The deal came four months after the $3.5 billion takeover of French logistics powerhouse Norbert Dentressangle. Earlier in the year, XPO paid $100 million for Bridge Terminal Transport to gain an in-house intermodal drayage operation and $59 million for another last-mile delivery company, UX Specialized Logistics.
In the span of four years, XPO Logistics has vaulted from a small truck brokerage to the top ranks of the global third party logistics industry.
Leading the way is the company’s gregarious founder, chairman and chief executive officer, Brad Jacobs. His aggressive consolidation strategy within fragmented industry verticals, innovative approach to harnessing technology to automate transportation and logistics decision-making, ability to attract investors and outsized public visibility has made it impossible for supply chain professionals to take their eyes off XPO.
For those reasons, and his overall impact on the freight industry, American Shipper has named Jacobs its “Person of the Year.”
No question, it seems, is too mundane for a full answer.
During the fall, Jacobs has been a speaker at several industry conferences, held multiple interviews with media members, met with more than 110 Con-way customers, visited Con-way’s headquarters in Michigan to celebrate the merger’s conclusion and conducted the company’s quarterly earnings call.
His activity is understandable because XPO needs to build its brand recognition as a new player in trucking and contract logistics markets. But spend some time around the former oil futures trader and it’s clear he is as much a showman as a calculating businessman.
It’s all part of the job, according to Jacobs.
“That’s great free advice. I like to hear what the doubters are saying and naysayers are thinking and analyze it, [determine] if I believe in that or not believe in that, and sometimes even adapt the business plan based on what people are saying.
“But it’s a healthy process to get out there to be connected to your employees, with your customers, with your shareholders and bondholders. It’s very, very important to do that.
“It’s a lot easier to do your job running a company if you’re closely in touch with all the different stakeholders,” he explained. “One thing that’s very important in terms of managing a company is to get lots of information about what is going on inside your company—you have to have feedback loops with employees, customers, vendors, and shareholders. You really need to know what’s going on.
“The more intense the communication is, the more transparent the communication is, the better. It helps you to run the company more. And as you become bigger, it’s even more important to stay in touch with all the different parts of the organization,” Jacobs said.
Art Of Integration. Investors have reacted negatively since the initial Con-way decision in early September, with the company’s stock price chopped by more than half from a high of $50.94 in June, until rising up to $33.50 as of Nov. 6.
But Jacobs has an excellent track record consolidating companies in other industries and is supremely confident that XPO’s management team has the formula to seamlessly blend acquired companies into a unified, global entity that can deliver industry-leading customer service, lower costs and shareholder value.
He has frequently said that the goods movement sector will mature like most other industries and have two or three players with the majority of market share, big advantages in cost structure and the ability to innovate.
XPO’s plan is to become the Coke or Pepsi of the logistics industry.
“I’ve bought and integrated about 500 companies over my life. I’ve seen pretty much everything that could go wrong. I’ve seen what competitors have done. I’ve made some mistakes early in my career, so I’ve seen what happens with information technology, accounts receivable, accounts payable, credit, and sales forces,” Jacobs said Sept. 29 during a townhall session at the Council of Supply Chain Management Professionals conference in San Diego.
He was referring to successful roll-up strategies that resulted in the creation of United Waste Systems (the fifth largest solid waste management company in North America) and United Rentals, now the largest equipment rental company in the world.
XPO’s management is so experienced at mergers and acquisitions by now, according to Jacobs, that it has a playbook of best practices for integrating companies—everything from how to blend different cultures to standardizing operating, accounting, information technology and human resources functions.
The key enabler for successful integration of 17 freight transportation companies in four years is a sophisticated IT platform that now commands about $225 million in annual investment and is supported by a staff of 1,000 programmers.
After acquiring Express-1 four years ago for $150 million, Jacobs convinced investors to go along with a plan to pour $70 million a year into building a robust back-office infrastructure of Oracle-based information technology for accounting, recruiting, training, and financial planning and analysis. On the front end, all the software programming for customer-facing logistics functions is done in house, with the goal of having one transportation management system and as few contract logistics systems as possible.
The plan meant XPO would lose money early on because it only produced $11 million in operating profit at the time.
As soon as a new company is bought, the back-office functions are rapidly merged. Meanwhile, broker data such as customer and carrier activity, shipping lanes, seasonality, and pricing is quickly pulled into a database as raw material for XPO’s proprietary Freight Optimizer, which has applications such as real-time price discovery (using algorithms to analyze recent transactions, supply and demand, and accurately quote rates by lane), truck-finding and load matching. The system aggregates large amounts of information from external (DAT, Chainalytics, Internet Truck Stop, etc.) and internal sources. All load board, truck ratio and carrier-base information is standardized and accessible to every location across North America.
XPO spent more than 18 months developing its Rail Optimizer system. It eliminated the six IT platforms that came along with the 2013 Pacer acquisition and put all the applications on one system with a common user interface for customers and employees.
XPO has $2.7 billion of freight under management, about half of it from Con-way’s Menlo business. Jacobs said the software migration to one platform in that business line takes more time because the software is typically tailored to each customer and there can’t be mistakes with pick-up and delivery.
In some cases, the acquired company has a valuable piece of technology that XPO will incorporate into its Freight Optimizer. That’s what the logistics provider did when it inherited a proprietary system from last-mile delivery company 3PD that allows customer satisfaction surveys to be conducted within 20 minutes of a delivery. The responses generate a score that XPO uses to winnow its base of independent contractors by giving more loads to better performing partners, and determine compensation.
“Most rollups blow up,” Jacobs told the San Diego audience. “They generally blow up because they don’t do the investment in infrastructure first. You don’t buy a bunch of companies and then start thinking, ‘Oh, how do I integrate these things?’”
Having scalable back-office systems in place, along with disciplined performance metrics for benchmarking across the entire organization, enables XPO executives “to run the business like something that’s been in business for 100 years, not something that was glued together over four or five years,” he said.
XPO is now moving 150,000 loads per day, up from about 33,000 this time last year. It is able to pay carriers on time, send out invoices and meet customer expectations because of its up-front investment in technology, Jacobs insists.
In fact, technology is moving so swiftly, that Jacobs predicted truck brokerage will be entirely automated in 10 years, eliminating the need for young professionals to help match carriers with available freight over the phone.
Trucks and trailers with radio-frequency identification, or other technology, will be connected by machine to shippers’ systems to match the freight, something XPO is already doing to a degree at its Southfield, Mich., managed transportation division where a skeleton staff of 123 people manage about $1 billion in freight. Larger shippers tender loads to XPO through electronic-data-interchange feeds, while smaller customers can go online to individually enter loads with origin-destination pairs, define characteristics of the freight, and input other selection parameters. XPO then holds online auctions every 12 minutes to source partner carriers that are closest to the pick-up location.
The technology was inherited in early 2014 as part of the NLM acquisition from Landstar. Jacobs said XPO invested another $12 million to dramatically improve the software.
Shippers tend to be nervous about service after a merger because there are so many examples of difficult transitions.
“The whole trick is not to just buy the company, not to just finance the acquisition, but to integrate it well and to optimize it so that the customer feels delighted about” the change, Jacobs said on the American Shipper podcast. “Anybody can buy a company; you just have to write a check. Not everybody can integrate companies. We excel at integration. The team that I have in senior management positions across the company is very long in the tooth at integration. This is a core competency of our company.”
In an interview, Jacobs said the integration of Norbert Dentressangle was essentially complete by October, with very little employee turnover and no customer loss. Back-office functions, including closing the books promptly and accurately each month, are doing well and rebranding all of ND’s 7,700 trucks is underway. Two former ND executives (Louis Gomez—transportation and Malcolm Wilson—logistics) are running the business day to day, and report up to Troy Cooper, XPO’s chief operating officer and a trusted lieutenant who has been with Jacobs for 20 years at three different companies where he has helped engineer hundreds of acquisitions.
Meanwhile, the Freight Optimizer has already been coded in French and coding is progressing for Spanish, Portuguese, Italian and other languages, as well as different currencies, for European operations. Legacy ND systems will be integrated into one Freight Optimizer over the next couple years.
Vision For Con-way. Another part of XPO’s strategy is to be one of the top two providers in any freight niche in which it participates. The reason is to have the size and scale to drive down purchasing costs, pass some of the savings onto customers, and be a one-stop shop for logistics services.
With the Con-way acquisition, XPO has become a top 10 logistics and transportation provider.
It now has the second largest amount of warehouse space under management (150 million square feet) of any logistics provider in the world, is the second largest truck broker in the world, the largest provider of last-mile delivery of heavy goods to homes, the largest manager of expedited shipments, the third largest intermodal provider and the second largest LTL provider in North America behind FedEx Freight.
Why buy Con-way?
After all, XPO originally positioned itself as a non-asset-based company with a focus on truck brokerage and last-mile delivery using outsourced carriers. The model changed to asset-light with the acquisition of Pacer, which owned intermodal containers. The Norbert Dentressangle deal included a fleet of trucks and made XPO executives realize the benefits of owning transportation assets because customers have more meaningful relationships with companies that control a portion of their capacity.
And Con-way Truckload also provides extra capacity in the high-growth, cross-border Mexico corridor. But in the third quarter earnings call on Nov. 5, Jacobs said XPO has received serious offers for the Con-way Truckload business and will make an official decision on whether or not to sell it in the near future. The news raises questions about whether XPO views Con-way Truckload as a strategic asset.
The piece of Con-way that XPO really coveted was Menlo Logistics, which it tried to buy two years ago. The ND deal opened Jacobs’ mind to more asset-intensive businesses and buying the entire Con-way organization.
Contract logistics tends to have better margins than transportation because of value-added, non-commoditized services that are provided to shippers. Jacobs says he likes the industry because customer relationships are stickier and longer term, with the average contract lasting five years and renewal rates of over 97 percent. Menlo is now part of a contract logistics organization that includes the former New Breed and Jacobson, a U.S.-based 3PL that ND beat out XPO for in 2014. All three companies were highly respected, well-run operations when they were bought.
Having LTL and truckload networks also enables XPO to cross-sell services to strategic accounts, and fits with the trend of shippers rationalizing their vendor bases. Many shippers like to have “one throat to choke” when it comes to their supply chain needs.
“Buying Con-way gives us a deeper level of relationship with the customer,” Jacobs said. “I want to know the customer’s entire supply chain—where are their origins and destinations, the modes they are using, the vendors they are using, where their pain points are, where their customers are located.
“I want to find ways to add value, to use our organization to actually save money for the customer. And we can’t do that unless we know the customer’s supply chain. I want to be a partner. I want to be someone who has a mutual, respected long-term relationship in good times and bad times, in times of tight capacity or loose capacity, times when the customer is doing great and when the customer not doing so great. I want to be a long-term fixture in their organization, and Con-way helps us get there. Con-way gives us a certain mass, a certain heft that gets us a bigger seat at the table,” he said.
XPO’s chief executive has said that a strategic reason for the Con-way deal was to control assets ahead of an expected capacity shortage once the economy takes off, so XPO won’t have to scramble for trucks.
Beyond contract logistics and truckload revenue benefits, XPO officials looked at the LTL side as a significant opportunity to cut overhead and improve profitability.
As a premium operator with more next-day and second-day lanes than any other carrier, Con-way Freight gets high marks from customers for things like on-time pick-up and delivery, reliability, low damage claims, and damage resolution. But it also has a high cost structure and imbalanced freight flows that the previous management team was unable to address, to the dismay of shareholders.
Management stumbled last decade by sharply raising prices that customers refused to accept, and then suddenly reversed gears with rock-bottom pricing in an effort to drive YRC Freight out of business when the LTL carrier was struggling to survive years ago. The resulting onslaught of freight business overwhelmed operations for a period.
XPO officials say savings are easily achievable in every part of the Con-way organization and are targeting operating profits of at least $1.7 billion by 2018—$200 million more and a year earlier than originally planned—compared to $268.5 million in 2014. The company said in its third quarter report that it has already removed $30 million of excess costs on an annualized basis.
One area officials previously identified for savings is the $227 million Con-way spent on outsourced IT services—something that XPO can bring in house with its expertise.
Also, Con-way probably has more terminals than it needs, John Larkin, lead stock analyst for transportation and logistics at investment bank Stifel, said.
XPO has a very disciplined approach for identifying waste and under-performing parts of an organization. It also understands the cost to serve each customer down to the shipment level, uses algorithms to figure out how to make the transport network more efficient, and then prices accordingly. In some cases, it may determine it’s not worth serving certain customers
At ND, for example, there were a handful of facilities in each region that were losing money, breaking even, or barely making a profit and were ignored because operations as a whole were doing well, Jacobs said.
“Things that lose money make me really upset because that’s a defeat. That’s something we messed up,” the XPO leader said. “Either we wrongly priced to the customer and we have to eat that, or we got a cost structure that’s more than needed to do the job, or we just didn’t manage it well. So, it’s only our fault if something is losing money. I don’t like to see anything losing money in any location.”
Jacobs said he ordered Cooper to cordon off about 100 locations, figure out why they were losing money, come up with a plan and a timeframe to fix things and if they were still not performing by that time-definite period “put a bullet in it. Close it down, honor all the contracts. Wind it down and get out of it.
“When you buy 15 to 16 companies and you put together $15 billion in revenue,” Jacobs added, “there’s always ways to take $50 million of cost out here, take $10 million here, a couple hundred million there—many ways to fine tune the organization.”
XPO officials say they plan to introduce an economy LTL service to go along with the legacy Con-way high-velocity service, which will triple the size of the addressable market.
A slower, economy product will enable XPO to shift a substantial portion of line-haul moves to intermodal because deferred delivery is an accepted part of the service. And, Jacobs said, intermodal can even be used for premium freight on dense “power lanes.”
Dealmaking. One hole in the XPO portfolio is parcel. XPO officials express regret that the company won’t be able to enter an arena already dominated by FedEx, UPS and DHL.
“I don’t want to go to customers and say, ‘We can do what they do, but our cost structure is higher and we don’t cover the entire U.S.,’” Jacobs said, adding that it wouldn’t be worth the investment to “be a little nothing compared to them.”
“I never quite figured it how, how we’re going to be No. 1 or No. 2 in ocean and air. I don’t see a path for us,” Jacobs said, noting that smaller forwarders can’t get the same pricing discounts from the top ocean carriers to make their service competitive. Plus, many freight forwarding customers are small companies and in XPO’s other business lines it deals with some of the biggest multinationals in the world.
“I think eventually we’ll have to buy somebody or bite the bullet and get out of it. But I don’t think being a sub-$1 billion freight forwarder is in our long-term plan,” Jacobs said.
Despite the large investments and borrowing for recent mergers, Jacobs made it clear he is careful not to overpay for companies.
Con-way, for example, was purchased at a modest value of 5.7 times its consensus 2015 EBITDA (earnings before interest, taxes, depreciation and amortization) of $528 million. Some analysts concur with XPO that the true cost will be closer to four-times EBITDA after synergies between the companies are implemented.
UPS bought non-asset-based carrier Coyote Logistics in July for $1.8 billion and said it believes synergies eventually will take the effective value down to nine-times EBITDA.
“We’ve passed on really great companies that I really wanted to buy, that I think will really fit well with us: the culture, the people, the customer base. But the price didn’t work.
“At the end of the day, we’re owned by shareholders. And we’re about creating value. So buying companies at expensive prices—I’m not interested in doing that,” Jacobs said.
People familiar with his thinking say one reason he pivoted to last-mile delivery and other logistics segments is because he realized that he’d have to start paying double-digit EBITDA multiples to acquire best-in-breed brokerages such as Command Transportation (ultimately bought by Echo Global Logistics) and Freightquote.com (bought by C.H. Robinson).
Brand Strategy. One of the main principles in XPO’s acquisition playbook is to immediately strip away the names of old companies and replace them with the XPO logo. The changeover happens with lightning speed, although there can be some lag to get an entire fleet of trucks rewrapped with new graphics, as is the case with Con-way and ND.
The strategy stands in marked contrast to some companies reluctant to get rid of well-known legacy brands that resonate with customers. In many cases, acquiring companies slowly transition to the name-change over months or years. In others, the legacy brands operate as semi-autonomous units, with little change from before other than revenue gets reported to a new parent company. Japanese forwarder Kintetsu Worldwide Express, for example, purchased APL Logistics in early 2015 for $1.2 billion. The 3PL functions as a stand-alone unit that can partner with other parts of Kintetsu when necessary, but still retains most of the old organization, including its own public relations staff.
At XPO, having one brand is critical because the company is run in a tightly integrated way and offers customers a comprehensive range of supply chain services.
Jacobs said he has switched many popular brands—including ND and New Breed in contract logistics—without losing customers. 3PD, for example, provided outsourced last-mile delivery of heavy goods for the 30 top big box retailers in the United States and XPO has grown the business to about 12 million deliveries this year.
“We don’t have 12 different people calling the same customer with 12 different business cards, 12 different names, and 12 different email domains. That’s a mess. I don’t get that at all.
“I guess some companies make that work, so I don’t want to disparage it. But I don’t know how to make that work. I don’t know how to get the relationship with the customer if I’ve got 12 different names.
“I have to have one name, one logo, one common branding guideline,” he said.
This feature article was published in the December 2015 issue of American Shipper.