UPS buys US truck operator

United Parcel Service's advertising slogan asks: "What can Brown do for you?" On Monday, the answer grew longer when the company, known for its brown delivery trucks, agreed to buy Overnite Corporation, a US truck operator, for Dollars 1.25bn.

The deal adds ground freight transportation to a growing list of logistics services offered by UPS, as the company diversifies beyond its original package delivery business.

Last year, UPS increased its heavy airfreight capability through the acquisition of Menlo Worldwide Forwarding and the company has a fast-growing supply chain management business, which helps customers co-ordinate their movement of goods around the world.

UPS believes that globalisation is creating demand for integrated, worldwide transport and logistics solutions that only itself and a handful of others – such as FedEx, Germany's DHL and Netherlands-based TNT Logistics – can provide.

"A freight integrator needs to do more than deliver packages," Mike Eskew, UPS chief executive, told a meeting of investors last week.

At first glance, a mature domestic truck operator might not seem the most obvious acquisition for a company seeking international capabilities. But no global freight network is complete without an ability to deliver goods in the US.

The addition of Overnite will allow UPS to carry everything from the smallest package to heaviest cargo along America's roads.

UPS had for years resisted a move into the trucking sector, balking at the low growth and low return on assets and its largely unionised workforce. Instead, the company contracted out its ground freight business to other carriers.

What caused the reversal? UPS might have worried that consolidation of the once-fragmented truck sector was threatening its access to the market. And the company was keenly aware that among those leading consolidation was its greatest rival: FedEx.

FedEx Freight is among the biggest providers of less-than-truckload (LTL) services, carrying lighter loads over shorter distances than the long-haul truckload operators.

UPS's purchase of Overnite – also a nationwide LTL carrier – means the fierce rivalry between UPS and FedEx in the parcel market is about to spread to trucking.

Most analysts welcomed the deal as the logical filling of a strategic gap for UPS and a reliable source of fresh growth.

Scott Davis, chief financial officer, said the acquisition – the company's largest – would make an immediate contribution to earnings.

But James Valentine, analyst at Morgan Stanley, warned that the acquisitions of Menlo and Overnite had taken UPS into parts of the transportation industry with lower returns on investment than in package delivery.

"Acquisitions of companies in highly cyclical, low-returning businesses such as domestic heavy air freight and LTL may suggest that UPS's opportunities to re-invest in the high-returning package business have come to an end," he said in a report.

Mr Valentine estimated that the LTL sector's return on invested capital over the past decade had been 7-8 per cent, compared with about 20 per cent from packages.

"Delivering small packages and envelopes to the front door of a company is a very different proposition than selling heavy freight to a company's traffic manager," he said.

Perhaps the biggest risk is the potential for labour strife as Overnite's non-unionised drivers are integrated with UPS's unionised workforce. UPS is expected to resist blanket unionisation of Overnite, setting up a possible clash with Teamsters, the truck drivers' union.

The acquisition came as UPS recovers from a disappointing end to last year, when the company missed its fourth-quarter earnings target because of weakness in its domestic package business, which still accounts for 73 per cent of revenues. Analysts cited the sluggish results as evidence that the company was losing ground to FedEx.

UPS bounced back in the first quarter of this year with a 16 per cent jump in net profits, beating Wall Street expectations. Last week, the company said business was "well ahead" of expectations in the second quarter.

Most of the growth is coming from international shipments, especially Asia, where exports increased 35 per cent in the first quarter. But Mr Davis said momentum was returning to the domestic package business, amid a renewed focus on lucrative medium-sized corporate customers.

A cost-cutting drive, expected to reap Dollars 200m of savings this year, and the introduction of new technology designed to make deliveries more efficient were also aiding the company's resurgence.

Integration of Overnite and Menlo gives management plenty to do.

But with Dollars 5bn of cash at the end of last year, UPS has the muscle to make more acquisitions when it is ready.