The Battle for Value,

2004: FedEx Corp. vs.

United Parcel Service,
Inc.
CASE ANALYSIS
FedEx and UPS Mission Statements

 FedEx will produce superior financial returns for shareowners by providing high
value-added supply chain, transportation, business, and related information
services… (FedEx)

 …We sustain a financially strong company, with broad employee ownership, that
provides a long-term competitive return to our shareowners. (UPS)

 Discussion question: How different and how similar are the two Mission
Statements?
A new opportunity in China

 On June 18, 2004, the United States and China reached a landmark air-
transportation agreement that quintupled the number of commercial cargo flights
between the two countries.
 FedEx Corporation and United Parcel Service, Inc. (UPS), the only U.S. all-cargo
carriers then permitted to serve the vast Chinese market, were certain to be the
primary beneficiaries of this opportunity.
 FedEx’s share price had rocketed at a rate nearly five times faster than UPS’s
 Discussion question: Why did FedEx’s share price react faster to the news
than UPS’s ?
The birth of FedEx corporation

 FedEx first took form as Fred Smith’s undergraduate term paper for a Yale
University economics class.
 In 1971, Smith invested his $4-million inheritance, and raised $91 million in
venture capital to launch the firm

 Discussion question: Do you have a similarly ground-baking business idea for

the term paper?
 If you would have inherited $4 million what would you do with it?
 Would you launch an overnight delivery company?
Compare FedEx to UPS

 Dimension FedEX
UPS Ratio
 Assets ($bn)
 Net Income ($bn)
 Revenues ($bn)
 Ground vehicles (th)
 Aircraft
 Employees (th)
 Packages / day (mn)
United Parcel Service, Inc. – the
incumbent
 Originally, the largest package-deliver company in the world
 „Big Brown” named after its brown trucks
 The company entered its strongest period of growth during the post–World War II
economic boom and, by 1975, UPS had reached a milestone when it could
promise package delivery to every address in the continental United States
 The key to the success of UPS… was efficiency.
 “Every route is timed down to the traffic light. Each vehicle was engineered to
exacting specifications. And the drivers . . . endure a daily routine calibrated down
to the minute.”
Financial innovation at UPS
 In November 1999, UPS initiated a two-for-one stock split, whereby the company
exchanged each existing UPS share for two Class A shares.
 The company then sold 109.4 million newly created Class B shares on the New
York Stock Exchange in an initial public offering (IPO) that raised $5.266 billion,
net of issuance costs.
 UPS used the majority of these proceeds to repurchase 68 million shares of the
Class A stock.
 Following a holding period after the IPO, Class A shares were convertible to Class
B, and could be traded or sold accordingly.
 Although both shares of stock had the same economic interest in the company,
Class A shares entitled holders to ten votes per share while the Class B shareowners
were entitled to one vote.
 Discussion question: What was the rationale behind the two stock classes and
the transaction?
Competition in the Express-Delivery
Market
 The $45-billion domestic U.S. package-delivery market could be segmented along
at least three dimensions: weight, mode of transit, and timeliness of service. The
weight categories consisted of
 letters (weighing 0–2.0 pounds),
 packages (2.0–70 pounds),
 and freight (over 70 pounds)

 Discussion question: Where do you see the future of the express-delivery

market?
Economic Profit (Economic Value Added,
or EVA™) Analysis
 EVA reflects the value created or destroyed each year by deducting a charge for
capital from the firm’s net operating profit after taxes (NOPAT).
 EVA = Operating profits - Capital charge
= NOPAT – (K X Capital)
 The capital charge was determined by multiplying the cost of capital, K, by the
capital employed in the business or operation.

 Discussion question: Why do we need to deduct the capital charge to find the
EVA of a business?
Exhibit 1

 Analyse UPS and FedEx Price Patterns between June 2003 to June 2004
 Is the industry attractive for investors?

 Discussion question: Why did FedEx shares react faster to the news in
China?
Exhibit 2-3

 Contrast the Financial and Analytical Ratios for FedEx to UPS

 Analyse the debt position of FedEx and UPS
 Contrast the sales growth of the two companies (CAGR)
 Contrast the ROE of the two companies

 Discussion question: Which company appears to be financially more

efficient? Where would you invest?
Exhibit 4

 Identify examples where UPS lagged behind FedEx in operational excellence and
service quality
 On average how many years was UPS behind? Provide concrete examples!
 Where is the industry heading?

 Discussion question: Which company is operationally more efficient? Is it

reflected in financial excellence?
Exhibit 5-6

 Analyse the announced list rate increases

 Discussion question: How intense was the price competition in the examined
period?

 Analyse the CAPEX for FedEx and UPS

 Discussion question: Why did FedEx have to outspend UPS after 1997?
Exhibit 7-8

 Analyse the domestic and international revenue growth for FedEx and UPS

 Discussion question: Which company proved to be more successful in which

segment? Is the answer intuitive?

 Likewise, contrast the two companies from a financial and market efficiency

 Discussion question: Which company did perform better financially?

Exhibit 9-10

 Conduct the Economic Profit Analysis for FedEx and UPS

 Discussion question: Which company performed better from an EVA point of

view?

 Discussion question: What is the reason behind the contradiction of FedEx’s

EVA and MVA evolution? Does it discredit the EVA methodology?
Assignment Questions

 Prepare to describe in class the competition in the overnight package delivery industry, and the
strategies by which those two firms are meeting the competition. What are the enabling and
inhibiting factors facing the two firms as they pursue their goals? Do you think that either firm
can attain a sustainable competitive advantage in this business?
 Why did FedEx’s stock price outstrip UPS’s during the initiation of talks over liberalized air
cargo routes between the U.S. and China? Assuming a perfectly efficient stock market, how
might one interpret a 14% increase in FedEx’s market value of equity?
 How have FedEx and UPS performed since the early 1990s? Which firm is doing better? In
class, prepare to discuss the insights you derived from the two firms’ financial statements,
financial ratios, stock-price performance, and economic profit (economic value added or
EVA). Also, prepare to describe how EVA is estimated, and its strengths and weaknesses as a
measure of performance.
 If you had to identify one of those companies as excellent, which company would you choose?
On what basis did you make your decision? More generally, what is excellence in business?