MEIHO UNIVERSITYCASE 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. 2 Group 3 vs. FedEx didn’t actually start showing a profit until July 1975. They have formed somewhat of a partnership with the U. FedEx introduced internet-based shipping. With advancements in technology around the world. and it is still in that location today. express carrier to offer direct flights to China. INTRODUCTION 1. The company was founded by Frederick W. Inc. Another noteworthy move by FedEx occurred in 2004 when they purchased Kinko’s in order to better serve small businesses. a Yale University graduate.S. United Parcel Service. thus another boost in revenues for the company. the U.S. 2004: FedEx Corp. In return. II. Federal Express offered overnight and second-day delivery to 25 cities in the United States. The company started in Memphis. In 1996. After that FedEx has expanded into several other markets that mainly deal with logistics. FedEx starting going international in the 1980s after the company purchased Tiger International and carriers in Japan and Italy.Case 4: The Battle for Value. 1973. In 1989 FedEx became the first U. FedEx calls this program inter Net Ship. Postal Service now allows FedEx to place drop-off boxes in significant locations. 3 Group 3 . FedEx had the task to keep up with the changes. FedEx has made available air transportation for express postal shipments.000 packages a day came to FedEx. The name “FedEx” didn’t come about until the year 2000. formally known as Federal Express. started delivering packages and freight on April 17. When UPS had a strike in 1997 850.S. Smith. FedEx corporation: FedEx. postal service. Tennessee. For UPS. the company maintains its reputation for integrity. The most recent public change came in 2003. adopting the acronym UPS as its formal name. an enterprising 19-year-old. funds. They made most deliveries on foot and used bicycles for longer trips. 2. reliability. 4 Group 3 . baggage. (“Jim”) Casey. The company went another step further. In response to telephone calls received at their basement headquarters. another indicator of its broad expanse of services.Case 4: The Battle for Value. Every day. employee ownership. United Parcel Service Inc. and information in more than 200 countries and territories worldwide. when the company introduced a new brand mark. Washington. In 1907 there was a great need in America for private messenger and delivery services. the future promises even more accomplishments as the next chapter in the company's history is written. It would be six years before the United States Parcel Post system would be established transportation and logistics services. delivered packages. Inc. and customer service. Only a few automobiles were in existence at that time and department stores of the day still used horses and wagons for merchandise delivery. and carried notes. messengers ran errands. evolved UPS. and trays of food from restaurants. James E. representing a new. United Parcel Service. To help meeting this need. we manage the flow of goods. borrowed $100 from a friend and established the American Messenger Company in Seattle. 2004: FedEx Corp. vs. and showing the world that its capabilities extend beyond small package delivery. That initial name was well-suited to the business pursuits of the new company. Ever true to its humble origins. the air-express has often been FedEx’s playground. the two companies split the small segment of the Express-Delivery market. 2004: FedEx Corp. United Parcel Service.Case 4: The Battle for Value. vs. III. Competition in the Express-Delivery Market a. Percentage of large shippers FEDEX RULES AIRS AND UPS RULES GROUND (%) Overall. While UPS has dominated the ground area. 5 Group 3 . There are ground market and air-express market. THE BATTLE BETWEEN FEDEX AND UPS 1. Inc. 5% 1. Capital-investment expenditures The graph shows that from 1992 to 2003.Case 4: The Battle for Value.0% 0.5% 2.1% 3.9% 1.5% 3.9% 3.5% 3.9% 3.5% 3.0% 0.5% 3.0% 0.S export 0. Inc. Price competition Table1: Summary of Announced List-Rate Increase UPS 1998 1999 2000 2001 2002 2003 2004 Average UPS ground 3.9% 3. during this period. 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.5% 3.1% U.9% 3.9% 2.0% 0.7% 4. vs.3% 2.S domestic air 3.9% 1.9% 2. Although the FedEx’s CCE is more than UPS. b.1% U.1% 3.5% 2. 6 Group 3 . cumulative capital Expenditures of FedEx and UPS regularly rise.0% 2.2% 2.8% 0.S export It can be seen from the table that price competition of two companies in ground is the same numbers.5% 3.1% 3.5% 3.9% 3.S domestic air 3.5% 2.1% 3.9% 2.0% 3.0% 4.5% 3.2% FedEx 1998 1999 2000 2001 2002 2003 2004 Average FedEx ground 3. United Parcel Service.3% U.5% 3.6% 2. 2004: FedEx Corp.8% U.9% 3. the two companies matched each other’s investments in capital almost exactly.0% 2.6% 2. c.9% 2. 7 Group 3 . FedEx and UPS is the same target. operation and the cumulative capital-investment expenditures in the Express-Delivery Market. Information FedEx use COSMOS (Customer. d.Case 4: The Battle for Value. vs. In short. Besides. providing customized solutions rather than standardized products. So each firm has done everything they can to catch up with each other and the competition has been fierce. which package movements. Inc. Logistics service FedEx combine with The London UPS combine with Dell design-company Laura Ashley to Computer to manage its total store. Some significant dimensions FedEx Customer UPS Two companies have the same targets: listening carefully to the customer’s needs. Service. Master On-line (Delivery on DIADS Information System). track. Moreover. and outbound shipping. Service expansion Having the aim is pecking its service UPS copied FedEx’s offerings as volume discounts and customer interfaces to catch superb quality. FedEx up FedEx’s schedule. development. FedEx is the primary choice for air and international shipping while UPS donate the ground. and ship products quickly inbound to individual stores worldwide. invoices. and committing to service relationship. customer were handheld unit that pickups. UPS relied technology Operations. barcodes and record customer signatures. which transmitted data from Acquisition Devices). and deliveries to a drivers used to scan package central database. United Parcel Service. bought $200 million to buy vehicles to match UPS. 2004: FedEx Corp. Besides. Sometimes. As the graph shows. In 1995. and FedEx is lower in 1993 and 2002) but this is not insignificant. FedEx and UPS developed equally. At the same time. Caribbean. So. Inc. to DHL (one of International Package –Delivery company) that made FedEx lost $1 billion in Europe. United Parcel Service.Case 4: The Battle for Value. they must use local partners. FedEx entered the 8 Group 3 . FedEx relinquished its hub in Europe by selling its Brussels. 2004: FedEx Corp. until 2005 FedEx and UPS just only focused on the import/export package market. growth of two companies rises. - In China. Belgium. UPS spent more than $1 billion to expand on Europe. FedEx expand its routes in Latin America. vs. If they want to have completely package operations in China. they slightly decrease (UPS decrease in 1997. International Package-Delivery Market - In 1992. 2. both of them also spent similar expenditure in developing their strategy in different areas. in the early 1990s. and Asia. and their variance are small in International Package-Delivery Market. from 2000 to 2001. they jump steadily. 2004: FedEx Corp. In 1999.Case 4: The Battle for Value. United Parcel Service. they slow down and finally. so the stock price rise and annual return also rise. 9 Group 3 . but their growths are similar to each other. Overlook. EPS. Performance Assessment a. Inc. After that. 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’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. FedEx: BBB shares). two companies increased unstably. vs. but UPS acquired higher revenues than FedEx at the end in 2003. market earlier than its competitors and generated revenues in the international market. Market Values. 3. they go up quickly. so stock price and annual return of UPS decreases. vs. No longer. especially UPS had more activities in China that made its rate of growths renew. Inc.4 million newly created Class B shares which lead to raise 5.Case 4: The Battle for Value. UPS used the majority of the proceeds to repurchase 68 million shares of Class A. And thank to having the largest foreign presence in China. 2004: FedEx Corp. 10 Group 3 . However. 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. This was due to the unexpected high costs of its expanding network. UPS concentrated on its operations. In 1999. It made stock price of FedEx go down. According to the linear. United Parcel Service. FedEx reported a large financial loss of its international division.226 billion. Clearly. UPS initiated a two-for-one stocks split. sold 109. FedEx go up again. stock price and annual return of UPS develop. Finally. b. Inc. UPS has been worsening in their ratios.Case 4: The Battle for Value. United Parcel Service. Ratio Analysis: Activity Analysis According to the chart. UPS seems to be losing more and more control of its receivables as it grows. 2004: FedEx Corp. vs. FedEx seems to be outperforming UP as it maintains its ratios and is trending towards slight improvement. 11 Group 3 . Inc. What this means for UPS is that to creditors and investors they are in a better position to satisfy their liabilities than FedEx is. United Parcel Service.Case 4: The Battle for Value. Leverage Analysis 12 Group 3 . vs. Liquidity Analysis FedEx again seems to be improving in the liquidity department but UPS is clearly superior. 2004: FedEx Corp. 69% of each dollar of sales left over after expenses UPS has 8. vs. The net profit margins demonstrate that while FedEx has 3.Case 4: The Battle for Value. That means FedEx is not taking advantage of the increased profits that financial leverage may bring.65% (in 2003). The chart shows the linear of debt/equity ratio of FedEx fall down rapidly. 2004: FedEx Corp. UPS tend to remain debt/equity ratio so this rate increases slightly from 1992 to 2003 because UPS want to develop in long term. United Parcel Service. 13 Group 3 . Inc. Profitability Analysis In terms of profitability FedEx has consistently been worse than UPS. but UPS’ NOPAT is higher than FedEx’s NOPAT.81% 35.83% 12. Economic Profit ( Economic Value Added(EVA)) Analysis NOPAT (Net Operating Profit After Tax) Look at the graph. United Parcel Service. the linear of two companies have the same rise.32% 8. C.51% 13.12% 18.35% With the exception of net income. UPS is still fairly high but FedEx is outperforming them.53% 9. 14 Group 3 . FedEx has fairly consistently out stepped UPS in terms of growth of things such as sales and assets. 2004: FedEx Corp. Inc.64% UPS 7. vs.Case 4: The Battle for Value. Growth Table 2: AVERAGE OF GROWTH FROM 1992 TO 2003 Sales Book assets Net income Operating income FedEx 11. Case 4: The Battle for Value. FedEx linear increases marginally. United Parcel Service. On the other hand. 2004: FedEx Corp. 15 Group 3 . Cost Of Capital (WACC: Weighted-Average Cost of Capital) Looking at the graph. vs. Inc. we can see that linear of UPS’ WACC tend to reduce steadily. A low WACC can show that the UPS created more value for the shareholders out of the projects it chooses to invest in. managers and shareholders have believed that growth in annual earnings per share and increases in ROE were the best measures for maximizing shareholder wealth. Dividend policy is not considered. These are: Alternative accounting methods may be employed. The time value of money is ignored. 2004: FedEx Corp. There are a number of other reasons why earnings fail to measure changes in the economic value of the business. The weakness of using EVA is that large companies can create more wealth than those small companies despite not using their assets as efficiently. However. EVA = Operating profits – Capital charge = NOPAT – (K X Capital) = NOPAT – (Capital X WACC) For many years. 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.Case 4: The Battle for Value. there has been a growing awareness that these conventional accounting measures are not reliably linked to increasing the value of the company’s shares. Thereby 16 Group 3 . 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). United Parcel Service. It includes the cost of all capital including the cost of equity capital (opportunity cost). One way of viewing the “shareholder value” approach is to value the business using Economic Value Added as a valuation methodology. vs. 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. Inc. 328. United Parcel Service. The EVA for two companies show’s that there is no comparison. while negative EVA values might decrease company values. 2004: FedEx Corp.252 cumulative EVA for the period while UPS shows a positive $4. FedEx shows a negative $2. 17 Group 3 . shareholders in a certainly time. the firm can accurately determine the real value is created for investors.Case 4: The Battle for Value. by this standard UPS is the clear victor. EVA values over time will increase company values. Inc. vs. Inc. while total capital supplied is the sum of the book values of debt and equity. 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. *Debt market values are usually relatively close to book values. All this applies also to EVA. 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. Total market value is the sum of the book value of debt and the market value of equity. maximizing the present value of EVA would amount to maximizing the market value of the firm. 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. United Parcel Service. * Determining the market value of most corporate debt issues is difficult because they are not actively traded. 18 Group 3 . 2004: FedEx Corp. Thus positive EVA means also positive MVA and vice versa.Case 4: The Battle for Value. In other words. This difference is called market value added (MVA). vs. It is calculated as the difference between the current market value of the company and its investment base. Case 4: The Battle for Value. And this is the primary goal of any business and the reason for its existence. * The market value of an organization's debt is more closely tied to interest rate movements than to managerial actions that influence shareholder wealth. Inc. vs. Essentially. 2004: FedEx Corp. United Parcel Service. we can see both of linear of two companies go up. the assumption is made that the market value of debt equals its book value. Increasing MVA that means UPS is increasing shareholder wealth. but UPS’s linear go up stronger than FedEx’s linear. 19 Group 3 . As the chart shows. 195 Graph 12 ($2. total return (1992–2003) 528. stakeholder value.191 $13. UPS was still able to capitalize and make a profitable decision to exploit an opportunity that had presented itself more so to a competitor. and process management. After splitting the stocks in 1999 we see that UPS have outperformed FedEx and others in the market with their stock prices. So. UPS targeted “a long-term competitive return” and the EPS confirms it.028 $57. CONCLUSION Financial ratio analysis Activity Liquidity Leverage Profitability Growth FedEx UPS Source (Graph number) Improving Improving Declining Worse than UPS High Weakening Better than FedEx Consistently low Better than FedEx Lower than FedEx Graph 6 Graph 7 Graph 8 Graph 9 Table 2 Total market returns Cum.95% Graph4 (in millions) $170 (in millions) $1.700 Graph13 Graph14 Summary of Comparative Results UPS is an excellent company because it has operationally excellent strong financial performance. The MVA which is the present value of all future EVA is also in favor of UPS. Despite being at a relative disadvantage to the China situation. United Parcel Service. Inc. we think UPS will have more and more innovation and staying power.328 $62. they have continuously improved their performance. vs. the excellence in business is the systematic improvement of business performance based on the principles of customer focus.02% Economic profit EVA 2003 Cumulative for 1992–2003 EVA Market value added Difference 705. IV. 2004: FedEx Corp.Case 4: The Battle for Value. 20 Group 3 . Beside.252) $11.443 $4. Furthermore. Besides.Case 4: The Battle for Value. Why do you use EVA to evaluate the development of one company? For many years. UPS had a reputation for being big. that show us the value of FedEx is generally lower than UPS. QUESTIONS AND ANSWERS 1. we use EVA to estimate of a business’ true economic profit. market performance was very positive. In the future. So. 3. FedEx had set a goal “superior financial returns”. also is an innovator and a tenacious adversary. 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. there has been a growing awareness that these conventional accounting measures are not reliably linked to increasing the value of the company’s shares. UPS will have more chance to enter to China market.195 billion in 1992 to $17. Inc. UPS’s debt/equity ratio didn’t have dramatic change and it tended to maintain stable. For FedEx. For UPS. During that period. but through the EVA. 2004: FedEx Corp. nor do they take account of the cost of additional capital invested to finance growth.277 billion in 2003 with a 233% growth rate. United Parcel Service. vs. which is the best company? And why? For us. while UPS targeted “a long-term competitive return”. This occurs because earnings do not reflect changes in risk and inflation. According to you. should have balance between debt and equity. if the firm wants to have a long-term competitive return. almost ratios of UPS are kept with good rise from 1992 to 2003. Had the two firms achieved their goals? And why? Two firms had achieved their goals. Although FedEx has a better growth and its profit is still high. However. 2. they have seen its revenue grow from $5. V. Because it includes the cost of all capital including the cost of equity capital (opportunity cost). 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. 21 Group 3 . The growth in annual earnings per share and increases in return on equity is not the best measures for maximizing shareholder wealth. What do you learn from this case? This case is intended for use in an introductory discussion of corporate value creation and its sources. United Parcel Service. irrespective of size or industry. 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. Inc.Case 4: The Battle for Value. 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. The managers of many well known international corporations have succeeded in substantially increasing the value of their business entities by using this valuable tool. 4. vs. 22 Group 3 . 2004: FedEx Corp. 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. The dynamics of using Economic Value Added and market value added have a very powerful application in every business entity. Economic profit is used as a performance measurement which directly links strategy to value and is therefore the key to wealth creation. Inc. VI. 3. 2. vs. United Parcel Service. Case Studies in Finance. 2004: FedEx Corp.Case 4: The Battle for Value. McGRAW-HILL International Edition.org/wiki/FedEx 23 Group 3 .com/1716317/fedex-vs-ups-by-the-numbers.fastcompany. 6th edition.wikipedia. REFERENCES 1. Robert Bruner. http://www. http://vi.