United Parcel Service (NYSE: UPS ) recently acquired TNT Express in a $6.8 billion deal to expand its European operations. In the process, UPS scored over industry peer FedEx (NYSE: FDX ) , which may have had somewhat similar aspirations. But FedEx was never in a position to compete with UPS for a deal like this, when you consider the price tag, the breakup fee, and FedEx's available cash, which is less than than half of what UPS possesses.
The deal will almost certainly have negative implications for FedEx. We'll have to see how FedEx will deal with it in the long run.
UPS's big acquisition will take away a sizeable chunk of FedEx's market share in Europe. UPS, which entered Europe nearly four decades ago, already controls a sizable 7.7% of the market, compared with FedEx's 3%. This deal will push UPS's share to around 17% and could result in annual sales exceeding $60 billion. Specifically, the TNT acquisition is likely to boost UPS's intra-Europe ground delivery services and cut into FedEx's growth opportunities on that front.
FedEx can at least continue to focus on imports and exports through airways. And there's always Asia, which is attractive for two reasons: emerging, fast-growing economies such as China and India; and lower penetration, which translates to lower competition. FedEx can benefit from the growing amount of trade in China, where it's been concentrating its efforts lately. In particular, it's been paying up to build a fleet of jets to service the area.
On the downside for FedEx, UPS also has exposure to Asia. Moreover, with the slower growth rate we've seen recently in some Asian economies, including China, too much dependence on these "high-growth" countries might prove detrimental for FedEx.
Of course, a small slide in the growth rate of emerging countries is still better than a stagnant European economy.
The Foolish takeaway
FedEx is sure to take a hit from UPS's latest acquisition, but it doesn't have to spell doom. FedEx simply needs to strategically expand its footprint by tapping markets where UPS lacks much of a presence.
While the U.S. market is attractive relative to Europe currently, many companies, such as UPS and FedEx, are looking to diversify all over the world. For three more global plays, check out our free report: "3 American Companies Set to Dominate the World." The report won't be available forever, so we invite you to get your copy today!