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LOS ANGELES – Franchisees are currently engaged in litigation with the world’s largest package delivery company regarding whether they should have been forced to convert from their original concept of Mail Boxes Etc. (MBE) to that of The UPS Store. United Parcel Services (UPS), through its acquisition of the 20-year-old franchise system in March 2001, has dramatically altered the MBE network, and now it is having to defend its actions in court against claims that it withheld crucial information and made misrepresentations in persuading franchisees to change over. In the closely watched trial of Morgate LLC v Mail Boxes Etc., a deposition taken in July 2006, MBE president and CEO James H. Amos’ memory was tested on the intricacies of the sale of his company. When he was asked about certain details surrounding the acquisition, he stated, “UPS actually only ended up acquiring MBE by accident.” Amos proceeded to tell the story, under oath, as to “why UPS owns this company [MBE] today.”
Now, these detailed accounts could prove to be crucial in the upcoming trial, currently scheduled for August 3 in Los Angeles Superior Court, as they could be with other similar court cases. Along with Amos’ testimony, other vital information will be allowed as evidence, including the following:
But there are certain aspects to Amos’ testimony that must be questioned.
Jim Amos’ deposition shows that he took confidential company information and passed it on to UPS, such as U.S. Office Products (USOP), then-parent company of MBE, was going to file for bankruptcy. His testimony also shows that USOP had negotiated a deal with Apollo Equity Group and that through insider information that he passed on, UPS was able to return to the bidding game and eventually acquire MBE. Those close to the case argue that in this regard Amos did not protect the interests of MBE franchisees by making sure that UPS in the asset purchase agreement would not force their own agenda on the franchisees in the system.
And regarding the bonus program, Amos and Herskowitz were only paid if the UPS/MBE deal closed, showing that they were in conflict with the idea of protecting Mail Boxes Etc.
Amos’ Untold Story of UPS Acquisition
Amos gives his testimony of how UPS’s purchase came about, stating, “I am the only person, one of a handful of people that really knows the truth, because after these transactions, there is always a lot of revisions [to] history, particularly when things go well.” As background, he said he came on board with MBE in 1996 because the board felt it was time to move former owner/CEO Tony DeSio out. After that, MBE gave Amos a year to complete the transaction of selling the company to U.S. Office Products, and in 1997 it was finalized with a transaction cost at $75 million.
After a chain of events, detailed in the deposition, Amos and his team were looking for an opportunity to sell the chain through private placement, engaging in management discussions with 18 interested parties. At that time, he said he presented his strategic overview of the Mail Boxes Etc. system. That’s when UPS first engaged MBE. But after all negotiations were whittled down to one company, Amos and his team entered into formal talks with Apollo Equity Group. The MBE parent company reached an agreement with Apollo. Amos, according to his testimony, put a management buyout (MBO) on the table with American Securities for $175 million. When the investment bankers and dealmakers became involved in the acquisition, they would not accept Amos’ offer. Later, they once again started over in the process, bringing the interested parties back to the table, including Apollo Equity and UPS. The bid ended with U.S. Office Products selecting Apollo Equity as the top acquisition prospect. At the end of the day, according to Amos, their offer was somewhere around $220 million. But as negotiations went forward with the successful bidder, Amos said Apollo became brutal in their tactics against USOP and he became concerned.
As the discussions were continuing with MBE and Apollo, Amos was also stepping into the chairman position of the International Franchise Association during its Las Vegas convention on February 27, 2001. Early in that week Amos said he received a call on behalf of stamps.com, or Stamps (previously doing business as Iship), in which MBE had invested $4 million on their technology to do online shipping. They were negotiating on a new program to benefit the MBE network. The call came from David Mounts who was running mergers and acquisitions for UPS when USOP first engaged them. Amos stated that at that time he and Mounts had become good friends.
As they were talking, Mounts told Amos that UPS was interested in an acquisition with Stamps, and the two discussed some of the problems MBE was having with that company and how they could resolve them. But then Mounts asked Amos how the “transaction” was going. Amos told him he couldn’t answer that. But when Mounts asked if the pricing structure was anywhere close to what he knew UPS would have offered a year ago, Amos told him it was in the ball park. Amos stated that UPS knew the right price was what he had put on the table with American Securities ($175 million).
But, according to the transcript, Mounts called back within an hour and told Amos UPS wanted to re-engage. Amos testified that he thought he was talking about Stamps, but Mounts told him no, they wanted to re-engage with MBE. Amos said he felt he had a moral and ethical dilemma—he could say nothing and the deal with Apollo would happen, or he could call somebody and talk to them about it. He said he had no love lost for U.S. Office Products. “I thought they were horrible operators and bleeding us dry,” he said in his testimony. He added, “The worst thing you want to be is the crown jewel in the hat of a bleeding parent.”
Amos said he sympathized with USOP because of the way Apollo had treated them, but he made the decision not to call them. He said he prayed about it. His final decision was to call the person involved in the transaction with Apollo, who was now co-chairman of Credit Suisse First Boston, and lay it out to him. According to his testimony, Amos stated, “ . . . I need to tell you what just happened, and I’m not going to make this decision, but I think it’s beyond my scope of authority with fiduciary responsibility to you as well as the system not to tell you what just occurred.” Credit Suisse thanked him for the information.
At that time, USOP officials were getting the paperwork done with Apollo to sign the contracts, and they were at such a late date they decided to bring in consultant Michael Seid to work with them on the franchising side. Apollo officials were toasting with champagne because they thought it was a done deal, since MBE had an exclusive with Apollo that they couldn’t talk with anyone else. But in a day or so Amos said he received a call back from Credit Suisse First Boston in New York, which owned 38 percent of USOP, saying they made the decision to disengage from Apollo Equity Group. Amos stated that records now show that USOP had to pay Apollo several million dollars as a break up fee if USOP could get through the process with UPS in order to complete the sale with UPS.
The Rest of the Story
But in his deposition, Amos said he wanted to tell one other thing that was salient. He said he also received a call a week or two before the IFA convention from Chase Bank in New York, a banker who knew him, asking, “Jim, do you know what USOP is about to do?” Amos told him he wasn’t sure and asked him what he was talking about. He answered, “Well, I have to tell you off-line because I can’t tell you officially, but I think you need to know that they [USOP] are about ten days away from filing bankruptcy.”
Amos testified that he immediately called USOP and confronted them with this news. He told them he was leaving on Friday to attend the IFA convention to become its chairman. He knew that he was within a day or so of having a deal cut that would exclude USOP, but “with a company that may be worse.” Amos said the whole breakup process was going on as he went to Las Vegas. On Monday he was named chairman, and on Tuesday he said he spoke on the phone with 200 bankers making a strong case that he’s not a “dip.” He said he had “upstreamed” 80 million bucks, and he hadn’t “taken a dollar from these guys.”
Wednesday, a year after their first discussions with UPS, MBE re-entered the war room with UPS. They didn’t leave for three days, Amos said. At the end, Jim Kelly, chairman and CEO of UPS, called him saying that they had a deal.
Amos said the whole deal was made in one week. When people asked him if he thought it was a miracle he told them no, “I know absolutely it is.”
But Amos also stated in his testimony, “And here is what the franchisees, my good friend[s], don’t understand.” He said he had several options, including the choice to say the heck with it and allow USOP to go into bankruptcy. He said, “I can become a debtor in possession.”
When the deposing attorney asked Amos if he believed the UPS acquisition was in the best interest of the franchisees, Amos said, “Absolutely 100 percent, no question.” He then asked if he knew during the discussions leading up to the execution of the Asset Purchase Agreement, that UPS was going to require the franchises to convert from MBE to The UPS Store. Amos responded with, “Of course not. How would I know that?” When he asked at what point he knew UPS was going to in fact require the franchisees to convert to The UPS Store, he answered that you can only offer them incentives. You cannot force them or require them to convert, not in the MBE program or any other program.
When the attorney asked if it was Amos’ understanding that the MBE franchisees had the option of converting to The UPS Store or remaining an MBE until the conclusion of their franchise agreement, Amos stated, “Well, I think that’s exactly what happened.”
After reading the Amos deposition, one person close to the case, who did not wish to be named, said, “The revealing of confidential insider information is inconsistent with the fiduciary duty that Amos owed MBE. The legal duties that he owed the MBE franchisees is no doubt what will be revealed in the courtroom. They were supposed to protect the franchise agreements and instead, they turned over the franchise to a company that had no interest in maintaining the franchise. And then that company, once they got hold of the franchisor, exercised their authority and power to wipe them out.”
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