'UPS vs Amazon'. Lessons from the separate M&A cases

 

Written by MIN, Jung Ung, Ph.D. / INHA UNIVERSITY Assistant Professor

 

 

[CLO] On 18th March 2012.
There was astonishing news that might cause upheaval in the world logistics market. That's UPS's acquisition of TNT. The world's second largest logistics firm UPS agreed to acquire Dutch-based TNT, which ranks 4th in the world and 1st in terms of a market share in Europe, for 5.2 billion euros. Even if there have been a number of mergers and acquisitions among major companies, this M&A is expected to bring about bigger change in market structure than ever.

 

On 19th March 2012.
Following the announcement of UPS's acquisition of TNT, another M&A news, which was relatively less in the spotlight, came the next day. It was that a global on-line distributor Amazon acquired 'Kiva Systems' at 780 million dollars. Kiva has been manufacturing unmanned automated equipments to operate logistics center.
What significance do these separate M&A cases contain? And why do we have to pay more attention to Amazon case than UPS?

 

UPS's acquisition of TNT
Horizontal expansion strategy of logistics firm

 

UPS decided to acquire shares in TNT for 9.5 euros per share at a premium of 53.7%. This M&A is in line with the strategic direction that most of the global logistics enterprises are moving towards. It means that UPS will be transformed from US market-oriented company into 60 billion dollar gigantic enterprise through expansion of global network.
Particularly the acquisition of TNT which is showing strength in European market will help provide UPS currently facing sluggish growth with opportunity to develop a new market. At the same time UPS is thinking about advance to Asian market by using TNT, total sales of which accounts for 1/3 in that region.

FedEx showed interest in TNT as well, however they finally gave up its acquisition because of low cost reduction due to sales of little importance in European market and lack of cash caused by replacement of deteriorated transportation equipments.
Even though UPS's acquisition of TNT still remains to be examined according to the regulations of antitrust laws inside Europe, it clearly represents strategy of typical network base expansion in global logistics market.
It aims to reduce the cost based on the economies of scale through horizontal expansion to secure global outposts within the same industrial category. In another words, traditional profit-oriented competitive strategy is shaking global logistics industry again.

 

Amazon's acquisition of Kiva Systems
Vertical expansion strategy of manufacturing ․ distribution company

 

Amazon announced that they were going to acquire Kiva Systems at 780 million dollars. M&A market estimates the price of this acquisition is on a quite high level.
Kiva Systems, established in the mid-2000s, specializes in producing automated robots to operate logistics centers. Kiva's customers are mostly internet based and e-commerce enterprises including Amazon, a stationery distributor of 'Staples.com' and online shoes vendor of 'ZAPPOS' and so on.
So then, what made Amazon acquire a specialized logistics equipment manufacturer of Kiva of all things? According to convincing analysis from the specialists, there are two major factors.
The first is cost saving. Amazon holds more than 70 logistics centers as of 2012. The company is known to have been adding about 10 centers every year along with the increase in the sales. Kiva's solution could be an important tool for improvement of work efficiency in the logistics center and facilitation of innovative cost reduction.
Although Kiva is an attractive equipment manufacturer, it would be very costly for Amazon to introduce robotized automatic logistics equipments. Usually it runs about 20 million dollars to install Kiva robots at a single logistics center. Allowing for 50% discount on a volume purchase, it still costs 10 million dollars. If Amazon installed such equipments to the 70 logistics centers of their own, roughly 700 million dollars would be paid.
By the way, that installation cost is almost equivalent level to 780 million dollars, which is an amount for Amazon's acquisition of Kiva. In other words, Amazon preferred acquisition to introduction of the equipments as the costs on either side were somewhat similar.
I

f manufacturing and operation costs for the equipments were even included, installation cost would clearly increase too. But cost reduction caused by the acquisition as well as additional sales arising from the corporate acquired must be attractive to Amazon. Dave Clark, a vice president of Amazon, stressed in a press release an Amazon's long will to propel innovative automation of logistics centers.
Secondly, Amazon blocked access of potential rivals like Walmart to Kiva's technology to hold a dominant position consistently. That is to hamper competitor's process efficiency by selectively proceeding with the sale of Kiva's technology and products after its acquisition.
In fact, the second logic is more convincing than the cost saving because Amazon hasn't gone over the introduction of Kiva system in detail so far and even if that was the case, Kiva's current production capacity cannot fulfil Amazon's requirements for the time being.

 

Why should we pay more attention to Amazon?
To what should we pay attention through two different M&A cases of UPS and Amazon? While UPS followed traditional M&A of expanding market, Amazon was rather a new type.
It is interesting that distribution or manufacturing company's business is diversified via logistics area particularly from the vertical and integrated point of view. What's more interesting is that Amazon acquired Zappos, one of Kiva's best customers, at 850 million dollars in 2009. In the strict sense, Amazon's acquisition of Zappos was done from the horizontal aspect like M&A of TNT by UPS.
What we should take an interest here is that Zappos's business model was on-line distribution for footwear in early days but turned into order fulfillment of logistics center at the turn of the year 2005.
Zappos entrusted logistics and order handling sections to UPS, a 3PL enterprise at the beginning, however, some complications came up from the specialty of footwear and many kinds of SKU(stock keeping unit) etc. After going through such trouble, Zappos finally regarded the operation of logistics center as core competencies and got to devote all their energy to it. That's why Zappos introduced Kiva's solutions.
Presently Zappos has 'Order Fulfillment' system that can process orders not only from their own web site but from other affiliated sites. In this view, Amazon's acquisition of Zappos and further including Kiva could be seen as a signal flare of new industrial convergence that distribution & manufacturing companies are expanding their business domains to logistics area to create new market and profit.
In this regard, Amazon's acquisition of Kiva should go over as an appearance of a new paradigm, not as a simple surprise. That's why we have to look at UPS and Amazon' M&As that were announced at the same period of time from a different perspective each other.