On Yellow Road to Acquisition

The dominant player in the less-than-truckload transportation industry, Yellow Roadway (NASDAQ:YELL), is moving in on the next-day and second-day delivery market now dominated by FedEx Freight (NYSE:FDX) and Con-Way Transportation, a subsidiary of CNF (NYSE:CNF).

Yellow Roadway announced that it was acquiring rival USF (NASDAQ:USFC) in a deal valued at $1.4 billion that is expected to close by the summer, pending shareholder approval. In less-than-truckload shipping, or LTL, goods from several shippers share space in a single trailer. It's also the fastest-growing segment of the industry. Yellow became the leader of the $60 billion market with a 60% market share when it swallowed Roadway in 2003 in a $1.1 billion merger. USF is second only to Yellow Roadway.

Yellow Roadway had been nonexistent in the next-day and second-day delivery market until this month. It only began service two weeks ago, but says it achieved a 98% on-time performance during its rollout. The idea is to become the primary carrier for all LTL shippers, winning over the next-day service and then grabbing the long-haul business, too. The combined Yellow Roadway-USF is going to be a formidable competitor with more than $9 billion in revenues, 70,000 employees, and 1,000 service locations.

Industry trailer volume in the fourth quarter of 2004 was at its highest level in five years, and that of 28-foot trailers, those favored by LTL haulers, grew 19% for the quarter. The American Trucking Association said that truck tonnage overall grew more than 6% for the year, though this year is not expected to be as robust. Still, as Fool contributor Stephen Simpson has also noted, truckers like Arkansas Best (NASDAQ:ABFS) and Old Dominion (NASDAQ:ODFC) have continued to benefit from a supply crunch and prolonged economic growth.

While USF suffered some during 2004 due to labor union problems, consolidation of units, and a CEO who resigned suddenly in November, it also reported $6.6 million in fourth-quarter earnings, down 64% from the previous year. Yellow was also a heavily unionized company, but it was able to integrate with Roadway without ruffling the feathers of the Teamsters, and analysts expect the USF merger to go smoothly.

The good times in trucking won't roll on forever. When United Parcel Service (NYSE:UPS) warned last month that it would miss analyst expectations by 12%, it reverberated throughout the industry, sending all trucking stocks lower. Things have been so good that people are expecting them to slack off soon. By rolling up USF, though, Yellow Roadway has signaled it intends to keep on truckin'.

Settle in for the long haul with these other Fool articles:

• US Xpress in the Fast Lane
• Is This Trucker Still the Best?
• Old Dominion Keeps on Trucking
• Trucking Firm Takes a Tumble

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Fool contributor Rich Duprey thought the Jan-Michael Vincent movie White Line Fever was cool when he was a teen. He does not own any of the stocks mentioned in the article.