Parts Greater Than the Sum

In the 90s, when every day seemed to bring a new announcement that another transportation or logistics company was “going global,” the CEO of Yellow Freight Corp. responded to my question about their global plans saying, “We want to be the best LTL company for origin and destination freight in the US.”?Was he right??Not long after that, Yellow had joined the fray of global expansion.

In the regulated era of less-than-truckload transportation, acquisitions and expansion weren’t easy.?Carriers who could prove there was a need for their service could acquire operating rights in additional states.?Often it was easier to acquire another company that had the operating rights than to apply for those rights and face challenges that might result in not obtaining the operating rights in the end.?Operating rights, therefore, had significant value and were somewhat less than intangible assets that influenced the company’s valuation.?

That was, until deregulation eased requirements for operating authority (fit, willing, and able).?Nearly every carrier acquired 50-state authority.?Roadway Express, realized the days of carrying operating authority as an asset were numbered, and it wrote down its operating authority, sending a shockwave through the industry.?Roadway was in a good position to take the financial hit at the time, but others went into technical default on loans as analysts evaluated their valuations without operating authority as an asset.?

Some carriers found the new competitive market challenging.?As companies failed, auditors examined freight bills and found charges didn’t match rates on file.?This was a result of an assumption that eased requirements for contract rates could be applied almost universally, and many of those negotiated rates weren’t documented.?This led to even more closures.?At this point, many creditors were becoming nervous because union pensions had priority in bankruptcies.?The bargain hunt was on while the US Supreme Court and legislators sorted out the crisis.?

At the same time, the concept of physical distribution management had morphed into logistics (and later supply chain management), and there was a rush to expand into logistics services.?While transportation companies expanded into forwarding, brokerage, consulting, and other facets of logistics (again fueled by some regulatory changes), non-asset companies expanded into asset-based operations and asset-based companies expanded into new areas – warehousing and distribution for transportation companies and logistics consulting for nearly everyone.?Globalization was taking hold, so expansions weren’t limited to the US mainland or even North America (NAFTA having been approved as well).?Suddenly, transportation companies whose history was in trucks and terminals first in regions of the US and later nationwide were declaring themselves global.

None of this was lost on Yellow, and the CEO who had commented about being the best LTL service for US origins and destinations for both domestic and international freight had retired and was replaced by leadership that saw opportunity in every facet of supply chain management – including global.?At the same time, premium services like FedEx and UPS were shopping for freight and logistics services.?Major carriers (especially non-union carriers) were being acquired by the parcel, express, and non-freight companies and by unionized trucking companies like Yellow.?

By now, there was a new crisis brewing.?Pension liabilities of companies that had closed were being spread across the remaining unionized carriers that were part of the collective bargaining agreement.?As large carriers such as P-I-E and Consolidated Freightways added their pension liabilities to those of smaller carriers who had failed, the burden was growing for companies like Roadway and Yellow to service those pension obligations.

If Yellow had taken a belated and reactionary approach to expanding into supply chain management and globalization, Roadway had been more measured in its approach.?It had non-union carriers, a logistics consulting and logistics services group, a premium expedited service, a parcel service, and even an air cargo component.?Most, except the air cargo operation, appeared to manage reasonably well in the new supply chain environment.?Perhaps as part of its feeding frenzy, Yellow couldn’t stop making acquisitions, and it acquired Roadway.?Analysts and industry watchers were a bit perplexed because there was so much overlap in the makeup of the two companies.?This was not an “end-to-end” merger.?Both companies had strong national coverage and a full range of supply chain services.?Yellow wasn’t necessarily filling gaps in its portfolio.?

Many customers were upset with the combination.?Yellow had been a strong competitor on price, and many customers had favorable rates they feared would be raised now that they didn’t have the two major players bidding against each other.?Others were concerned that too much of their supply chain was tied up in one company.?And some customers had placed business with Roadway because it had superior service in a region than Yellow.?

The new company had significant challenges dealing with integration, and that added to the concerns customers were already expressing.?On top of that, the unions were getting extremely touchy about companies operating both unionized and non-unionized groups.?Roadway’s CEO had negotiated terms that satisfied some of the union concerns, but how was that going to play in this new, larger entity YRC?

Competitors are certainly going to prey on perceived weaknesses, and YRC had plenty of both.?Add a volatile economy, shifts in freight patterns, and volume declines, and Yellow no longer had the agility to respond quickly.?

Yellow’s demise was not sudden.?It required decades of decisions to take the company as far off its original course as it has steered.?Those third- or fourth-generation members of the founder’s family who ran a large, successful domestic freight transportation company can’t be faulted for recognizing the company’s core strengths.?They can be criticized for moving slowly, but they were not letting themselves be seduced by a “shiny object.”?Perhaps being the best domestic transportation company and serving an ever-changing mix of global players with high quality transportation services wasn’t a bad strategy after all.?Unfortunately, we’ll never know.?At this point, it appears Yellow is worth more for its parts than the whole.