UPS purchase of Coyote a truckload, technology play

Analysts have lauded the decision to let Coyote operate as it has in the past, as the $1.8 billion deal gives UPS significant access to the truckload market, which was previously a void in its portfolio.

These are the bare facts: Chicago-based Coyote Logistics rose from startup freight broker to $1.8 billion acquisition target of the world’s largest package delivery company in less than a decade.
UPS said Friday it had acquired the non-asset-based transportation provider pending regulatory approval. It is said to be the single largest acquisition in UPS’s history, and the largest ever deal for a pure freight brokerage.
But what might really set this deal apart is the manner in which UPS emphatically announced that Coyote would be left to operate as it always had, a subsidiary brand under the umbrella and not a new truckload brokerage division to be enveloped by the larger company.
“When this closes, we’ll still be Coyote,” the company’s spokeswoman Jodi Navta told American Shipper in an interview Friday. “We’ll still be black and green, we’ll still have no excuses, we’ll answer phones the same way. We’ll be who we are today. It’s business as usual for us. Our culture won’t change. It’s about the opportunity moving forward.”
In discussing the deal with a number of experts in the trucking and domestic freight industries, it became clear that Coyote has carved out its successful niche through a focus on serving its customers well. The company has also been driven by the entrepreneurial spirit of its founder Jeff Silver, and its emphasis on a young, ambitious, and technologically savvy workforce.
In that sense, Coyote is not unlike some of its brokerage rivals, like Echo Global Logistics, C.H. Robinson, and XPO Logistics – companies that have also placed a premium on building work cultures that match the skills and ambitions of millennials.
There have been questions about whether Coyote fits neatly within a UPS structure that has been called bureaucratic by many. For context, Coyote has around 2,200 employees at its 16 North American locations, while UPS employs nearly 400,000 people worldwide. But that is a simplistic view of this deal. UPS is getting a number of benefits with this transaction.
On the surface, the company gets a big, size 13 foothold in the domestic truckload space, a market it from which it has been conspicuously absent. That absence became more obvious at times when demand for UPS’s services surged, e.g. holiday season, when the company had to turn to truckload carriers to handle volume that its own fleet couldn’t. Not coincidentally, Coyote was one of the companies UPS turned to when it needed to find truckload capacity, and fast.
Dave Ross, managing director of the Stifel Transportation and Logistics Research Group, theorized in a note to investors prior to the merger announcement that the key to a successful deal would be UPS’ willingness to leave Coyote alone and lock Silver in as the “visionary, and keeper of the culture (along with his wife).”
“We believe the goal for UPS in any transaction here is to tap into the largest area of the transportation market to which it currently has little exposure and do so in a non-asset-based fashion,” the note said. “This gives its customers access to more (truckload) services, which is a key ingredient that’s been lacking. (Truckload) is the biggest mode of transport in the U.S., and UPS does not have a solution for large shippers.”
Also on the surface, UPS gets a significant stake in the fast-growing freight brokerage business, an industry that seems to be coagulating at a breakneck pace at the top end of the market. C.H. Robinson last year acquired the high-growth broker FreightQuote. In April, Echo acquired fellow broker Command Transportation. And XPO has been brazenly rolling up freight brokerages for the past four years.
UPS’s purchase of Coyote also comes amid a looming driver shortage in the North American trucking industry, one that could place a premium on being able to secure capacity as truck safety regulations gradually take hold. Coyote, as a well-known broker with a strong customer service reputation among its network of 12,000 carriers, is well-positioned to give UPS access to what could become scarcer capacity over the next few years.
“Coyote’s strong domestic operation strengthens the UPS network and will further lock out smaller competitors from already limited capacity that continues to shrink,” said Jeremy Bodenhamer, CEO of logistics automation company ShipHawk.  “It also gives UPS the opportunity to better utilize their assets like the trucks of the fifth largest LTL carrier in the U.S., UPS Freight.”
Jett McCandless, chief executive officer of the Chicago-based consultancy CarrierDirect, told American Shipper Coyote is among a group of trusted brokers among truckload carriers.
“Good carriers tend to buddy up with brokers like Coyote, Echo and Robinson,” he said. “Coyote treats their carriers really well. I think they have a great following of carriers.”
Coyote is a big fish in a pond that now has several pretty big fish, not just one massive fish, a couple sardines and a thousand guppies.
“People get hung up on UPS being buttoned up and Coyote being about millennials,” said McCandless. “They’re not understanding how the industry is evolving. This period in transportation is like the gold rush. I see transportation evolving like telecommunications. You let me use your infrastructure and we both make money on it. And you’ve seen private equity moving in. The old school guys still look at it as, that’s my customer, or that’s my truck.”
CarrierDirect earlier this year published a white paper on the freight industry that looks rather prescient after a number of major acquisitions. The paper, Eat or Be Eaten: The Year of Separation in Freight, posited the theory that consolidation was going to occur at a rapid rate in 2015, even after the paper listed a sizable number of mergers and acquisitions in 2014.
McCandless said the brokerage industry will consolidate further at the top over the next five years before the giants leave space for startups to attack more niche, service-oriented markets. The cycle will then repeat.
Silver knows the cycle well. He was an executive with the freight brokerage American Backhaulers when it was sold in 1999 to industry market leader C.H. Robinson. Afterward, Silver took some time off, got some degrees, let his non-compete clause from the C.H. Robinson deal expire, and then started Coyote. Incidentally, his colleague Paul Loeb, the founder of American Backhaulers, started Command Transportation around the same time. Both have since been acquired.
What may be more interesting in the UPS-Coyote deal is what UPS gets underneath the surface. It gets a very progressive company built around solid freight optimization technology. You think that specific technology might be important to a company sending thousands of trucks across its network each hour?
Indeed, there is a great chance for UPS to leverage what Coyote does well across its network in a way it never has before. But what’s also fascinating about this deal is that UPS appears to be recognizing when it needs to shop for technology outside its own four walls. For years, the company has prided itself on the amount it spends annually on technology. But sometimes, it makes more sense to acquire technology, especially when that technology comes wrapped neatly around a well-run business in a market that fills a specific hole in a company’s portfolio.
Ross, meanwhile, raised an interesting point in his note: might UPS and FedEx now jump headlong into the truck brokerage market, and what would that mean for the existing brokerage market?
“If FedEx and UPS get into truck brokerage in a bigger way, would this mean stand-alone brokers would be at a disadvantage?” he wrote. “We don’t think so. The (truckload) market is many times the size of the parcel market and is highly fragmented. C.H. Robinson has more than 20 percent of the brokerage market, according to Armstrong & Associates recent estimates, so FedEx and UPS would still be well behind them. And there are others still growing quickly, like TQL, which has the potential to compete effectively.
“Furthermore, much of the brokerage business does not come from large accounts, but from smaller shippers that don’t necessarily get any benefit from going with UPS over TQL or Echo, for example. There is no bundling of truckload with less-than-truckload/parcel, which is why UPS/FedEx have not jumped into the market sooner; however, we feel that the large parcel integrators can’t ignore the (truckload) market forever because it’s the largest market in U.S. transportation (and the safest way to really tap into it profitably is via brokerage).”
There’s another dimension to this discussion as well. To what extent has XPO’s aggressive acquisitiveness in the brokerage market contributed to this deal and others? Might XPO Chief Executive Officer Brad Jacobs have set off an arms race at the top? Perhaps, but McCandless said it’s not as simple as that.
“What Brad has done is make people believe they could go after bigger acquisitions, that they could be bigger than they initially thought,” he said.
UPS throwing its hat in the freight brokerage ring brings serious money and serious clout to the market. It also ups the ante across the board. To use CarrierDirect’s verbage, smaller brokerages need to think about being eaten. Likewise, the larger cadre of brokerages at the top need to think about doubling down on acquisitions, or whether they too will be acquired. UPS rival FedEx will likely consider a move to buy its own truckload-oriented brokerage, though it has a pending purchase of TNT in Europe to also digest, assuming that deal isn’t submarined by European regulators.
There’s a lot to consider here, but for now, let’s focus on the bare facts. UPS is now in the truckload business, it’s now a major freight brokerage, and it’s also an acquirer of technology. As for Coyote, that’s not a bad decade’s worth of business.

Original Source:

Scroll to Top