James R. Crane, chief executive of EGL Inc., neatly summarized the reasoning behind his company's acquisition of Circle International Group. ''Circle needed a CEO and we needed an international structure,'' he said.
Circle, which has gone through a series of short-term CEOs during the last few years, will be headed by Crane, who has built his company into a forwarder with a strong reputation for sales and customer service.
And EGL, a primarily domestic company that does business as Eagle Global Logistics, will get an international network much faster than it could have developed one on its own.Analysts praised the deal, which will produce a company with combined revenue of more than $1.4 billion and market capitalization of $1.5 billion. ''We think the new organization will be very aggressive,'' said Gregory Burns, vice president of research at Lazard Freres & Co. ''We think it will turn up the heat on other players that don't offer the full spectrum of services.''
The EGL-Circle deal is the latest in a string of big mergers and acquisitions in the forwarding and logistics business. Deutsche Post's purchases include Air Express International and Danzas, which have begun to commingle their operations. In February, Ocean Group and NFC, the two largest logistics companies in Britain, announced a merger.
Burns said the EGL-Circle deal reflects the trend toward consolidation - and maybe more. ''This is perhaps the strongest combination yet because they truly will have a combined global one stop shopping capability,'' he said. ''EGL will add an international network and will bring an aggressive management culture.''
After the EGL-Circle deal was announced, Lazard upgraded its investment rating for EGL to a ''buy,'' saying the deal provides a low-cost way for EGL to achieve international scale, while reducing its near-term earnings drag. U.S. Bancorp Piper Jaffray analyst Stephen Jacobs upgraded both concerns from ''buy'' to ''strong buy,'' calling the merger positive for both parties.
VOTE OF CONFIDENCE. The praise of Wall Street analysts contrasted with the market's reaction after David Beatson, the former Emery Worldwide president and chief executive, announced his resignation as chief executive of Circle on May 15, leaving longtime chairman Peter Gibert in charge. Circle's stock dropped by one-fourth on the news of Beatson's departure to head a new Silicon Valley e-commerce venture.
Crane will be chairman, president and chief executive of the merged company, which will retain the EGL name with Circle becoming a wholly owned subsidiary. Gibert will have a seat on the board.
The companies said the deal would create a global leader in domestic and international transportation, logistics and customs brokerage. Bear Stearns & Co. said while there are risks at play in the near term due to integration costs and the potential loss of business to competitors, the deal should create ''a powerful combination'' in the long term.
HEAVY FREIGHT SPECIALISTS. EGL and Circle are non-asset-based forwarders specializing in heavy freight. If the merger goes through as expected this fall, the combined customer base would exceed 10,000.
EGL already was viewed as a leading provider of air freight forwarding and other transportation and logistics services. Missing was a big presence internationally, which Circle provides. Circle operates in 100 countries while EGL operates in only nine.
The only top customer that both companies work with is Compaq Computer, and EGL officials indicated Compaq liked the deal. The transaction would be worth $543 million, based on EGL's June 30 closing stock price of $30.75 a share. Each of Circle's 17.65 million shares of common stock would be converted to one share of EGL common stock. EGL's shareholders will own about 63 percent of the outstanding shares and Circle shareholders, 37 percent.
OPERATIONS. EGL provides overnight service with dedicated aircraft but operates differently than its major rivals. Instead of owning planes and routing them through a hub, it leases freighters and uses them point-to-point in heavy-volume markets such as Detroit, the West Coast, Texas and Mexico. Express One and Capital Cargo provide aircraft.
Generally, EGL is known for its performance-driven sales culture, while Circle is viewed by analysts as somewhat weak in executing sales.
However, Circle is viewed as a strong operator. The combined companies will have more than 8,200 employees in more than 350 locations worldwide. The headquarters of the merged operation will be in Houston, where 700 of EGL's 3,400 employees are based.
LAYOFFS. ''We do not expect a lot of layoffs,'' Crane said, though he added there would be ''some adjustment'' at the San Francisco headquarters where Circle is based. Key personnel will be offered jobs at EGL's Houston headquarters.
In the United States, almost one-third of the companies' offices are expected to be consolidated or combined, since many are located in the same cities. Michael Slaughter, EGL's vice president of investor relations, emphasized that the consolidation would focus on eliminating duplication of office space, not personnel. Domestically, EGL has offices in 78 cities and Circle has offices in 50 cities. EGL has forecast that the merger will result in $10 million in pre-tax savings in 2001 and $20 million in 2002.
EGL INC. CIRCLE INTERNATIONAL
HEADQUARTERS Houston San Francisco
FOUNDED 1984 1898
CHAIRMAN & CEO James R. Crane Peter Gibert
REVENUE 1999 $637.6 million $814.1 million
NET INCOME 1999 $30.7 million $23.2 million
EMPLOYEES 3,400 4,900
FACILITIES 92 300
(Source: EGL Inc.; JoC Week)