Merging Global Trade Management with Global Finance

Vastera Acquired by JPMorgan Chase Bank

On January 7, JPMorgan Chase Bank, N.A. (NYSE: JPM), a leading global financial services firm with assets of $1.1 trillion (USD) and operations in more than 50 countries announced an Agreement and Plan of Merger with Vastera (NASDAQ: VAST). What is significant about this merger, is that JPMorgan is a leader in investment banking and financial services and Vastera is the only publicly traded software company focused exclusively on global trade. Vastera's services includes global trade management (GTM) software, managed services, global trade content, education and high-end consulting services. Under the agreement, Vastera will be acquired by and combined with the Logistics and Trade Services businesses of JPMorgan Chase's Treasury Services unit.

With more than 50,000 clients and a presence in 36 countries, the Treasury Services business of JPMorgan Chase is the world's largest provider of treasury management services. Its full-services include innovative payment; collection; liquidity and investment management; trade finance; commercial card; and information solutions for corporations; financial services institutions; middle market companies; small businesses; governments; and municipalities worldwide. Under the planned merger agreement, Vastera shareholders will receive $3.00 for each of their outstanding shares of Vastera common stock. The total transaction value will be approximately $129 million (USD), about 50 percent premium over the annual revenue of Vastera.

Vastera's solutions automate the required trade management processes associated with the physical movement of goods internationally. The acquisition should further provide JPMorgan Chase clients with a "one-stop-shop" service that addresses the increasing challenges and risks associated with moving goods internationally. The JPMorgan Chase solution currently facilitates the seamless management of information and processes in support of the movement of physical goods movement and the financial settlements when the trade process is completed. Through this combination, JPMorgan Chase is believed to be the first global financial institution to offer a complete, integrated cash, trade, and logistics solution across the physical and financial supply chains in a way that maximizes benefits to its clients.

Vastera already had an extensive working relationship with JPMorgan Chase by providing it with GTM solutions. Now the two tout they will be able to build on that relationship as part of the same firm offering a broader GTM infrastructure to bring tangible benefits to their clients. Namely, this acquisition should give current JPMorgan Chase's clients the benefits of broader GTM solutions. In turn Vastera's clients will receive the benefits of JPMorgan Chase's comprehensive financial services platform and product set. Vastera will continue to independently market its software and services and manage complex export-import paperwork. However, much more growth opportunity is expected from bundling Vastera's software and services with JPMorgan Chase's offering, which will supposedly track trade goods and the payments needed at each step of the process.

The merger, which was subject to the approval of Vastera shareholders, and the approval of various banking and other, customary regulations, took place in April. The transaction was previously approved by Vastera's board of directors who recommended that shareholders vote in favor of the transaction at a subsequent shareholder meeting. Two major shareholders, Ford Motor Company and Technology Crossover Ventures, representing approximately 28 percent of the Vastera shares outstanding have reportedly committed to vote their shares in favor of the transaction pursuant to voting agreements entered into with JPMorgan Chase.

With approximately 650 professionals in 14 countries and with over 400 clients throughout the world, Vastera is the worldwide leader in providing solutions for GTM and serves an international client base, including companies such as Alcatel, Dell, Ford, General Electric (GE), Lucent, Fonterra, Goodyear, Nortel Networks, and Seagate. Clients use Vastera's solutions and services to manage information flows associated with the cross-border components of importing and exporting goods. As a result, they can navigate the complexities and inefficiencies inherent in global trading in a manner that allows them to capitalize on the large, highly fragmented, and rapidly growing opportunity that exist in the international market. These clients reportedly realize significant cost reductions when managing their global trade operations, while improving compliance with government regulations and service levels to end customers.

This is Part One of a three-part note. Part Two will cover Vastera.

Part Three will discuss the merger rationale.

Vastera Background

Dulles, Virginia-based (US) Vastera began life in 1991 as a software vendor assisting companies with the complex world of global trade with software to guide manufacturers through logistics planning and customs regulations. The applications kept up with duty rates, regulations, licensing requirements, and value added tax (VAT) rates, to focus mainly on country-specific trade regulations and compliance. Vastera's initial solutions consisted almost exclusively of software solutions and implementation services associated with the installation of the software products.

In July 2000, the company undertook a fundamental shift in its product and services offerings when it acquired Ford Motor Company's global customs import operations, including a number of Ford's employees. The acquisition has enabled Vastera to significantly broaden its solutions offerings allowing it to provide trade management BPO services to its clients in the form of its managed services provider (MSP) offering. By striking a sound ten year deal with Ford, Vastera has leveraged its global trade systems and deep content knowledge into an MSP model. In turn, Ford can focus on its core competencies of designing and building cars and trucks while gaining the collaborative advantages of Vastera's business-to-business (B2B) GTM offerings.

Thus, in recent years, as trade becomes even more complex with "smart ports" and twenty-four hour advanced notice requirements, manufacturers have increasingly been seeking outsourced global trade services. An astute software vendor should do this more efficiently than a manufacturer, since it is a non-core aspect of the manufacturer's operation. As a result of this arrangement with Ford, which currently owns 20 percent of Vastera and accounts for 30 percent of its revenues, Vastera became one of the first software firms to use its core content knowledge in customs and import/export documentation and in compliance application development to become a business service provider (BSP).

Both parties benefited. Ford remained staffed on-site with its former employees, with Vastera maintaining the systems and keeping content updated daily. Vastera gained a long-term customer and the chance to replicate its BSP model and extend its knowledge beyond Ford to other Vastera customers. Additionally, Ford has lent its stability to Vastera and allowed it to build a deep database of automotive and truck industry parts, HTS classifications and duties, and to gain country-specific knowledge where Ford has supplier relationships.

GTM Background

Most supply chain management (SCM), not to mention enterprise resource planning (ERP) vendors typically lack strong international trade logistics (ITL) and GTM capabilities. Specifically, while technology may be rendering the world smaller, the word has also become a lot more complicated. Many barriers to conducting international business over the Internet inevitably exist and most businesses are still not prepared for these challenges.

The Internet has enabled a networked world by providing a communication infrastructure and enterprise applications, and this has opened the door for international trade, but not many applications really offer multi-enterprise services and software to automate the complex, multimodal transportation and Internet-based logistics management needs of a global trading network. Simply put, most modern Web-based buy- and sell-side applications fall well-short of providing automated global trade management and a traditional international trade logistics.

As described in more detail in International Trade or ITL Adoption, ITL and GTM are execution systems specifically designed to automate the import/export business process. Their basic functional components are trade documentation generation and transmission, and regulatory compliance validation. They exchange complex information between multiple entities, including suppliers, carriers, freight forwarders, customs brokers, banking institutions, and other third party transportation and storage providers. A true ITL/GTM system is, in effect, an inter-enterprise resource management system, and requires a data model that takes into account the breadth and depth of information exchanged between the multiplicity of interrelated entities. Thus, ITL/GTM systems should support export and import border-crossing processes, documentation, compliance (which are incomprehensible to ordinary mortals), accounting, and financial reporting in a multicurrency, multilingual, and multi-units of measure (UOM) environment.

When people talk about the risks of globalization, many are usually referring to the threat of domestic jobs moving overseas. The global trade compliance aspect is rarely discussed, even though it poses a risk that affects almost every manufacturer that either imports or exports. Namely, getting these goods and parts shipped from one country to another is a daunting task and needs the support of a GTM software and service provider. This must be combined with global trade domain knowledge, proven processes, and international trade best practices in order to be successful.

Each of the nearly 200 countries in the world has individual governmental requirements for importing and exporting goods. One has to account for factors like tariffs and duties, country-to-country preferences and anti-dumping laws, and there is the danger of incurring hidden costs at every step. If that is not complex enough, the events of September 11, 2001 have increased the scrutiny countries place on global trade and can impact costs adversely. According to the Brookings Institute, the cost of slowing the delivery of imported goods by one day because of additional security checks could amount to $7 billion (USD) per year. Stringent new documentation and homeland security requirements are placing serious legal and financial consequences on importers and exporters violating these constantly changing trade regulations. Moreover, the burden is on the importer/exporter to know exactly what the regulations are and how to comply with them.

Although global trade requires multimodal transportation of shipping goods across borders, many international shippers do not yet have e-logistics software to provides the necessary visibility and flexibility to e-businesses wanting to automate their global supply chains. They also do not have e-procurement software that can analyze the total landed cost, which are the cost of sourcing and shipping a product internationally, including customs management, tariffs, transportation, cost of goods, etc. While there have been a number of Internet-based logistics tools that are helping companies analyze and reduce costs by automating the processes of booking shipments, keeping customers informed, and making sure goods arrive on time (for more information, see Understanding the True Cost of Sourcing), these companies still lack the software. Now, savvy customers are increasingly asking for help in researching the costs for importing from different countries. By using software to check duties, taxes, and trade regulations in the potential countries of origin, GTM experts should be able to create what-if scenarios that will help importers make the right decision

This concludes Part One of a three-part note.

Part Two will cover Vastera. Part Three will discuss the merger rationale.