Last week, FedEx Inc. (NYSE: FDX) announced the completion of the integration of TNT Express, a long process that required complex decisions.
FedEx, which was founded in 1973 in Memphis, Tennessee, acquired TNT Express in May 2016 for $ 4.8 billion.
At the same time, United Parcel Service had to fight for the purchase. The latter backed out of a $ 6.8 billion deal for TNT Express after European antitrust authorities objected.
When it was announced nearly four years ago, the deal was hailed for several reasons. A well-known European brand has been rescued from a difficult time and saved thousands of European jobs as a result. The FedEx Express global air network and the TNT Express intra-European road system were effectively intended to become a one-stop shipping hub for European and non-European companies on the continent and around the world. It would also strengthen FedEx’s position in terms of expected growth in e-commerce in Europe.
Why integration was difficult
For FedEx, the deal would benefit twofold: it would seemingly gain a foothold in Europe and keep TNT Express out of UPS.
However, the integration was not long in coming. TNT Express, which was already in trouble when UPS made its offer, continued to slide down. TNT Express’s physical infrastructure, and in particular its information technology, was outdated and decayed when it was approached by FedEx. Sales of TNT Express services in Europe were weak, integration was difficult, and problems of duplication of delivery networks remained.
Shippers have become nervous about the operational problems that usually accompany the integration of large companies across continents. FedEx also struggled with a sluggish European economy in the second half of the decade, as well as an unfavorable mix of low-income freight generated by TNT Express.
As a result, TNT Express has gone through two leadership changes. An additional blow was the large-scale cyberattack of the NotPetya virus on the company’s servers in 2017.
Lawsuit against FedEx Corporation on behalf of its shareholders
Additionally, in 2019, Thornton Law Firm LLP filed a lawsuit against FedEx Corporation on behalf of its shareholders. According to the statement, false and misleading reports and statements by the corporation’s top management have resulted in “tens of millions of dollars in losses” for investors. That is, the lawsuit accused FedEx of the fact that its management knew that the purchase of TNT would not bring investors the returns that were originally expected, due to the consequences of a cyberattack soon after the deal.
The lawsuit alleges that the executives “made substantive and misleading statements and / or failed to report that:
- ▪ The aggregate growth in the volume of items delivered by TNT slowed down, as after the cyber attack, TNT’s large customers went to competitors;
- ▪ As a result of the departure of customers, TNT’s business structure changed in favor of less profitable operations and services;
- ▪ The costs and timing of integrating TNT and restoring its network after a cyber attack were significantly higher than reported;
- ▪ FedEx’s stated profit growth targets from the TNT takeover were unattainable;
- ▪ In the face of unpublished data on negative trends and high costs, FedEx’s statements about TNT’s recovery from the cyberattack, successful integration into FedEx’s operating structure, improved customer portfolio structure, service, profitability and prospects were not well founded. “
FedEx acknowledged some concerns in June 2018, but continued to insist that TNT had largely recovered and its merger goals would be met. However, in December 2018, all the lies came out “in full” with the publication of the second quarter reporting, which showed a significant decrease in profits.
“FedEx acknowledged that the sharp decline in profit was due to lower shipping volumes in Europe and an unfavorable restructuring of TNT’s customer portfolio with an increase in the share of low-margin products following the cyber attack. FedEx also downgraded its earnings forecast and announced that TNT’s profit targets no longer appear to be achievable. On the news on December 19, 2018, FedEx’s share price fell 12.2% to $ 162.51. ”
At auction on January 22, 2021, the FDX share was worth $ 254.08.
FedEx originally planned to spend up to $ 800 million on integration, but in the end, the costs were doubled. FedEx is solving the problem radically.
Cutting employees is a radical solution
FedEx Express said in a statement that as it operates two large European networks linking similar geographic regions, thousands of jobs have become redundant. The reductions will affect operating and support personnel. In Europe, up to 6,300 employees will be cut, which will require severance payments of up to $ 575 million.
But these actions will save up to $ 350 million annually starting in 2024. Analysts at UBS said that FedEx could gain more than $ 200 million in additional annual savings by rationalizing costs such as fuel, purchased services, maintenance, rents, and also depreciation and amortization.
Most of the cuts are expected to take place at the division’s intra-European hub in Liege, Belgium, which was the hub for TNT Express. FedEx’s air delivery network will merge with TNT Express’s extensive European ground delivery network.
FedEx Express will use a dual hub network across the continent. The primary hub at Paris Charles de Gaulle International Airport will serve intercontinental air travel. Liege, meanwhile, will operate as a secondary site.
The European structure is similar to that of the FedEx air hub in the United States, with Memphis being the primary hub and Indianapolis the secondary hub. Indianapolis has historically been known as a “daytime sorting” facility, handling cargo that does not require supercritical response.
FedEx Express was vague about the future features of Liege, saying only that the hub will “provide customers with excellent service all year round.” Liege was thought to focus on supporting FedEx Express’s intra-European operations. It can also act as a safety valve in the event of a de Gaulle outage, said Dean Machuba, a longtime FedEx executive and now managing partner at North America, a consulting company Last-Mile Experts LLC.
The integration process is hampered by many challenges and is unlikely to be fully completed before calendar year 2022. But now FedEx is counting on the costly acquisition to help long-term growth.
The completion of the TNT Express integration is welcome news for FedEx shareholders. Integration costs worsened the company’s financial performance, and successful completion of this process will help FedEx gain a foothold in the European market.
Based on materials: American Shipper, Freedom Finance, FedEx