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On Nov. 17, the Department of Justice cleared the Yellow Corp.’s proposed acquisition of the Roadway Corp., the largest trucking merger in U.S. history. The combined company, which will be the leader in the less-than-truckload (LTL) segment of the industry, received one of the more in-depth investigations of a transportation-related merger, and certainly the most intensely analyzed trucking merger in the last quarter-century. The transaction was reviewed with a keen eye toward the dramatic changes that followed the passage of the Motor Carrier Act of 1980, a historic piece of legislation that effectively removed federal regulatory controls over trucking rates, routes, and services, and opened the industry to full antitrust scrutiny. Now the Yellow Roadway deal is expected to tip off a wave of consolidation throughout the trucking industry as companies adjust to the new landscape in transportation services and try to keep up with increasingly large, integrated competitors. Trucking, which accounts for more than 80 percent of all transportation costs in the United States, is undeniably the most important mode of transit for consumer goods. The deregulation of the industry has significantly reduced direct and indirect shipping costs and provided businesses with greater flexibility with respect to shipment options and inventory control. The passage of the Motor Carrier Act also opened up the industry to numerous new entrants, who came in droves from both related and unrelated businesses to all segments of trucking. A CHANGED INDUSTRY In the regulated era, the LTL business was the exclusive domain of certified carriers who handled intercity shipments, generally under 10,000 pounds, by utilizing an elaborate hub-and-spoke network. In its simplest form, freight would be consolidated at a terminal or hub, transported to a second terminal once there was enough aggregated freight to completely fill a truck, “broken down” or de-consolidated at the second terminal, and ultimately delivered to the customer. LTL carriers served the needs of a broad array of shippers, with the most important accounts being those that sent thousands of smaller shipments to multiple locations — i.e., large national manufacturing and retail businesses. For four decades prior to the Motor Carrier Act, these LTL shippers were effectively protected from competition from more efficient modes of carriage by an antiquated regulatory scheme that was aimed at ensuring a certain level of profit for the trucker and at preserving a Washington institution known as the Interstate Commerce Commission. Today, LTL services are available from traditional LTL carriers and a large number of new entrants. Success depends upon a carrier’s ability to provide a multitude of services at prices that are largely the subject of intense negotiations between powerful shippers and the carriers that seek their business. If there is a more-efficient means of transporting a customer’s goods than the traditional hub-and-spoke system — for example, where full truckloads can be direct-routed between major cities without consolidating and breaking down the freight at intermediate terminals — such options will generally win out. The most prominent of the new entrants into the LTL business are the parcel carriers, the FedEx Corp. and United Parcel Service, which have developed totally different, but equally efficient, systems for handling LTL freight. FedEx developed a more traditional system by acquiring two adjacent regional LTL carriers and operating them as a seamless national system. UPS has become one of the largest LTL carriers by agreeing to handle all its customers’ needs as long as the freight is broken down into 150-pound parcels that can be efficiently handled by UPS’s equipment. Other large regional LTL carriers — such as Con-Way Transportation Services, the USF Corp., and Estes Express Lines — have greatly expanded their geographic service areas by building new terminals or by forming “virtual mergers” through alliances with other regional carriers. For example, Estes, a carrier in the Eastern United States, offers services to the rest of the United States and Canada through its partners in the ExpressLINK alliance. Additional new entrants into the LTL sector include truckload (TL) carriers, which traditionally carried only large shipments from a single customer. Now these carriers are increasingly aggregating smaller loads from multiple customers into a complete truckload. The opportunity to efficiently combine LTL shipments into TL shipments has been greatly facilitated by the growth of third-party logistic providers, consolidators, freight forwarders, and brokers who utilize powerful software programs to direct freight to the lowest-cost option. A significant and growing amount of former LTL traffic is now moving via TL carriers. Finally, railroads working in close conjunction with LTL firms, and in conformity with trucking-union collective bargaining agreements, now carry a significant amount of former LTL traffic, particularly on transcontinental routes. COMPETITION AHEAD The dramatic changes that deregulation has brought to LTL trucking can best be illustrated by one statistic: Of the 50 top LTL carriers in 1980, only three will still be operating at the beginning of next year. Does this suggest that we have a failing industry or a hopelessly outdated business model? Hardly. The competition that the new entrants have brought to the LTL sector — enhanced network efficiency, reduced and more definite transit times, better tracking of freight locations, etc. — are all largely the result of improved technology, which can be adapted to work with the various types of carriers operating in the market today. In other words, the future Yellow Roadway Corp. will be a formidable competitor in the trucking industry, but so will behemoths such as UPS and FedEx. (Full disclosure: Our law firm represented Yellow in the acquisition of Roadway.) The fact that the LTL, TL, and parcel segments are all morphing into a single business does not mean that each type of carrier does not have its own strengths or the opportunity to utilize the sophisticated technologies that will separate the winners from the losers in the years ahead. DOJ INVESTIGATES Even before the proposed merger, Yellow and Roadway were already two of the largest LTL carriers in the United States with combined annual revenues of approximately $6 billion. In the period since deregulation, they have survived and sometimes prospered, while other national carriers have mostly disappeared from the scene. However, the changing technological environment, increased customer demand for value-added services, and intense competition from FedEx, UPS, and regional carriers have put them in a difficult spot, forcing them to make a choice: grow and evolve, or disappear into bankruptcy. In the face of these pressures, Yellow chose a business strategy that few had expected — acquisition of its larger competitor, Roadway. Initial reactions from the business community suggested that obtaining DOJ approval for the deal would be quite difficult. Analysts noted the large premium being offered on Roadway’s stock and expressed concern about the antitrust risk inherent in combining the two largest national LTL carriers. The American Antitrust Institute filed with the DOJ a brief, written by a leading economist, arguing that the acquisition would have anti-competitive effects, particularly in rural areas. A large number of customers who were particularly reliant on national LTL carriers also voiced concerns that there would be few transportation options remaining to them following the acquisition. The DOJ conducted an appropriately methodical and focused investigation of the transaction. A Second Request for information was made to both parties in August, concentrating on the long-haul LTL segment in which Yellow and Roadway compete. (Long-haul LTL trucking involves shipments of more than 1,000 miles, which generally take three to five days for delivery.) A major issue was whether this segment constituted a relevant product market for antitrust purposes, and if so, would the reduction in national LTL carriers, from three to two, have a negative impact on competition. In response, the parties argued that whether one focused on the relevant market definition per se or examined the probable competitive effects of the deal overall, the transportation costs for shipping customers were not likely to increase as a result of the merger. The parties presented evidence of competition in the LTL industry, establishing that customers had numerous other shipping options, such as FedEx, UPS, and various regional carriers. Yellow and Roadway also stressed the necessity of the transaction to allow them to remain competitive and to serve their customers more effectively. Apparently, the DOJ agreed with them. Last month, the department cleared the acquisition without requiring any divestitures or other remedies. Yellow and Roadway closed on the transaction last week. THE FUTURE OF TRUCKING The Yellow Roadway deal is just the latest signal that the trucking industry is continuing to evolve beyond simple point-to-point transportation. Customers are demanding more comprehensive and sophisticated services, while trucking profit margins have thinned and competition is fierce. Successful LTL carriers must integrate logistical services with physical transportation and offer these to customers on an international scale. As a result, the industry is expected to see a wave of consolidation in the near future, as carriers expand and combine in order to remain competitive. While small, regional carriers may continue to occupy niche markets, the dominant trend will be the formation of “mega-carriers” that combine large trucking fleets with a portfolio of other services in order to compete with market leaders such as FedEx and Yellow Roadway. In fact, UPS — as noted, already a significant player in parcels, LTL shipping, and logistics — is rumored to be looking to create its own national trucking fleet through the acquisition of one or more LTL carriers. The race toward consolidation only emphasizes the antitrust issues presented by any deal in this industry. Transportation mergers involve a complicated, sometimes chaotic relationship between diverse customer demands, numerous goods and services offered, and competition on a variety of different levels. Market definition in this business is difficult and market share data are often misleading, since they only give part of the story. As mega-carriers emerge and the total number of players in the industry decreases, each successive deal will likely receive more and more scrutiny from the antitrust agencies. Yellow Roadway is only the beginning. Sean F.X. Boland is a partner and Patrick A. Tillou is an associate in the antitrust group in the D.C. office of Howrey Simon Arnold & White. The firm was the Yellow Corp.’s antitrust counsel in its recent acquisition of the Roadway Corp.

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