FedEx’s $4.4 Billion Acquisition of TNT Has Been a Dud

(Bloomberg Businessweek) -- FedEx Corp.’s European road trip has turned into a yearslong headache.

The parcel-delivery company, historically a laggard in Europe relative to rival United Parcel Service Inc., bet big on the region in 2016 with the $4.4 billion acquisition of Netherlands-based TNT Express NV. Three years later, FedEx is still trying to integrate TNT into its operations. Two veteran executives leading that process have been replaced, and sluggish growth abroad is weighing on FedEx’s results. On March 19, the company cut its fiscal 2019 earnings guidance for the second time in only three months and said it may need to take more drastic cost-cutting actions to mitigate the impact of weak international sales.

“We remain confident in the long-term strategic value of the FedEx Express/TNT Express combination,” Rajesh Subramaniam, FedEx’s president and chief operating officer, said in a press release. Subramaniam took over as head of the unit that houses TNT in January after former unit President David Cunningham unexpectedly retired. Subramaniam was then promoted to chief operating officer in March after the equally unexpected departure of David Bronczek, the onetime heir apparent to founder and Chief Executive Officer Fred Smith.

FedEx intended to use the TNT purchase to tap into growing global e-commerce demand and said it could cut costs by merging TNT’s pan-European ground network with its existing Express air business. But the acquisition was risky from the start, coming after years of earnings challenges at TNT as a sputtering economy weakened demand in its core western European markets, cheaper competition piled on pricing pressures, and restructuring led to eye-watering charges. TNT had woefully underinvested in its network, and now the cost of catching up has fallen on FedEx.

FedEx initially expected a four-year integration process. In December it was forced to acknowledge that downtrodden demand in Europe and aftershocks from a 2017 cyberattack on TNT’s network would delay the expected benefits of the deal and cause it to miss profit growth goals for the Express segment. On March 19, FedEx said the work may stretch into its fiscal 2021—which is an awfully long time to wait for a big deal to start paying off.

$1.5 billion

● Money pit

FedEx’s original cost estimate for the deal was $700 million to $800 million in integration expenses—about half the current estimate.

● Raise the roof

On March 19, FedEx increased its estimate of cumulative integration costs by $100 million, from the $1.4 billion it had predicted in 2017.
—Sutherland is a deals columnist for Bloomberg Opinion.

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