For years now, academics have been producing studies showing that most merger-and-acquisition activity ultimately results in little more than a transfer of wealth from the shareholders of the buyer to the shareholders of the seller. Even the famous and well-respected investor Peter Lynch has echoed this sentiment in the past in his books.
Investors in UPS (NYSE:UPS) today are no doubt hoping their company beats the odds. Early Monday morning, UPS announced the acquisition of Overnite Corporation (NASDAQ:OVNT) at a 46% premium to the stock's Friday closing price.
For those who don't follow the trucking industry, Overnite is a good-sized, less-than-truckload hauler that services all 50 states, Mexico, and Canada. Formerly a part of Union Pacific (NYSE:UNP), Overnite has been on its own for only about a year and a half. Depending upon how you define your peers, Overnite is the 10th-largest publicly traded trucker by revenue.
Obviously this acquisition would significantly expand UPS's less-than-truckload service capabilities. While many casual observers still think of UPS as a parcel-delivery company, the reality is that it is a large and integrated global logistics and shipping company. Given that this acquisition would meaningfully expand the company's heavy freight capability, it definitely makes a certain amount of sense.
But I have two questions: Why Overnite, and why pay so much?
Overnite is a good trucker, but it's not the best. Its margins have been improving, but other truckers, such as Arkansas Best (NASDAQ:ABFS) and Old Dominion (NASDAQ:ODFL), do better in the same space. What's more, you see a similar pattern with returns on capital. On the other hand, Overnite does have a large fleet and a considerable geographic footprint. It also offers direct service to more than 45,000 cities.
The "why pay so much" question is a bit stickier to me. I'll concede that Overnite was trading below the industry average P/E, but I'm not sure why UPS thinks it has to pay a 46% premium -- especially considering that it's paying in cold, hard cash.
I find that sort of premium to be a major head-scratcher, but I'll concede a couple of points to UPS: It rarely acts hastily or out of desperation, and there is undoubtedly a major opportunity to expand Overnite's business under its aegis. Nevertheless, if I were a UPS shareholder, I think I'd want to know why management felt such a high premium was in order -- especially considering the overall history of corporate buyouts and value creation.
There will certainly be a period of adjustment in the wake of the merger. For instance, UPS is, by and large, unionized, while Overnite is not. But UPS has experience with integrating companies into itself. I'll say again that the price baffles me, but I do see how Overnite fits into UPS and could provide another leg up for this global shipping giant.
For more on the shipping and logistics world, check out these prior takes:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
