We got 10 minutes of Brad Jacobs’ time this week at the Council of Supply Chain Management Professionals’ (CSCMP) annual meeting in San Diego. Granted, it was standing against a wall outside the CSCMP sponsors’ room. But given the elevated stature of XPO Logistics, Inc.’s founder, chairman and CEO, we were happy for any time and venue we could get.
Going from almost nothing in five years to a $15 billion a year company, largely through a spree of acquisitions, will attract attention. Sure enough, as we talked, peripheral vision picked up people stopping and staring as they walked by. Jacobs professed not to notice (we did). There were also folks lining up to get a chance to pick Jacobs’ brain about any number of issues—not the least of which would be what it would take to buy their company. If you think that scenario to be far-fetched, consider that a freight broker attending last April’s Transportation Intermediaries Association annual meeting, where Jacobs was appearing, said he was there for the sole purpose of convincing Jacobs to buy his firm. (We have suggested the silk screening of t-shirts that read “Bought By Brad.” Jacobs, for his part, said he wants one.)
Our talk covered as much ground as can be trod in 10 minutes. On acquisitions, there will be none in the near term—integrating two transactions with a combined cost of $6.5 billion will take priority. The integration of the French firm Norbert Dentressangle, bought in April for $3.5 billion, is virtually complete, Jacobs said. The focus now is on Con-way, Inc., the $5.8 billion a year asset-based truck, brokerage and 3PL provider bought by XPO last month for $3 billion.
Asked why he entered the asset-based game after building a model around non asset-based services, Jacobs said customers, almost from XPO’s founding, would ask if the company had trucks or if it didn’t; the constant querying led Jacobs to believe that assets were something customers were interested in. In a world of tight capacity, truck assets are king, and will serve as the gateway to conversations about XPO’s other services, according to Jacobs. Besides, XPO is no stranger to assets, having owned container equipment operated by intermodal marketing company Pacer International, which XPO bought in 2014, and trucks that are operated by Norbert Dentressangle in Europe, Jacobs added.
Re the Con-way assets, which consist of LTL carrier Con-way Freight, Con-way’s largest unit, and truckload carrier Con-way Truckload, the work still lies ahead. Headcount at Con-way Freight’s corporate level will likely be reduced, but the operations will largely be left alone. Jacobs said Con-way Freight customers have told him the service levels are excellent and customers love the provider.
Maybe so. But 2013 numbers for Con-way Freight’s national accounts didn’t demonstrate a lot of love. According to internal data, the company lost more than $72 million in aggregate on its top 20 national accounts that year. Of those, only three generated a profit. National accounts made up more than 65 percent of the unit’s overall revenue in 2013, according to the data.
A good chunk of the losses were the legacy of the 2008-10 LTL price wars when Con-way and FedEx Freight, the LTL unit of FedEx Corp., led the charge to slash prices in an effort to drive YRC Worldwide, Inc., the then-market leader and way, way back on its heels, out of business. As those who follow the business know, the effort failed. YRC is still in business, and most of the industry managed to dig itself a huge hole that took several years to emerge from.
Yet there is a belief that Con-way Freight has lost market share because it is not as efficient and productive as its peers. Its second-quarter operating ratio—the ratio of revenues and expenses—rose to 92.4 from 91.2 in the second quarter of 2014, not a positive trend. Revenue, tonnage and operating income also fell year-over-year. Yield rose a scant 0.4 percent, benefiting modestly from better pricing.
Jacobs has said XPO will boost the Con-way parent’s operating profits by up to $210 million a year for the first two years through “synergies and operational improvements.” The LTL unit may be the best place to harvest those synergies and improvements. Given the unit’s so-so operating performance, the gains there are likely not to come from robust top-line growth, at least in the near term.
Five years on, the jury is still out on Jacobs’ great experiment. Some point to his solid track record in the energy, solid waste, and equipment rental businesses, and say the same principles of scale, scope, and density that worked there can work here. Others say XPO is a house of cards, pointing to a near 50 percent drop in the company’s market value in the past few months. Still others say that, by buying Con-way, Jacobs bit off more than he could chew.
We will let time answer the first two arguments. To the third, we contend that the opposite is true. Asset-based players will have superior leverage for the balance of the decade as a shortage of drivers and tougher government regulations reduce the carrier playing field. XPO needed a meaningful asset-based position in the U.S. to balance out its service proposition and support the rest of its portfolio. There is no doubt non-asset based players enjoy fatter margins, but if the world is changing as many people believe it is, then the deal was something Jacobs had to do, and one that will ultimately pay off.