UPS to Buy TNT Express for $6.8 Billion

Michael J. De La Merced and Mark Scott wrote in a recent New York Times article about the United Parcel Service's (UPS) acquisition of the Dutch shipping company TNT Express. The $6.8 billion deal (yet to receive regulatory approval) will increase UPS market share in Europe and open opportunities in China; the share of UPS revenue earned outside the US will rise by 10% to 36%.

UPS Chief Executive D. Scott Davis said that the acquisition, the largest in UPS's 105-year history, "will significantly enhance [UPS's and TNT Express's] ability to serve [their] combined customers' complex global logistics needs." During the past few years, both UPS and FedEx have vied for the acquisition.

Since its spinout from Dutch mail carrier TNT in May, TNT Express has been experiencing millions in losses, a situation executives attribute to the global economic slowdown. Since talks with UPS began mid-February, TNT Express shares have risen over 50%.

The acquisition is a smart move on UPS's side. As Clayton M. Christensen and Michael Overdorf note in Meeting the Challenge of Disruptive Change, companies sometimes create capabilities through acquisition, though assimilation of the acquired company must be done properly to be successful. TNT Express's capabilities are not embedded in its processes or values, but rather in its resources. It is, after all, a parcel carrier like UPS, so its processes must be similar. Though it may reach different destinations, it is still a logistics company. And, being in a similar business, though more focused on express delivery, it must have the same values, such as quick and reliable service. After all, it was created to be a parcel carrier, and that is what it will likely continue to be under the acquisition.

What is different is its resources. Chief among these is its delivery network through which it serves 200 countries. Its fleet of freight planes, vehicles, and depots makes it valuable to UPS, since such networks take time and effort to establish. By acquiring the company, UPS can take advantage of an already-established network.

Because its resources are the rationale for the acquisition, TNT Express's integration into UPS is wise. UPS can take advantage of the new network to cut costs, and cost savings of $725 million are in fact projected over the next several years. And, with horizontal integration, UPS and TNT Express will be able to increase the services they offer. With a logistics company this may be especially important, as the better coverage a firm can offer, the more clients it is likely to gain.

The move to acquire another company instead of creating the capability to serve more nations with express service internally makes sense. The challenge does not require new processes--it requires resources. Therefore, setting apart a group from within does not make sense. Nor does creating a spinout seem a good idea. UPS's values do not hinder it in pursuing greater coverage of its express services. Resources are the issue, and so acquisition is the answer.

The acquisition may also be viewed from the Williamson framework of five factors that determine the level of transaction costs, presented in Note on Managing the Value Chain: Governance, Location, and Firm Scope Decisions. Transactions between UPS and TNT Express occur when one secures the use of the other's network to make deliveries. If both want to increase their service coverage, the frequency of these transactions will be high, as each has thousands of parcels to handle each day and many of them are likely to be out of the firm's individual coverage. Uncertainty may also be high, as each would not know well in advanced what transactions it will need to complete to make deliveries. And, because of bounded rationality and the sheer number of parcels to be handled to a wide array of destinations, arranging with an outside firm may be difficult. These factors suggest that doing operating within the company is preferable. With the acquisition, these transactions will become internal.

Another interesting idea to note is that UPS is acquiring TNT Express at a time when the smaller firm is struggling to make a profit. This is still a good idea. While TNT Express may be struggling in the express-delivery market, nothing will stop UPS from using the network to deliver other services, like non-express mail and parcels. These other services do not seem to be struggling as much. The resources are valuable, though their value is limited for a company that brands itself as express mail only. For UPS, the acquisition will likely be beneficial not only when people begin demanding express service again, but immediately.

What do you think? Is the acquisition of the unprofitable TNT Express a good idea for UPS? Should UPS have looked to acquisitions to expand instead of internal or spinout solutions? To what extent will the two companies leverage each other's delivery networks?