XPO’s effort to roll up domestic logistics industry progresses, with projections for $9 billion in revenue by 2017.
The rise of XPO Logistics is unlike many in the history of the logistics services market.
To put things in perspective right off the bat, consider this: XPO had revenue of $177.1 million. In 2014, that revenue rose to $2.4 billion.
XPO Chief Executive Officer Brad Jacobs has built a budding empire in truck brokerage, contract logistics, intermodal, expedited and last-mile delivery. But it’s been the sheer pace at which he has built the size and scale of his company that’s especially staggering, perhaps even beyond his own ambitious projections.
When American Shipper interviewed Jacobs at the start of 2014, he was projecting $5 billion in revenue for XPO by 2017. They’ll likely hit that mark this year, and are now projecting $9 billion in revenue by 2017, a number that would put the company within touching distance of C.H. Robinson, the largest freight brokerage in North America by a large margin.
XPO’s story is largely centered on two parallel paths: its aggressive acquisition strategy, and Jacobs’ willingness to pivot toward diverse logistics categories where he sees the chance to consolidate.
There’s a healthy dose of so-called “cold starts” mixed in—new locations developed organically—but you don’t grow revenue 13-fold in three years without acquiring and integrating.
In that respect, 2014 was particularly notable for XPO. Of all the acquisitions the company has made in its short history, the purchase of Pacer International and New Breed Logistics in 2014 for a combined $970 million brought home the reality of this project. If this was a roll-up, it was a diversified roll-up with a heavyweight presence in a number of key transportation and logistics segments.
By Jacobs’ estimation, XPO now has a leading position in freight brokerage (where it’s the third biggest company in North America), intermodal (where it’s the third biggest behind J.B. Hunt and Hub Group), expedited logistics and last-mile logistics (where XPO is now the biggest provider in North America).
Throughout, Jacobs has been aiming at consolidation.
“The way I see the industry evolving is like other industries,” he said in an interview with American Shipper. “Over time, fragmentation decreases and two or three companies have dramatic advantages in terms of scale.”
Jacobs found success with a similar strategy in the waste management and equipment rental markets over the prior two decades. He’s also undoubtedly a star at raising capital via private equity funds and investors.
In September, XPO snared $700 million in equity from three investment funds—PSP Investments; GIC, Singapore’s sovereign wealth fund; and the Ontario Teachers’ Pension Plan.
The financing equated to roughly 22 percent of XPO’s common stock, with the proceeds to be used for acquisitions. Jacobs said at the time that a “strategic investment by three blue-chip institutions is a strong endorsement of our plan for value creation.” He said the funds would allow XPO to “capitalize on an acquisition pipeline that’s livelier than expected.”
Bloomberg last year dubbed Jacobs’ strategy as a model based on “serial takeovers.”
“Missing from these deals are investment bankers,” Bloomberg wrote. “Jacobs uses staff to scout out and negotiate acquisitions, turning to Wall Street banks for financing only.”
The Pacer acquisition, in particular, perked ears in the transportation industry, because it was a household name with deep connections to international freight markets. Jacobs, aside from adding an intermodal business that he craved from the start, also bought name recognition. But he saw opportunity as well.
“Pacer made $27 million last year before we bought them, so they were fairly profitable,” he told Motley Fool in 2014. “But their margins were lower than their competitors. We are going to improve that by reducing their empty miles; about 39 percent of total miles for Pacer are empty versus an industry average of about 25 percent (at the time of the acquisition). This is a big deal.”
New Breed brought a similar level of expertise and scale in the contract logistics segment. During the Stifel Transportation and Logistics Conference at Miami in February, Jacobs purred to potential investors in the audience about XPO’s contract logistics capabilities thanks to the new New Breed deal. It’s part of a larger directive to go up-market.
“Three years ago, we were focused on small customers,” he told American Shipper. “I wanted to get not just multimodal, I wanted to get more experience under our belt, get the IT developed, and get the back office hitting on all cylinders before going to tier one retailers and manufacturers, so that we had an authentically world class offering. Now we have a greater proportion of larger shippers (which XPO defines as those with $1 billion or more in revenue). In the last quarter, we signed 19 strategic accounts, and we’ve been adding 15 to 30 of those accounts per quarter.”
Jacobs said Pacer “fulfilled my goal to get into intermodal because that’s such an important part of the supply chain. It gives us the opportunity to solve supply chain problems.”
An $87 million move in late 2013 to acquire Landstar’s managed transportation solution provider NLM made less of a splash, but gave XPO a piece of a market in which other brokerages like C.H. Robinson and Echo Global Logistics have profited nicely.
“Managed transportation is more sticky (longer-term contracts, harder to move to another provider), and NLM is highly customized for each customer,” Stifel’s Transportation and Logistics Research Group noted.
All these pieces have grown XPO’s footprint significantly, helping build the scale that Jacobs seeks. XPO also integrated some of its divisions to emphasize the unified nature of its offerings, bringing, for instance, its XPO Express, XPO NLM and XPO Air Charter brands into a single expedited group “to serve customers more synergistically.”
“Transportation customers are focused on cost and service, and as you get bigger, you usually get better at that,” Jacobs said, pointing to XPO’s 600-strong, in-house IT development staff. “For example, we wouldn’t be able to invest in $125 million in IT. As you get bigger, you can do things you can’t do when you’re smaller.”
Jacobs has long seen IT as a differentiator in a highly fragmented transportation and logistics market.
The challenge three years on from his initial $150 million entrance into the industry is integrating the disparate companies he’s acquired onto XPO’s proprietary systems. Some analysts wonder how quickly that integration can actually occur (or indeed whether it’s currently occurred to the extent that XPO has said publicly) but Jacobs said it’s a core strategy.
“All the IT, except for contract logistics, are similar and highly integrated,” he said. “We’re big believers in proprietary technology. We develop it based on real-time input from customers and employees from the standpoint of what is the perfect IT system to let them do their jobs better. What do you want it to achieve. We have more than 200 projects we’re developing.”
Among the systems being developed—a rail optimizer for its intermodal business, and dynamic routing functionality in last-mile for mobile devices. Jacobs said XPO’s freight optimizer for its brokerage business “gives every rep access to our nearly 30,000 carriers. That’s a powerful tool that you can’t get off the shelf.”
XPO does use software from Catapult to manage international freight rates.
There are skeptics, of course. Those who wonder whether XPO has grown too fast. Whether the IT is truly integrated. Whether the transportation and logistics industry can really be consolidated. Whether Jacobs is in it for the long haul.
Jacobs merely points to the numbers. Aside from the $9 billion revenue target in 2017—that’s nearly four-times its 2014 revenue—XPO expects to turn a $575 operating profit that year. One of the main queries thrown at Jacobs in past years was the company’s lack of profits, even as its revenue and reach grew. But the lack of questions about profit from investors at the Stifel conference this year was noticeable.
Perhaps it’s because the pace of XPO’s acquisitions and general growth make it hard to determine its operational prowess.
“Quarterly (earnings per share) results have been hard to estimate, as assumptions surrounding revenue growth, potential acquisitions, margin expansion, diluted share count, debt balances and associated interest expense, amortization of intangible assets, et cetera, have evolved just as rapidly as the company’s fast-paced roll-up strategy,” Stifel wrote in a February investor note about XPO. “We are likely still a year or two away from the company settling into a more mature and developed state—where quarterly EPS estimates will be more reflective of actual operating performance and less reflective of the outsized impact of the acquisition-related costs in the particular quarter.”
Jacobs’ goal was to create a transportation giant, one that’s largely been accomplished already. The next step is to create one of those two or three companies left standing in a consolidated industry (whether or not the consolidation for that scenario actually occurs is still up for debate). Not only that, but XPO projects its revenue will increase in 2015 in a balanced manner, with half of the growth coming from acquisitions and the other half through organic expansion and cross-selling to existing customers ($1 billion in growth is forecast for each).
He also talks as someone who now knows what shippers want.
“The conversation we have with shippers is very high now,” he said. “We’re trying to listen to their supply chain needs, because we have an integrated service offering.”
This article was published in the April 2015 issue of American Shipper.