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 FedEx had the task to keep up with the changes. FedEx corporation: FedEx. 2004: FedEx Corp. a Yale University graduate. They have formed somewhat of a partnership with the U. formally known as Federal Express.S. express carrier to offer direct flights to China.S. started delivering packages and freight on April 17. The company started in Memphis. In 1989 FedEx became the first U. the U. vs. FedEx has made available air transportation for express postal shipments. 1973. Another noteworthy move by FedEx occurred in 2004 when they purchased Kinko’s in order to better serve small businesses. postal service. and it is still in that location today. Smith. In return. 3 Group 3 . Tennessee. The name “FedEx” didn’t come about until the year 2000.S. When UPS had a strike in 1997 850. The company was founded by Frederick W. Postal Service now allows FedEx to place drop-off boxes in significant locations. INTRODUCTION 1. With advancements in technology around the world. II. Inc. FedEx didn’t actually start showing a profit until July 1975.000 packages a day came to FedEx. FedEx calls this program inter Net Ship. FedEx introduced internet-based shipping. 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. Federal Express offered overnight and second-day delivery to 25 cities in the United States. In 1996. thus another boost in revenues for the company. United Parcel Service.Case 4: The Battle for Value. To help meeting this need. adopting the acronym UPS as its formal name. 2. The most recent public change came in 2003. The company went another step further. and information in more than 200 countries and territories worldwide. In response to telephone calls received at their basement headquarters. Inc. For UPS. It would be six years before the United States Parcel Post system would be established transportation and logistics services. we manage the flow of goods. an enterprising 19-year-old. United Parcel Service. and carried notes. James E. baggage. the company maintains its reputation for integrity. employee ownership. Every day. another indicator of its broad expanse of services. funds. and showing the world that its capabilities extend beyond small package delivery. (“Jim”) Casey. United Parcel Service Inc. and trays of food from restaurants. Washington. Only a few automobiles were in existence at that time and department stores of the day still used horses and wagons for merchandise delivery. the future promises even more accomplishments as the next chapter in the company's history is written. evolved UPS. borrowed $100 from a friend and established the American Messenger Company in Seattle. 4 Group 3 . That initial name was well-suited to the business pursuits of the new company. messengers ran errands. Ever true to its humble origins. 2004: FedEx Corp.Case 4: The Battle for Value. and customer service. vs. They made most deliveries on foot and used bicycles for longer trips. reliability. representing a new. delivered packages. when the company introduced a new brand mark. In 1907 there was a great need in America for private messenger and delivery services. Case 4: The Battle for Value. Competition in the Express-Delivery Market a. Inc. III. THE BATTLE BETWEEN FEDEX AND UPS 1. United Parcel Service. 2004: FedEx Corp. the two companies split the small segment of the Express-Delivery market. There are ground market and air-express market. the air-express has often been FedEx’s playground. 5 Group 3 . While UPS has dominated the ground area. vs. Percentage of large shippers FEDEX RULES AIRS AND UPS RULES GROUND (%) Overall. 2% 2.9% 2002 3. vs.S export 0.8% U.5% 2.S export FedEx FedEx ground 0.1% 4.6% U.3% U.1% 3.0% 2001 3. b.1% 3.9% 2.5% 2003 3.0% 1998 3.5% 2.1% 3.9% 2002 3.9% 2001 3. United Parcel Service. 6 Group 3 .1% 3. 2004: FedEx Corp.9% 2.5% 2. c.0% 0.9% 3.5% 2.S domestic air 3.5% 0.6% 1999 2.9% 2000 3. Price competition Table1: Summary of Announced List-Rate Increase UPS UPS ground 1998 3.8% 0. Capital-investment expenditures The graph shows that from 1992 to 2003.5% 2004 1. 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% 4. Although the FedEx’s CCE is more than UPS.2% Average 3. Inc.3% 2.0% It can be seen from the table that price competition of two companies in ground is the same numbers. during this period.9% 3.0% 2000 3.5% 3.9% 2.0% 1999 2.9% 2004 1. cumulative capital Expenditures of FedEx and UPS regularly rise.5% 3.9% 2.1% 0.5% Average 3.0% 3.S domestic air 3.Case 4: The Battle for Value.5% 3.7% 2. the two companies matched each other’s investments in capital almost exactly.9% 2003 3.0% 1.5% U. and committing to service relationship. Inc. Moreover. invoices. Logistics service FedEx combine with The London UPS combine with Dell design-company Laura Ashley to Computer to manage its total store. 2004: FedEx Corp. Besides. Service expansion Having the aim is pecking its service UPS copied FedEx’s offerings as volume discounts and customer interfaces to catch superb quality. Service. development. and outbound In short. customer were handheld unit that pickups. FedEx up FedEx’s schedule. FedEx and UPS is the same target. Some significant dimensions FedEx Customer UPS Two companies have the same targets: listening carefully to the customer’s needs. which transmitted data from Acquisition Devices). bought $200 million to buy vehicles to match UPS. barcodes and record customer signatures. So each firm has done everything they can to catch up with each other and the competition has been fierce. Information technology FedEx use COSMOS (Customer. shipping. track. which package movements. UPS relied on DIADS Operations. 7 Group 3 .Case 4: The Battle for Value. providing customized solutions rather than standardized products. d. operation and the cumulative capital-investment expenditures in the Express-Delivery Market. United Parcel Service. Master On-line (Delivery Information System). FedEx is the primary choice for air and international shipping while UPS donate the ground. and ship products quickly inbound to individual stores worldwide. and deliveries to a drivers used to scan package central database. vs. FedEx entered the 8 Group 3 . International Package-Delivery Market In 1992. Besides. FedEx and UPS developed equally. they must use local partners. both of them also spent similar expenditure in developing their strategy in different areas. 2.Case 4: The Battle for Value. So. and FedEx is lower in 1993 and 2002) but this is not insignificant. If they want to have completely package operations in China. they slightly decrease (UPS decrease in 1997. Sometimes. vs. to DHL (one of International Package –Delivery company) that made FedEx lost $1 billion in Europe. In China. growth of two companies rises. in the early 1990s. FedEx expand its routes in Latin America. As the graph shows. until 2005 FedEx and UPS just only focused on the import/export package market. and Asia. Belgium. FedEx relinquished its hub in Europe by selling its Brussels. Caribbean. and their variance are small in International Package-Delivery Market. At the same time. In 1995. UPS spent more than $1 billion to expand on Europe. United Parcel Service. 2004: FedEx Corp. Inc. Case 4: The Battle for Value. and Returns As can be seen from the graph. After that. EPS. 3. FedEx: BBB shares). from 2000 to 2001. they go up quickly. Market Values. they jump steadily. so the stock price rise and annual return also rise. market earlier than its competitors and generated revenues in the international market. United Parcel Service. two companies increased unstably. Overlook. 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. Performance Assessment a. but UPS acquired higher revenues than FedEx at the end in 2003. Inc. In 1999. vs. 2004: FedEx Corp. 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. they slow down and finally. but their growths are similar to each other. 9 Group 3 . In 1999. 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. FedEx reported a large financial loss of its international division. UPS used the majority of the proceeds to repurchase 68 million shares of Class A. sold 109.226 billion.4 million newly created Class B shares which lead to raise 5. UPS initiated a two-for-one stocks split. stock price and annual return of UPS develop. Finally. UPS concentrated on its operations. However. 10 Group 3 . Clearly. United Parcel Service. vs. It made stock price of FedEx go down. And thank to having the largest foreign presence in China. This was due to the unexpected high costs of its expanding network. Inc. According to the linear. especially UPS had more activities in China that made its rate of growths renew.Case 4: The Battle for Value. FedEx go up again. No longer. 2004: FedEx Corp. so stock price and annual return of UPS decreases. Inc. Ratio Analysis: Activity Analysis According to the chart. 2004: FedEx Corp.Case 4: The Battle for Value. UPS has been worsening in their ratios. b. 11 Group 3 . FedEx seems to be outperforming UP as it maintains its ratios and is trending towards slight improvement. vs. UPS seems to be losing more and more control of its receivables as it grows. United Parcel Service. Inc. 2004: FedEx Corp.Case 4: The Battle for Value. vs. United Parcel Service. Leverage Analysis 12 Group 3 . What this means for UPS is that to creditors and investors they are in a better position to satisfy their liabilities than FedEx is. Liquidity Analysis FedEx again seems to be improving in the liquidity department but UPS is clearly superior. 65% (in 2003). 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. vs. United Parcel Service. 2004: FedEx Corp. Profitability Analysis In terms of profitability FedEx has consistently been worse than UPS. Inc. UPS tend to remain debt/equity ratio so this rate increases slightly from 1992 to 2003 because UPS want to develop in long term. The net profit margins demonstrate that while FedEx has 3.69% of each dollar of sales left over after expenses UPS has 8.Case 4: The Battle for Value. 13 Group 3 . Inc. United Parcel Service.Case 4: The Battle for Value. but UPS’ NOPAT is higher than FedEx’s NOPAT. the linear of two companies have the same rise. Growth Table 2: AVERAGE OF GROWTH FROM 1992 TO 2003 Sales FedEx UPS 11. FedEx has fairly consistently out stepped UPS in terms of growth of things such as sales and assets.51% 18.64% 12.32% Book assets 9. vs. Economic Profit ( Economic Value Added(EVA)) Analysis NOPAT (Net Operating Profit After Tax) Look at the graph. C. 2004: FedEx Corp. UPS is still fairly high but FedEx is outperforming them.35% With the exception of net income.53% 7.83% Operating income 13.12% Net income 35. 14 Group 3 .81% 8. 2004: FedEx Corp. On the other hand. vs. A low WACC can show that the UPS created more value for the shareholders out of the projects it chooses to invest in. Cost Of Capital (WACC: Weighted-Average Cost of Capital) Looking at the graph. Inc. we can see that linear of UPS’ WACC tend to reduce steadily. FedEx linear increases marginally. United Parcel Service. 15 Group 3 .Case 4: The Battle for Value. nor do they take account of the cost of additional capital invested to finance growth. 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 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). This occurs because earnings do not reflect changes in risk and inflation. there has been a growing awareness that these conventional accounting measures are not reliably linked to increasing the value of the company’s shares. vs. These are: Alternative accounting methods may be employed. Inc. The time value of money is ignored. 2004: FedEx Corp. United Parcel Service.Case 4: The Battle for Value. One way of viewing the “shareholder value” approach is to value the business using Economic Value Added as a valuation methodology. EVA = Operating profits – Capital charge = NOPAT – (K X Capital) = NOPAT – (Capital X WACC) For many years. It includes the cost of all capital including the cost of equity capital (opportunity cost). However. managers and shareholders have believed that growth in annual earnings per share and increases in ROE were the best measures for maximizing shareholder wealth. 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. Dividend policy is not considered. There are a number of other reasons why earnings fail to measure changes in the economic value of the business. the firm can accurately determine the real value is created for investors. by this standard UPS is the clear victor. United Parcel Service. EVA values over time will increase company values. 17 Group 3 .Case 4: The Battle for Value. 2004: FedEx Corp. FedEx shows a negative $2.328. Inc. The EVA for two companies show’s that there is no comparison. shareholders in a certainly time. vs. while negative EVA values might decrease company values.252 cumulative EVA for the period while UPS shows a positive $4. 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). 18 Group 3 . Whether a company has positive or negative MVA depends on the level of rate of return compared to the cost of capital. In other words. Thus positive EVA means also positive MVA and vice versa. Total market value is the sum of the book value of debt and the market value of equity. Inc. 2004: FedEx Corp. while total capital supplied is the sum of the book values of debt and equity.Case 4: The Battle for Value. * 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. vs. United Parcel Service. maximizing the present value of EVA would amount to maximizing the market value of the firm. All this applies also to EVA. It is calculated as the difference between the current market value of the company and its investment base. 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. 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. we can see both of linear of two companies go up. * The market value of an organization's debt is more closely tied to interest rate movements than to managerial actions that influence shareholder wealth. 2004: FedEx Corp. As the chart shows. vs. United Parcel Service. but UPS’s linear go up stronger than FedEx’s linear. And this is the primary goal of any business and the reason for its existence.Case 4: The Battle for Value. 19 Group 3 . Essentially. the assumption is made that the market value of debt equals its book value. Inc. Increasing MVA that means UPS is increasing shareholder wealth. 2004: FedEx Corp. vs. total return (1992–2003) 528. 20 Group 3 .191 $13.195 Graph 12 ($2. 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.02% 705. stakeholder value. United Parcel Service. The MVA which is the present value of all future EVA is also in favor of UPS. 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.252) $11. the excellence in business is the systematic improvement of business performance based on the principles of customer focus. Inc. Beside. UPS targeted “a long-term competitive return” and the EPS confirms it.443 $4. we think UPS will have more and more innovation and staying power. IV. they have continuously improved their performance.328 $62.95% Graph4 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 Economic profit EVA 2003 Cumulative for 1992–2003 EVA Market value added Difference (in millions) $170 (in millions) $1.028 $57.700 Graph13 Graph14 Summary of Comparative Results UPS is an excellent company because it has operationally excellent strong financial performance. Despite being at a relative disadvantage to the China situation.Case 4: The Battle for Value. CONCLUSION FedEx Financial ratio analysis Activity Liquidity Leverage Profitability Growth Total market returns Cum. 195 billion in 1992 to $17. Furthermore. 2. should have balance between debt and equity. Inc. UPS will have more chance to enter to China market. This occurs because earnings do not reflect changes in risk and inflation. while UPS targeted “a long-term competitive return”. vs.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. 21 Group 3 . However. 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. which is the best company? And why? For us. also is an innovator and a tenacious adversary.277 billion in 2003 with a 233% growth rate. that show us the value of FedEx is generally lower than UPS. FedEx had set a goal “superior financial returns”. almost ratios of UPS are kept with good rise from 1992 to 2003. they have seen its revenue grow from $5. Besides. During that period. So. 2004: FedEx Corp. For UPS. Had the two firms achieved their goals? And why? Two firms had achieved their goals. According to you. Because it includes the cost of all capital including the cost of equity capital (opportunity cost). 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. nor do they take account of the cost of additional capital invested to finance growth. if the firm wants to have a long-term competitive return. but through the EVA. 3. UPS had a reputation for being big. QUESTIONS AND ANSWERS 1. In the future. we use EVA to estimate of a business’ true economic profit. V. For FedEx. Although FedEx has a better growth and its profit is still high. United Parcel Service. UPS’s debt/equity ratio didn’t have dramatic change and it tended to maintain stable. market performance was very positive. The managers of many well known international corporations have succeeded in substantially increasing the value of their business entities by using this valuable tool. Economic profit is used as a performance measurement which directly links strategy to value and is therefore the key to wealth creation.Case 4: The Battle for Value. irrespective of size or industry. 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. 22 Group 3 . 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. vs. 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. 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. Inc. 4. 2004: FedEx Corp. The dynamics of using Economic Value Added and market value added have a very powerful application in every business entity. The growth in annual earnings per share and increases in return on equity is not the best measures for maximizing shareholder wealth. Case 4: The Battle for Value. Case Studies in Finance.wikipedia. Inc.fastcompany. 6th edition. United Parcel Service. 2004: FedEx Corp. http://vi. REFERENCES 1. Robert Bruner. 2. 3. vs. McGRAW-HILL International Edition. http://www. VI.org/wiki/FedEx 23 Group 3 .com/1716317/fedex-vs-ups-by-the-numbers.