XPO Logistics, Inc. (NYSE:XPO) was prepping late last year for a massive acquisition, one that Chairman and CEO Brad Jacobs said Tuesday would have effectively doubled XPO’s $17 billion a year size “in short order,” before it shifted gears and launched a sizable stock repurchase plan to capitalize on the equity’s low price levels.
Jacobs, who keynoted the second day of Transparency19, would not identify the proposed target. Jacobs has said previously that the company was very close to consummating a deal near the end of 2018 before changing course. However, it is believed to be the first time he has described it in terms of such magnitude.
XPO’s largest acquisition to date is its $3.5 billion purchase of French firm Norbert Dentrassangle S.A. in June 2015. It followed that three months later with a $3 billion acquisition of truckload and logistics giant Con-way, Inc. Since then, it has been on the merger and acquisition (M&A) sidelines.
Jacobs has said that XPO will eventually return to the acquisition game, and that it would have done so in 2018 had the stock price not fallen so precipitously in the fourth quarter of 2018 so as to make repurchases an attractive option. Share prices had hit a 52-week high of $116.40 at the end of September 2018 but fell to as low as $41.50 a share in late March. Shares were buffeted by disappointing quarterly results, a scathing short-seller’s report and the loss of $600 million in business from its largest customer, believed to be Amazon.com, Inc. (NASDAQ:AMZN).
So far, XPO has spent $1.9 billion of the $2.5 billion that its board authorized for buybacks. It has repurchased the equivalent of one-quarter of its market capitalization at average prices in the low to mid-$50 per share range, according to recent estimates from Deutsche Bank.
If and when XPO returns to the acquisition trail, it will not be in maritime or in truckload, Jacobs said Tuesday. Ocean shipping has too much rate volatility, and the risks are beyond XPO’s control, Jacobs said. In September 2016, XPO sold its North American truckload unit, which it had acquired as part of the Con-way deal, to Canadian carrier Transforce International for $440 million. The reasons behind the divestiture – high-priced assets operating in an ultra-competitive market segment – still apply today, he said. XPO still runs truck assets in Europe because most European shippers insist on doing business with asset-based carriers, he said.
By contrast, businesses like truck brokerages which have relatively small capital expenditures are ideal businesses for XPO because they are healthy generators of cash flow derived from earnings before interest, taxes, depreciation and amortization (EBITDA), Jacobs added.
Jacobs did not address what market segments or geographies that XPO is looking at. He has said previously that XPO would avoid acquisitions in Asia because of high price multiples and the difficulties of doing business there. He has also said that the prices of many non-asset based providers are richly valued.
XPO will spend about $550 million this year on all forms of information technology (IT), and Jacobs waxed bullish about the value that rapid-fire changes that IT will deliver. Many transactions that today require an intermediary will routinely be conducted directly between shipper and carrier. Human intervention will still be required for more complex issues, he said.
Jacobs said he was intrigued by Trucking Freight Futures, the futures platform developed to trade futures on the truckload spot market. An approach to hedging risk on spot market fluctuations imposes needed free-market pricing discipline on an industry that has long relied on what Jacobs called “sort-of” contracts. The contracts don’t hold carriers to legal account for the capacity they pledge, nor do they sanction shippers for the loads they commit to tender but fail to.
Robots, many of which will operate collaboratively in warehouses and distribution centers alongside humans, will be increasingly welcomed by employees who will be freed up from handling boring and repetitive tasks. “I haven’t met a warehouse worker who doesn’t love robots,” he said.
Technology will advance to the point where a real-time map of all truck capacity and each truck’s behavior at any given moment will be available on a universal level, Jacobs predicted. No such view is close to existing today, and it would be a “game changer,” he said. Efforts to digitize the many moving parts of a typical less-than-truckload (LTL) movement such as pick-up and delivery, line-haul and dock operations, would work wonders for an industry that still struggles with time-consuming complexity, Jacobs said. “Return on time” will become the standard for dictating competitive advantage, he added.
Jacobs declined comment on the strategies behind Amazon’s moves to enter the truckload brokerage segment, as well as its plans to shorten from two days to one the delivery window for orders placed through its “Prime” service. Jacobs said that he has no idea what Amazon wants, but said that anything it does, because of its scale and enormous resources, “bears watching.”
Asked about his very long-term outlook, Jacobs broadened his perspective to support his view that technology will be a force for good for many aspects of society as well as for business. Education will be more cost-effective due to widespread utilization of technology, Jacobs said. Government policymaking will be more intelligent due to access to large swaths of relevant data never available before, he added.