DC Velocity - February 2012

not welcome a potentially disruptive player to the game, and the capital markets may not be healthy enough to support XPO’s funding needs. “The risks are there, and they are not trivial,” he said in a recent interview with DC VELOCITY.

XPO’s publicly traded shares took a hit in the fall after the company reported a $5.38 per-share third-quarter loss. The stock price fell steadily through November, though it had recovered some of its losses by the middle of December.

The company said the third-quarter loss was due to accounting charges relating to Jacobs’ initial $150 million investment, the expense of building out the IT network and physical infrastructure, and the cost of recruiting high-end personnel.

XPO’s executive team includes Greg Ritter, who built the brokerage business of truckload giant Knight Transportation after spending 22 years at C.H. Robinson; Scott Malat, who was Goldman, Sachs & Co.’s senior equity transportation analyst; and Richard M. Metzler and Thomas Connolly, who combined have decades of mergers and acquisitions experience in the transportation and finance fields, respectively.

“BEGGING TO BE CONSOLIDATED”

Despite the risks, Jacobs believes the characteristics of the truck brokerage business are so favorable as to make the potential negatives seem minor. Perhaps the sector’s strongest lure to an entrepreneur like Jacobs is its extreme fragmentation. There are approximately 10,000 licensed truck brokers in the United States, but only about 25 have annual gross revenues— revenues before the cost of purchased transportation—of more than $200 million.

C.H. Robinson is on track to generate more than $10 billion in gross revenues in 2011. Robinson’s 2011 net revenue, which includes the cost of transportation, will be about $1.5 billion if current patterns hold. The next 29 biggest brokers have combined net revenues of about $1.9 billion, according to Armstrong & Associates.

Many truck brokers, though successful, remain small because they lack the working capital to fund a meaningful expansion. It is this wide net of modest-sized brokers—those with $30 million to $200

million in annual gross revenue— that Jacobs has targeted.

Jacobs said the number of small
brokers fighting for market share
means the brokerage business is “just
begging to be consolidated.” He
added, “Small companies are more
valuable to me as part of a larger
company than they are to the actual
owners who control them.”
The sector has also shown a long-
running pattern of above-trend
growth, regardless of macroeconom-
ic conditions. For years, it has grown
two to three times faster than annu-
alized gross domestic product, and it

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