippers may be through rationalizing and consolidating to both enhance profitability and enhance rate levels,” Barone said.

As much as this transaction is about reducing costs through acquiring synergies and solidifying rates, it is also about having the power to bring new services into the market and the ability to compete not only against other LTL carriers but also against the likes of global transportation powerhouses such as UPS, FedEx and DHL, according to Satish Jindel, president of the Pittsburgh-based transportation consulting firm SJ Consulting.

Zollars’ comments indicate the new company is in tune with this thinking: “In the longer term, having a company that can compete with anybody is our goal. And I mean anybody in the transportation space.”

Allan Robison, president of Reimer Express Lines, added that many Canadian shippers are now serving the world – mostly in the U.S, but also Mexico and other countries – and LTL carriers must grow to serve their needs.

“If you are supplying a transportation service for them and you can’t do that, that’s where your problems start. As an LTL carrier you have to keep asking yourself can I provide the kind of service my customers need or am I becoming isolated and they are going to find someone else? That is usually what drives LTL carriers to start looking at mergers,” Robison told Motortruck. “What it brought to Reimer when Roadway purchased us was the ability to serve the world. We had the ability to do a good job in Canada but we didn’t have the ability to do that in the rest of the continent. Now there isn’t a place we can’t go. And now that we have Yellow as well, it gives us that much more than we had before, so the opportunities for our customers in Canada have become that much greater.”

Yellow and Roadway expect to realize up to $45 million in annual savings by the second year of the merger and up to $125 million by the fifth year by combining “back office” administrative functions such as payroll.

Robison said his Winnipeg general office functions already have the advantage of paying wages in Canadian dollars but this integration could result in further benefits for his firm.

“I don’t know what will eventually happen with the administrative functions but if they decide one day to make them all identical, that means that whatever enhancements Roadway or Yellow have, we will end up with them. And that will help our customers,” Robison said.

As already noted, however, industry analysts and competitors are questioning if the new company will be satisfied with $125 million in annual savings – a drop in the bucket, really, for a $6 billion operation. They don’t see the company retaining 35,000 Teamsters, 715 terminals and duplicate sales forces in the long run. Perhaps even the separate corporate identities will be up for further consideration. Maybe a year from now we’ll know for sure.

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