Is There a New M&A Rationale?

In this deflation era, will there be a new rationale for mergers and acquisition?  Fedex pulled off a move UPS could not?  How come?

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FedEx struck a €4.4bn deal for struggling rival TNT Express in a bet that it can expand its presence in Europe and avoid the regulatory concerns that prevented its rival UPS from pulling off the same deal.

For the last 45 years the deal was to take massive asset-less backed credit and outbid competitors by overpaying.  Who cares?  Like a house, prices always rose.  That is no longer the case.  Is this a credit deal?

Fred Smith, FedEx’s chairman and chief executive, said the timing of the deal was influenced by the strength of the US dollar as well as signs that lower oil prices and the European Central Bank’s monetary stimulus were delivering a boost to Europe’s economy.

Fred Smith is Skull & Bones, so maybe it has to do with USA control over routes, or unloading dollars overseas, and the reference to EU QE clearly suggests it is an EZ credit-rationale deal.

As part of the deal, the two companies would need to sell TNT’s airline operations. FedEx, which has more than 660 aircraft in its global fleet, said that TNT’s European road network — which connects more than 40 countries through 19 road hubs and over 550 delivery depots — would be “highly complementary”.

Yes, that last mile is critical when competing on price.  The road network is the thing. TNT has 32 aircraft, mostly leased or old, so they are easy to deal with, but to whom would they sell the operations?    The part they are getting rid of is the part no one wants.  And TNT is only 15 years old, it was a boom time phenomena. Last in first out?

Now this is just weird:

The deal comes with international couriers struggling to adapt to the rise of e-commerce, which has put pressure on their delivery systems. These are more geared to serving high-density areas.

How does increased demand cause one to struggle?  usually you have two options, one is raise prices, the other is delay delivery.  The latter is not an option in delivery services, so the struggle must be in the pricing.  When Amazon.com can live off EZ ZIRP credit to take a loss on delivery, they push a hard bargain on what they will pay.  When Amazon can match up with Fedex on this EZ ZIRP credit to in essence get taxpayer subsidy on freight, ouch to the little guy.

If debt is behind this, then the nominal amount owed to the banks will get relatively more expensive over time, at which point Fedex will have to be bailed out, assuming they are deemed too big to fail.  Will the Europeans be so willing to support the hegemon, or let 100 new competitors emerge?  Or sell it off to the Chinese?  My guess is things will start to turn out contrary to expectations.

As an aside, there seems to be a nasty short squeeze here.  From the article we learn that the company value before the bid was about 3.4 billion euros, and about 10% of that was loaned out on shorts, or 340 million euros.  A 33% jump in price (28% so far) would hammer (in the form of margin calls) people leveraged 10-1 in shorts...  with .60 euro investment, they now have to fork over 1.40 euros more to get out of the trade.  If someone has 1000 shares, or EU6000 in, they now have to cough up EU14,000... NOW!  The people on the other side of the short trade pick up an easy 25 million euros, if they new the details of the offer (and if it goes through, and if I have the calculation right.)

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