Earlier this week, the European Commission — the ruling agency governing transactions affecting the euro zone — made a critical decision that ultimately may be seen as an affront to free-market capitalism. A dual announcement made by express delivery couriers FedEx Corp. (NYSE:FDX) and TNT Express (OTCMKTS:TNTEY), in which they confirmed that the European Commission found no objection to FedEx’s takeover bid of TNT, should be making waves beyond the pages of business media. Alarmingly, the scandalous details of former NBA basketball star Lamar Odom carries more populous weight than a controversial ruling which will eventually impact the global economy.
Rather unexpectedly, the European Commission defied their own logic in the FedEx ruling, opening themselves quite clearly to charges of hypocrisy. Two years ago, major rival United Parcel Service, Inc. (UPS) put up a bid to buy TNT for the very same reason FedEx did — to increase the scope of presence in the European markets and effectively stymie competition. The commission ruled unfavorably for UPS, claiming that such a transaction would essentially damage capitalism by limiting service providers (reduced supply), ultimately leading to higher prices (increased demand). Apparently, the European Commission got over their qualms fairly quickly.
From a pure numbers game, the decision has some merit. UPS is roughly twice the size of FedEx, and a UPS-TNT merger would certainly have a greater impact on competition. Additionally, the financial state of UPS is healthier than that of FedEx, which implies that “big brother” can do far more damage over a shorter time frame, thus catalyzing the courier consolidation that the commission fears so much.
However, FedEx is no “micro-cap” company. Its proposed buyout is part of a broader mergers and acquisitions (M&A) landscape that is affecting multiple industries. The M&A drive is perhaps most pronounced within the airliners as they battle declining revenue — and until the oil market collapse, higher business costs that affected profitability. Whether FedEx or UPS attained the right to buy TNT is not the main issue. Weakness in global markets necessitated the sale; otherwise, what would be the point of selling a cash-cow unless it were for a ridiculously large amount?
For FedEx specifically, the buyout hides (or detracts from) significant vulnerabilities in their financials. On an annualized basis, both revenue and net margins have sharply declined, especially so in the last fiscal year. The TNT takeover may help matters, but can FedEx absorb the liabilities associated with the transaction?
Investors aren’t so impressed. FDX stock may have surged in the markets for October on the back of the positive ruling by the European Commission, but as it stands, its share price is stuck in between its 50 and 200 day moving averages. This signals indecision, especially in the wake of last Friday’s pensive trade, with shares closing down -0.13%.
Although FedEx succeeded in a coup, there are major hurdles ahead for the global economy. These challenges could quickly negate any of the positives of the merger and put FDX shareholders in a bad situation.