Cautious Optimism

Randy Grider
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Need a few signs that the economy may be improving? Take notice of July 8, 2003. That date could serve as a watershed for the economy – a much-needed vote of confidence for brighter days ahead.

CNN/Money reported that for the first time since Sept. 24, 2001, three major – but separate – deals were announced on the same day, according to Dealogic, an independent investment research firm. ArvinMeritor made a hostile $2.2 billion bid for rival Dana Corp., data storage provider EMC agreed to buy Legato Systems for $1.3 billion in stock, and trucking company Yellow Corp. announced it would buy competitor Roadway Corp. for cash and stock worth just under $1 billion.

While the pace of mergers and acquisitions are still running below last year’s levels – and far below the major deals craze of the late 1990s, according to a CNBC analyst – companies are shopping around again. After a three-year decline of stock prices, bargains are available for cut-to-the-bone companies wanting to expand and increase profits. Unprecedented low interest rates make instant expansion through mergers and acquisitions even more attractive.

Yellow said the merger with Roadway allows growth while cutting costs.

The Yellow-Roadway deal comes in the wake of Consolidated Freightways’ bankruptcy announcement last September, which sent more business to large LTL carriers, such as Yellow. “We think we’re on the verge of an economic recovery,” said Bill Zollars, president and CEO of Yellow in a conference call July 8. “We have a new five-year agreement with the teamsters, and the debt market has never been more attractive than right now.”

Kansas-based Yellow paid $48 per share for its Ohio-based rival and will assume $140 million in Roadway debt. The companies’ combined revenue for the 12 months ending in March was nearly $6 billion. The companies expect to save $45 million by the end of their second year together and $125 million after five years.

The new company will be known as Yellow-Roadway Corp. Roadway will become an operating entity under Yellow-Roadway.

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As both the Yellow-Roadway acquisition and the ArvinMeritor-Dana hostile bid were announced just as this issue was going to press, there were some questions still to be answered – especially in the takeover attempt. Dana had asked its shareholders not to make a decision on the hostile takeover bid until they considered its board of directors’ recommendation on the sale.

ArvinMeritor, which said its previous proposals to purchase Dana had been rejected without serious discussion, decided to go straight to the shareholders. The company said its offer represents a 25 percent premium over Dana’s closing stock price July 7, as well as an additional $2.2 billion for assumption of debt.

While the ArvinMeritor-Dana situation was up in the air at press time and anything could happen, the proposal hints at the fact that major companies are once again feeling more confident about economic recovery.

Investors also are looking to the trucking industry for additional signs of an improving economy. They’re especially interested in seeing what percentage of this year’s rate increases by some major fleets will stick. Many see trucking companies’ ability to negotiate and implement rate increases as a leading economic indicator due to shippers’ close relationships to manufacturer and retail sectors.

Inventories in various sectors also have shown some signs of decline in recent months, which can be good for the trucking industry if depleting inventories are coupled with strong sales over several consecutive months.

Overall, most movers and shakers are still somewhat guarded in their actions, but they’re ripe and ready for growth. Without a major setback such as a major terrorist attack or an international crisis, we may already be seeing an economic rebound taking its first true steps.

However, new truck sales, the impact of the new hours-of-service rule (effective Jan. 4) and other trucking-related issues will figure into the equation.

We only need to keep our eyes on the trucking industry to see where the last few months of this year will lead. Hopefully, it will pave the way to a more prosperous 2004.