Carrier's woes, sale a long haul for U.P. OMAHA -- When Union Pacific Corp. bought Overnite Transportation Co. in 1986, it had visions of the Richmond, Va.-based trucking unit becoming a strong profit center outside its core rail business, the Omaha World-Herald reports. That was the thing to do back then, when catch-phrases like "synergy" and "multimodal transportation" were hot in the railroad industry. And it was the sort of acquisition that Wall Street cheered, even though U.P. paid a hefty $1.2 billion for Overnite. But as Union Pacific and other railroad companies discovered, it is difficult to integrate trucking and rail businesses. The great freight hope never got off the ground. Over the past decade, Overnite generated combined profits of about $150 million, a measly return for a company that generated roughly $1 billion in annual revenue. Overnite lost money in 1993, 1995 and 1997. A management change helped return the business to profitability, but growing labor strife last year boiled over into a Teamsters strike that pushed the company back into the red in 1999's fourth quarter. After a scuttled attempt to unload Overnite through an initial public offering, Union Pacific executives in 1998 acknowledged plans to sell the trucking subsidiary at a loss. But two years later, Omaha-based U.P. remains saddled with Overnite, there's no end in sight to the Teamsters dispute, and if anything, the buyout offers are getting worse. Union Pacific representatives say the company remains committed to resolving the labor dispute and returning Overnite to a level of profitability that will fetch a fair purchase price. Union leaders counter that the troubled trucking unit continues to bleed losses, and the money used to pay legal fees and other strike-related expenses comes out of the funds earmarked for equipment. "They have not had the funds to reinvest into the business," said Jim McCall, a Teamsters lawyer. "The value of the company has gotten worse." A couple of years ago, McCall said, the Overnite IPO was set up to raise $450 million to $500 million. "Any economist in the trucking industry would say that the company now is worth $250 million to $300 million in operating value," he said. Union Pacific and Overnite executives would not comment on the value of the trucking company. They have dismissed recent suitors as "bottom feeders" and say the timing is not right to get a good offer. "What's happening is the Teamsters has brought all of this untrue propaganda, and they're grasping at straws," said Overnite Chief Executive Officer Leo Suggs. "At this point in time, there is no hurry to sell." Trucking stocks in general are down, he said, and Overnite will be worth much more "the longer amount of time we have to recover." Suggs said that despite past problems and the current strike, the company will be profitable this year. "You'll see that in the second-quarter results." When U.P. bought Overnite in 1986, the Virginia-based carrier was among the nation's most profitable trucking companies. But it quickly became apparent that the expected synergies weren't panning out. Less than three years after the acquisition, some senior U.P. executives made critical remarks about the deal. In January 1989, Union Pacific's then-CEO, Drew Lewis, told The World-Herald that "at 10 percent interest, it costs us $210 million a year for a company that is generating $60 million in profits." In fact, Overnite netted $39 million that year and averaged a $15 million profit in the 1990s. The cause of Overnite's problems? "They sent railroad people to Richmond to run the company," said Overnite founder Harwood Cochrane, now 87. "They just didn't understand how to deal with things." Cochrane, who got started in business at 16, delivering milk with a horse and cart, created Overnite in 1935. His current office is just across the street from Overnite's headquarters. "I feel real bad about it," he said of the trucking company's woes. "Mr. Suggs is doing the best he can do. If anyone can turn a company around, he could." Cochrane said he expects that Overnite eventually will be sold and become fully unionized. The tough part, he said, is attracting buyers to a unionized truck line because buyers don't like to deal with high union demands. "The union's losing and the company's losing," he said of the strike. "It's a crying shame. It took about six years to put it where it's at now." U.P. Chief Financial Officer Jim Young said Overnite's performance continues to improve. When asked why Union Pacific has held onto the trucking unit for so long, Young said the company is waiting for a fair offer. As Overnite's performance improves and enhances its value, he added, more offers should surface. Young added that Overnite is "self sufficient today and is generating enough cash to pay for its own capital." Outside observers don't seem troubled by the strike. When Teamsters members showed up at Union Pacific's annual shareholders meeting this spring in Salt Lake City, investors complained not about Overnite but about union people taking up time that could have been spent addressing their more pressing questions. Industry analyst Craig Kloner of Goldman Sachs Group Inc. in New York said U.P. has already written off much of the loss it took on Overnite's value and "what they choose to do with it is up to them." In the meantime, the Virginia subsidiary's struggles won't have much effect on the parent company. "From a financial perspective," Kloner said, "this is a fly on the back of an elephant." (Next Story)

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July 10, 2000
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