the battle for value fedex ups

MEIHO UNIVERSITY

CASE STUDY FOR FINANCIAL MANAGEMENT

CASE 4:

The Battle for Value, 2004:

FedEx Corp. vs. United Parcel Service, Inc.

VALUE CREATION AND ECONOMIC PROFIT

Lecture: 鍾紹熙老師

Group 3: F49802134 胡秋草

F49802153 高玉享箮

Presentation date: 16th Apr 2012

Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

I. OUTLOOK OF CASE 4

Case 4 mentions about the competition between two leading companies in

package- delivery market. FedEx which is the largest foreign presence in China,

with 11 weekly flights, serving 220 Chinese cities, so the company’s volumes in

China had grown by more than 50% between 2003 and 2004. UPS which is the

world’s largest package-delivery company and dominant parcel carrier in US,

serving 200 cities in 2003. FedEx had virtually invented customer logistical

management, and was widely perceived as innovative. Historically, UPS had

reputation for being big, bureaucratic and an industry follower.

Two companies have their own market, an individual characteristics, and

inconclusive. Thus, not only based on the development and operation of the two

companies, the analysis also relied on the special purpose financial ratios

( especially Economic Value Added (EVA), an effective measure and rapid for

firm within an industry) to find which company has more competitive advantage.

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II. INTRODUCTION

1. FedEx corporation:

FedEx, formally known as Federal Express, started delivering packages and

freight on April 17, 1973. The company was founded by Frederick W. Smith, a

Yale University graduate. Federal Express offered overnight and second-day

delivery to 25 cities in the United States. The company started in Memphis,

Tennessee, and it is still in that location today. FedEx didn’t actually start

showing a profit until July 1975. FedEx starting going international in the 1980s

after the company purchased Tiger International and carriers in Japan and Italy.

In 1989 FedEx became the first U.S. express carrier to offer direct flights to

China.

With advancements in technology around the world, FedEx had the task to

keep up with the changes. In 1996, FedEx introduced internet-based shipping.

FedEx calls this program inter Net Ship. When UPS had a strike in 1997 850,000

packages a day came to FedEx, thus another boost in revenues for the company.

The name “FedEx” didn’t come about until the year 2000. After that FedEx

has expanded into several other markets that mainly deal with logistics. They

have formed somewhat of a partnership with the U.S. postal service. FedEx has

made available air transportation for express postal shipments. In return, the U.S.

Postal Service now allows FedEx to place drop-off boxes in significant locations.

Another noteworthy move by FedEx occurred in 2004 when they purchased

Kinko’s in order to better serve small businesses.

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2. United Parcel Service Inc.

In 1907 there was a great need in America for private messenger and

delivery services. To help meeting this need, an enterprising 19-year-old, James

E. (“Jim”) Casey, borrowed $100 from a friend and established the American

Messenger Company in Seattle, Washington.

That initial name was well-suited to the business pursuits of the new

company. In response to telephone calls received at their basement headquarters,

messengers ran errands, delivered packages, and carried notes, baggage, and trays

of food from restaurants. They made most deliveries on foot and used bicycles for

longer trips. Only a few automobiles were in existence at that time and

department stores of the day still used horses and wagons for merchandise

delivery. It would be six years before the United States Parcel Post system would

be established transportation and logistics services. Every day, we manage the

flow of goods, funds, and information in more than 200 countries and territories

worldwide.

The most recent public change came in 2003, when the company

introduced a new brand mark, representing a new, evolved UPS, and showing the

world that its capabilities extend beyond small package delivery. The company

went another step further, adopting the acronym UPS as its formal name, another

indicator of its broad expanse of services. Ever true to its humble origins, the

company maintains its reputation for integrity, reliability, employee ownership,

and customer service. For UPS, the future promises even more accomplishments

as the next chapter in the company's history is written.

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III. THE BATTLE BETWEEN FEDEX AND UPS

1. Competition in the Express-Delivery Market

a. Percentage of large shippers

FEDEX RULES AIRS AND UPS RULES GROUND (%)

Overall, the two companies split the small segment of the Express-Delivery

market. There are ground market and air-express market. While UPS has

dominated the ground area, the air-express has often been FedEx’s playground.

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b. Capital-investment expenditures

The graph shows that from 1992 to 2003, cumulative capital Expenditures

of FedEx and UPS regularly rise. Although the FedEx’s CCE is more than UPS,

during this period, the two companies matched each other’s investments in capital

almost exactly.

c. Price competition

Table1: Summary of Announced List-Rate Increase

UPS 1998 1999 2000 2001 2002 2003 2004 Average

UPS ground 3.6% 2.5% 3.1% 3.1% 3.5% 3.9% 1.9% 3.1%

U.S domestic air 3.3% 2.5% 3.5% 3.7% 4.0% 3.2% 2.9% 3.3%

U.S export 0.0% 0.0% 2.9% 2.9% 3.9% 2.9% 2.9% 2.2%

FedEx 1998 1999 2000 2001 2002 2003 2004 Average

FedEx ground 3.6% 2.5% 3.1% 3.1% 3.5% 3.9% 1.9% 3.1%

U.S domestic air 3.5% 2.8% 0.0% 4.9% 3.5% 3.5% 2.5% 3.0%

U.S export 0.0% 0.0% 0.0% 2.9% 3.5% 3.5% 2.5% 1.8%

It can be seen from the table that price competition of two companies in

ground is the same numbers. There are some small changes of figure in domestic

air and export but it seems that both firms had settled into a predictable pattern of

regular price increase.

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d. Some significant dimensions

FedEx UPS

Customer Two companies have the same targets: listening carefully to the

customer’s needs, providing customized solutions rather than

standardized products, and committing to service relationship.

Information

technology

FedEx use COSMOS (Customer,

Operations, Service, Master On-line

System), which transmitted data from

package movements, customer

pickups, invoices, and deliveries to a

central database.

UPS relied on DIADS

(Delivery Information

Acquisition Devices), which

were handheld unit that

drivers used to scan package

barcodes and record customer

signatures.

Service expansion Having the aim is pecking its service

offerings as volume discounts and

superb quality. Besides, FedEx

bought $200 million to buy vehicles

to match UPS.

UPS copied FedEx’s

customer interfaces to catch

up FedEx’s schedule.

Logistics service FedEx combine with The London

design-company Laura Ashley to

store, track, and ship products quickly

to individual stores worldwide.

UPS combine with Dell

Computer to manage its total

inbound and outbound

shipping.

In short, FedEx and UPS is the same target, development, operation and the

cumulative capital-investment expenditures in the Express-Delivery Market.

Moreover, FedEx is the primary choice for air and international shipping while

UPS donate the ground. So each firm has done everything they can to catch up with

each other and the competition has been fierce.

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2. International Package-Delivery Market

- In 1992, FedEx relinquished its hub in Europe by selling its Brussels,

Belgium, to DHL (one of International Package –Delivery company) that made

FedEx lost $1 billion in Europe. In 1995, UPS spent more than $1 billion to

expand on Europe. At the same time, FedEx expand its routes in Latin America,

Caribbean, and Asia. So, in the early 1990s, both of them also spent similar

expenditure in developing their strategy in different areas.

- In China, until 2005 FedEx and UPS just only focused on the import/export

package market. If they want to have completely package operations in China,

they must use local partners.

As the graph shows, growth of two companies rises. Sometimes, they

slightly decrease (UPS decrease in 1997, and FedEx is lower in 1993 and 2002)

but this is not insignificant. FedEx and UPS developed equally, and their variance

are small in International Package-Delivery Market. Besides, FedEx entered the

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market earlier than its competitors and generated revenues in the international

market, but UPS acquired higher revenues than FedEx at the end in 2003.

3. Performance Assessment

a. EPS, Market Values, and Returns

As can be seen from the graph, stock price and annual return of two

companies increased slightly from 1992 to 1998 and the stock price and annual

return of UPS is higher than FedEx (UPS: AAA shares; FedEx: BBB shares). In

1999, they go up quickly. After that, from 2000 to 2001, they slow down and

finally, they jump steadily. Overlook, two companies increased unstably, but their

growths are similar to each other.

FedEx’s stock price grow in 1999 because FedEx expanded its network

rapidly to a large number of cities in China and made FedEx had 20% of the

market, so the stock price rise and annual return also rise.

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However, FedEx reported a large financial loss of its international division.

This was due to the unexpected high costs of its expanding network. It made stock

price of FedEx go down. And thank to having the largest foreign presence in

China, FedEx go up again.

In 1999, UPS initiated a two-for-one stocks split, sold 109.4 million newly

created Class B shares which lead to raise 5.226 billion. Clearly, stock price and

annual return of UPS develop. No longer, UPS used the majority of the proceeds

to repurchase 68 million shares of Class A, so stock price and annual return of

UPS decreases. Finally, UPS concentrated on its operations, especially UPS had

more activities in China that made its rate of growths renew.

According to the linear, we can see the growth of earning per share of UPS

the same increase with FedEx but EPS’s linear of FedEx higher than UPS.

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b. Ratio Analysis:

Activity Analysis

According to the chart, FedEx seems to be outperforming UP as it

maintains its ratios and is trending towards slight improvement. UPS has been

worsening in their ratios. UPS seems to be losing more and more control of its

receivables as it grows.

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Liquidity Analysis

FedEx again seems to be improving in the liquidity department but UPS is

clearly superior. What this means for UPS is that to creditors and investors they

are in a better position to satisfy their liabilities than FedEx is.

Leverage Analysis

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The chart shows the linear of debt/equity ratio of FedEx fall down rapidly.

That means FedEx is not taking advantage of the increased profits that financial

leverage may bring. UPS tend to remain debt/equity ratio so this rate increases

slightly from 1992 to 2003 because UPS want to develop in long term.

Profitability Analysis

In terms of profitability FedEx has consistently been worse than UPS. The

net profit margins demonstrate that while FedEx has 3.69% of each dollar of sales

left over after expenses UPS has 8.65% (in 2003).

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Growth

Table 2: AVERAGE OF GROWTH FROM 1992 TO 2003

Sales Book assets Net income Operating income

FedEx 11.53% 9.81% 35.51% 13.64%

UPS 7.32% 8.12% 18.83% 12.35%

With the exception of net income, FedEx has fairly consistently out stepped

UPS in terms of growth of things such as sales and assets. UPS is still fairly high

but FedEx is outperforming them.

C. Economic Profit ( Economic Value Added(EVA)) Analysis

NOPAT (Net Operating Profit After Tax)

Look at the graph, the linear of two companies have the same rise, but

UPS’ NOPAT is higher than FedEx’s NOPAT.

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Cost Of Capital (WACC: Weighted-Average Cost

of Capital)

Looking at the graph, we can see that linear of UPS’ WACC tend to reduce

steadily. On the other hand, FedEx linear increases marginally. A low WACC can

show that the UPS created more value for the shareholders out of the projects it

chooses to invest in.

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Economic Value Added( EVA)

EVA reflects the value created or destroyed each year by deducting a

charge for capital from the firm’s net operating profit after tax (NOPAT).

EVA = Operating profits – Capital charge

= NOPAT – (K X Capital)

= NOPAT – (Capital X WACC)

For many years, managers and shareholders have believed that growth in

annual earnings per share and increases in ROE were the best measures for

maximizing shareholder wealth. However, there has been a growing awareness

that these conventional accounting measures are not reliably linked to increasing

the value of the company’s shares. This occurs because earnings do not reflect

changes in risk and inflation, nor do they take account of the cost of additional

capital invested to finance growth. There are a number of other reasons why

earnings fail to measure changes in the economic value of the business. These are:

Alternative accounting methods may be employed.

Dividend policy is not considered.

The time value of money is ignored.

One way of viewing the “shareholder value” approach is to value the

business using Economic Value Added as a valuation methodology.

EVA (economic Value Added) measures the extent by which the firm has

increased shareholders wealth. Strengths of using EVA to analyze how a

company is being run is that EVA is an estimate of a business’ true economic

profit. It includes the cost of all capital including the cost of equity capital

(opportunity cost).

The weakness of using EVA is that large companies can create more wealth

than those small companies despite not using their assets as efficiently. Thereby

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the firm can accurately determine the real value is created for investors,

shareholders in a certainly time.

The EVA for two companies show’s that there is no comparison, by this

standard UPS is the clear victor. FedEx shows a negative $2,252 cumulative EVA

for the period while UPS shows a positive $4,328. EVA values over time will

increase company values, while negative EVA values might decrease company

values.

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Market Value Added (MVA)

The way in which shareholder wealth is increased is by maximizing the

difference between an organization's total market value and the amount of capital

that investors have supplied to the organization. This difference is called market

value added (MVA).

It is calculated as the difference between the current market value of the

company and its investment base.

MVA = Present value of all future EVA

MVA = Market value of debt and equity – Capital

The market value created could be compared with cumulative EVA.

Whether a company has positive or negative MVA depends on the level of rate of

return compared to the cost of capital. All this applies also to EVA. Thus positive

EVA means also positive MVA and vice versa. In other words, maximizing the

present value of EVA would amount to maximizing the market value of the firm.

Total market value is the sum of the book value of debt and the market

value of equity, while total capital supplied is the sum of the book values of debt

and equity. The book value of debt is used in the calculation of total market value

for four reasons:

* The purpose of the analysis is to assess the addition to shareholders'

wealth.

* Determining the market value of most corporate debt issues is difficult

because they are not actively traded.

*Debt market values are usually relatively close to book values.

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* The market value of an organization's debt is more closely tied to interest

rate movements than to managerial actions that influence shareholder wealth.

Essentially, the assumption is made that the market value of debt equals its book

value.

As the chart shows, we can see both of linear of two companies go up, but

UPS’s linear go up stronger than FedEx’s linear. Increasing MVA that means UPS

is increasing shareholder wealth. And this is the primary goal of any business and

the reason for its existence.

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IV. CONCLUSION

FedEx UPS

Source(Graph number)

Financial ratio analysis Activity Liquidity Leverage Profitability Growth

ImprovingImprovingDeclining

Worse than UPSHigh

WeakeningBetter than FedExConsistently low

Better than FedExLower than FedEx

Graph 6Graph 7Graph 8Graph 9Table 2

Total market returns

Cum. total return (1992–2003) 528.02% 705.95% Graph4

Economic profit EVA 2003

Cumulative for 1992–2003EVAMarket value addedDifference

(in millions) $170

($2,252)$11,191$13,443

(in millions)$1,195

$4,328$62,028$57,700

Graph 12

Graph13Graph14

Summary of Comparative Results

UPS is an excellent company because it has operationally excellent strong

financial performance. UPS targeted “a long-term competitive return” and the EPS

confirms it, they have continuously improved their performance. After splitting the

stocks in 1999 we see that UPS have outperformed FedEx and others in the market

with their stock prices. The MVA which is the present value of all future EVA is

also in favor of UPS.

Beside, the excellence in business is the systematic improvement of

business performance based on the principles of customer focus, stakeholder

value, and process management.

Despite being at a relative disadvantage to the China situation, UPS was

still able to capitalize and make a profitable decision to exploit an opportunity that

had presented itself more so to a competitor. So, we think UPS will have more and

more innovation and staying power.

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V. QUESTIONS AND ANSWERS

1. FedEx had set a goal “superior financial returns”, while UPS targeted

“a long-term competitive return”. Had the two firms achieved their goals?

And why?

Two firms had achieved their goals. For FedEx, they have seen its revenue

grow from $5.195 billion in 1992 to $17.277 billion in 2003 with a 233% growth

rate. For UPS, almost ratios of UPS are kept with good rise from 1992 to 2003.

Besides, if the firm wants to have a long-term competitive return, should have

balance between debt and equity. During that period, UPS’s debt/equity ratio

didn’t have dramatic change and it tended to maintain stable.

2. According to you, which is the best company? And why?

For us, the best company is UPS because UPS not only has stronger

analysis ratio than FedEx but also the economic profit analysis is higher than the

rival. Although FedEx has a better growth and its profit is still high, market

performance was very positive, but through the EVA, that show us the value of

FedEx is generally lower than UPS. Furthermore, UPS had a reputation for being

big, also is an innovator and a tenacious adversary. In the future, UPS will have

more chance to enter to China market.

3. Why do you use EVA to evaluate the development of one company?

For many years, managers and shareholders have believed that growth in

annual earnings per share and increases in return on equity were the best measures

for maximizing shareholder wealth. However, there has been a growing awareness

that these conventional accounting measures are not reliably linked to increasing

the value of the company’s shares. This occurs because earnings do not reflect

changes in risk and inflation, nor do they take account of the cost of additional

capital invested to finance growth. So, we use EVA to estimate of a business’ true

economic profit. Because it includes the cost of all capital including the cost of

equity capital (opportunity cost).

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4. What do you learn from this case?

This case is intended for use in an introductory discussion of corporate

value creation and its sources. The growth in annual earnings per share and

increases in return on equity is not the best measures for maximizing shareholder

wealth.

The creation of wealth can be achieved in the real world through the use of

economic profit / economic value added as a performance measurement linking

strategy to value. The managers of many well known international corporations

have succeeded in substantially increasing the value of their business entities by

using this valuable tool.

The dynamics of using Economic Value Added and market value added

have a very powerful application in every business entity, irrespective of size or

industry. The Economic Value Added methodology can be applied to create

wealth for the owners of businesses from the size of the corner store to that of the

multinational corporations. It is now up to us as business executives and advisers

to assist owners with the implementation of business strategies which are

consistent with the principle of Economic Value Added. Economic profit is used

as a performance measurement which directly links strategy to value and is

therefore the key to wealth creation.

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VI. REFERENCES

1. Robert Bruner, Case Studies in Finance, 6th edition, McGRAW-HILL

International Edition.

2. http://www.fastcompany.com/1716317/fedex-vs-ups-by-the-numbers .

3. http://vi.wikipedia.org/wiki/FedEx

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http://vi.wikipedia.org/wiki/FedEx

http://www.fastcompany.com/1716317/fedex-vs-ups-by-the-numbers

the battle for value fedex ups

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