When the news came down that Yellow Corp. had announced its intention to buy Roadway Corp., the industry didn't just sit up and take notice—it leapt to its feet in surprise. The unexpected announcement hit the industry hard, and its impact was felt from coast to coast.

The deal includes a $966 million payout, translating to $48 per share—a 49-percent premium on Roadway's stock. Yellow also will absorb some $140 million in Roadway's debt, making the total cost of the merger approximately $1.1 billion. The new company, to be called Yellow-Roadway, is expected to pull in roughly $6 billion of revenue annually—twice what Yellow posted last year.

Yellow executives insist they will keep both brands, including existing facilities and drivers, operating separately but acknowledge their intention to consolidate management and "back room" functions such as accounting and information technology.

Separate brands or not, with that kind of market share on the line, some observers naturally have raised the question of whether or not the deal violates antitrust regulations. Indeed, the combined company will command about 20 percent of the national LTL market, but company executives defend the move by noting that Yellow-Roadway's stake in the $600 billion U.S. transportation market will be just 1 percent.

There were none of the typical initial rumblings or other harbingers of the transaction, no industry rumors for either side to confirm or deny. But although this particular merger may have come as a surprise, market factors pointed to this sort of deal, says Jon Langenfeld, vice president and senior research analyst with Robert W. Baird & Co. in Milwaukee, Wis. "It wasn't out of the blue," he says. "When you look at the transportation industry in general, there has been a consistent move toward consolidation across all modes. It's taken a pause given what the economy's been doing, but I think that continued consolidation is going to occur, and I think we'll see some more surprises, if you will, down the road."

Which may not be an entirely good thing for shippers. In its July 11 newsletter, the National Industrial Transportation League warned that the merger might trigger a new round of consolidations in the LTL industry that would further reduce the availability of carriers offering competitive rates, transit times, and strong service performance.

Now the question is: What impact will the merger have in the LTL arena?

Despite the insistence of Bill Zollars, chairman, president, and CEO of Yellow-Roadway, that the two companies will operate as separate units, the merger still amounts to the departure of one major player. "In a way they'll work independently, but I'm sure they won't be cutting each others' throats," says industry analyst and Logistics Management columnist Ray Bohman. "With CF (Consolidated Freightways) gone and the number one and two companies under the same ownership, I think we'll see some stability in discounting at a level we haven't seen in years."

Some analysts have noted that the combined capacity of the two companies will allow the new entity to more effectively compete with FedEx and United Parcel Service, which have been encroaching on the LTL market for some time. A Bear Stearns analysis, meanwhile, suggests several factors that may have moved Yellow toward the purchase, including current low interest rates, which are very agreeable to large-scale financing.

Still, the "departure" of one LTL giant will create a hole from which smaller carriers should be able to pump more revenue. Many analysts expect that shippers that had been splitting their freight between the original Big Two may not care to do so once they become a Big One. One possible reaction would be to start parceling out business to smaller regional LTLs. If shippers prefer to stick with a national carrier, though, that would put ABF in a strong position.

That is, if ABF remains ABF. Industry buzz suggests that the third-largest unionized LTL carrier could also be a buyout target. One scenario that's often been mentioned since the Yellow-Roadway announcement has UPS buying ABF to keep pace with its main competitor, FedEx. "There's been speculation since FedEx bought out American Freightways and Viking that UPS will eventually want to offer an LTL service as well," says Bohman. "It wouldn't surprise me at all to see UPS make a move to purchase a major LTL carrier with broad territorial coverage." As one of the last unionized nationwide carriers, ABF would be a likely target, he suggests.

In Langenfeld's view, such a move would make economic sense. "The requirement for scale is a necessity in order to compete," he says. "The leading companies have realized that you have to garner scale—whether it's within a specific vertical or across different verticals—in order to compete over the longer haul."

Now that the shock of the announcement has worn off, other carriers will be watching carefully to see where the pieces from this shake-up fall and looking for a way to scoop those pieces up for themselves. "Whenever you have a merger, you're going to have some attrition of customers," says Langenfeld. "The question is how much. Any attrition off the Roadway and Yellow base, which is obviously very large, should benefit the other players. [Yellow-Roadway's] ability to retain its customer base is going to determine how successful the other companies are going to be at taking advantage of the situation."

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