The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
The theme of the past week might be best summarized by the word “focus.” Enterprises are focusing back on their core competencies and cutting out underperforming businesses, in an effort to increase their competitive edge in the area they serve best. The current market is further adding benefit for those choosing this strategy, making it likely that in the near future, we will see more divestments and spinoffs while the timing is ideal.
Market conditions
There are two conditions making this focused business model feasible: high valuations and cheap capital. Some valuations are currently so high that they are causing a reassessment of the traditional methods of valuing businesses. Stock price-to-earnings ratios are being pushed upward based on the soaring stock market, making earnings more detached from the valuation than ever before. These high valuations create an ideal time for enterprises to sell or split. At the same time, they benefit from the current conditions of cheap capital to fund these moves.
Whereas at other times cheap capital might be an occasion to expand and take on bigger risks, this time, enterprises are not using their resources to expand outside their bread-and-butter business but instead to invest within it.
Core competencies
Enterprise players in transportation and logistics are getting back in their swim lanes, doubling down on core competencies. Where the vision in the past was to reach multiple spaces, being a “one-stop” solution for their customers across a wide range of services, now we’re seeing the value in trimming this down, excelling in one space and outsourcing the rest. There are few opportunities to focus on multiple businesses well, and ultimately, enterprises will want to leave what is underperforming to hone their leading services.
Recent divestment examples
In late 2020, XPO Logistics announced the split of its logistics from the trucking and brokerage side, with the aim to bring greater value for the customers of each side with better focus and clarity for each business.
TFI International, a Canadian holding company, will acquire UPS Freight (LTL and dedicated TL) in an $800 million deal that will likely close in Q2 2021, in an effort to become the LTL leader for North America.
UPS, on the other hand, is getting back to its core focus: its parcel business. The e-commerce boom has shown a huge opportunity for excelling in this one marketplace. UPS just released its Q4 2020 results showing a 21% increase in revenue of $24.9 billion year-over-year, after a 15.9% increase in revenue in Q3 2020.
UPS Freight was always working within low margins, with the strategy of attracting shippers to the higher-margin parcel business. That plus the cost of benefits for their unionized workers led UPS to the split, as they found it more cost-effective to outsource their LTL needs.
Via LinkedIn, I recently asked Benjamin Gordon of Cambridge Capital and BG Strategic Advisors why he thought UPS is parting ways with its LTL division. He said, “I think UPS wants to focus primarily on the high-growth, high-margin parcel business that is surging on the basis of eCommerce growth. LTL is a non-core business from that vantage point. And sometimes it takes a new CEO to shake things up!”
Q1 2021 also marked the divestment of Werner Global Logistics to Scan Global. Werner Inc. is one of the largest trucking fleets in North America, and this move helped streamline operations and narrow focus for the trucking and logistics services company. In a press release, Werner Vice Chairman, President and CEO Derek Leathers said, “We are proud of the global operation WGL has built and are confident it will continue to succeed as part of the SGL family. Going forward, we remain committed to our North American logistics capabilities in truck brokerage, freight management, intermodal, and final mile services.”
We can expect other divestments and spinoffs like these in the future. Times are good not only for selling but also for strengthening core competencies, while many in the industry are turning to outsource what they don’t do best. The value for these enterprises is refocusing on the services where they have others beat.
