The agreement with Clayton, Dubilier & Rice, an investment firm that owns 75 percent of Kinko's, will add to FedEx earnings in 2005, the companies said. JP Morgan Partners owns 20 percent and is helping finance the purchase, FedEx said in a statement.

By acquiring Kinko's, which has 1,200 stores, FedEx is adopting a strategy of United Parcel Service Inc. when it bought MailBoxes Etc. in 2001 to reach small businesses. Chief Executive Frederick Smith announced the agreement after FedEx this month had its biggest quarterly drop in net income in six years, as daily air shipments in the U.S. fell and more employees than expected took buyouts to leave the company.

``This acquisition is all about access to small businesses that don't have their own shipping and receiving departments,'' said A.G. Edwards analyst Donald Broughton, who rates FedEx shares ``hold'' and doesn't own them. ``The small customers, which can have the highest profit margin, clearly are the target.''

Broughton said FedEx's purchase of the 33-year-old Kinko's was a ``timely response'' to United Parcel, the world's biggest package carrier, which bought MailBoxes Etc. in 2001 and is encouraging franchise owners to adopt the ``UPS Store'' name. The unit sells shipping services to small businesses. The purchase of Kinko's is expected to be complete by April, the statement said.

Shares of FedEx fell $1.18 to $68.76 at 10:37 a.m. in New York Stock Exchange composite trading, and had increased 27 percent this year.

`Steep Price'

FedEx will pay $700 million to $800 million in cash and the remainder using commercial paper, from its own $1 billion credit facility and a $2 billion commitment from JP Morgan, Chief Financial Officer Alan Graf said on a conference call.

The company is paying ``a steep price'' for Kinko's, compared with the $2 billion it spent for Caliber Inc.'s trucking and packaging businesses in 1998 and the $180 million United Parcel paid for MailBoxes Etc., which has about 4,500 stores, Bear Stearns analyst Edward Wolfe said in an investor note.

The price is about twice the $1.04 billion that Kinko's was worth in a recapitalization announced in January.

Smith said FedEx will expand shipping and package services to small business, especially those who travel frequently.

``It expands our relationship with small and medium-sized customers which is very significant to us,'' Smith said in a televised interview with Bloomberg News.

Mergers, Acquisitions

U.S. merger and acquisitions activity picked up in the last quarter, with $536 billion worth of deals compared with $185 billion in the same quarter a year ago.

The advisers to Kinko's, Goldman Sachs and J.P. Morgan, ranked first and fourth respectively in global mergers and acquisitions advisory for announced deals this year. Goldman had a market share of 26.5 percent and 228 deals worth $319 billion. J.P. Morgan had a market share of 15.4 percent from 262 deals worth $185 billion.

Merrill Lynch advised FedEx, and ranked third in global mergers and acquisitions advisory in 2003 with a market share of 15.6 percent of announced deals, based on 166 transactions, worth $188 billion.

Clayton Dubilier

New York-based Clayton Dubilier was started in 1978 by Joseph L. Rice III, Gene Clayton and Martin Dubilier to buy and sell closely held companies. The firm has invested more than $5 billion in 36 businesses including International Business Machines Corp.'s printer business, renamed Lexmark International Inc.; gun-maker Remington Arms Co.; and investment manager Van Kampen Merritt Cos.

The firm, which counts former General Electric Co. Chairman John F. Welch as a special partner, hires senior executives from multinational corporations to help run acquired businesses.

Clayton Dubilier and its limited partners more than tripled their Kinko's investment, gaining more than $1 billion, said partner David Wasserman. The firm's 75 percent stake is worth $1.8 billion, compared with $500 million investment in Kinko's in the past seven years.

Kinko's stores, with annual revenue of about $2 billion this year, will offer new or expanded FedEx service at its locations. FedEx has fully staffed operations in 134 Kinko's stores.

New Services

Paul Orfalea, who was selling school supplies at the University of California campus in Santa Barbara, founded Kinko's in 1970 and remained active in the company until resigning in 2000. He is chairman emeritus.

Kinko's has sales of about $2 billion annually, according to FedEx's statement, and is ``cash-flow positive''. Earnings weren't announced. FedEx's statement said the acquisition would be ``neutral'' to this fiscal year's earnings and would add to earnings in its 2005 financial year.

``This acquisition will significantly increase customer access to FedEx services on a domestic and global basis,'' said Executive Vice President Michael Glenn in an interview. ``It's much more than packing and shipping. Kinko's is a magnet for small businesses. With this acquisition, FedEx becomes the back office for small businesses.''

Glenn said Kinko's offers services such as video conferencing, E-mail and wireless Internet access that aren't available at other mailing stores.

FedEx, which has overnight package drop boxes in Kinko's U.S. stores, will begin adding ground shipping services early next year as soon as the acquisition closes, Glenn said. FedEx has those services now at 136 of Dallas-based Kinko's U.S. stores.