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:
Group 3: F49802134
F49802153
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 companys volumes in
China had grown by more than 50% between 2003 and 2004. UPS which is the
worlds 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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Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

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 didnt 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 didnt 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
Kinkos in order to better serve small businesses.
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Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

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

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 FedExs playground.

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

b. Capital-investment expenditures

The graph shows that from 1992 to 2003, cumulative capital Expenditures
of FedEx and UPS regularly rise. Although the FedExs CCE is more than UPS,
during this period, the two companies matched each others 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%

0.0%

0.0%

0.0%

2.9%

3.5%

3.5%

2.5%

1.8%

U.S export

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

d. Some significant dimensions

FedEx
Customer

UPS

Two companies have the same targets: listening carefully to the

customers needs, providing customized solutions rather than
standardized products, and committing to service relationship.

Information

FedEx use COSMOS (Customer, UPS

relied

technology

Operations, Service, Master On-line (Delivery

on

DIADS

Information

System), which transmitted data from Acquisition Devices), which

package

movements,

customer were

handheld

unit

that

pickups, invoices, and deliveries to a drivers used to scan package

central database.

barcodes and record customer

signatures.

Service expansion

Having the aim is pecking its service UPS

copied

FedExs

offerings as volume discounts and customer interfaces to catch

superb

quality.

Besides,

FedEx up FedExs schedule.

bought $200 million to buy vehicles

to match UPS.
Logistics service

FedEx combine with The London UPS

combine

with

Dell

design-company Laura Ashley to Computer to manage its total

store, track, and ship products quickly inbound
to individual stores worldwide.

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

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

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

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 EPSs linear of FedEx higher than UPS.

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

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

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

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

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 FedExs NOPAT.

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

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

Economic Value Added( EVA)

EVA reflects the value created or destroyed each year by deducting a
charge for capital from the firms 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 companys 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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Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

the firm can accurately determine the real value is created for investors,
shareholders in a certainly time.

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

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

* 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
UPSs linear go up stronger than FedExs 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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Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

IV. 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. total return (19922003)

528.02%

Economic profit
EVA 2003
Cumulative for 19922003
EVA
Market value added
Difference

705.95%

Graph4

(in millions)
$170

(in millions)
$1,195

Graph 12

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

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

Graph13
Graph14

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

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, UPSs debt/equity ratio
didnt 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 companys 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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Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

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

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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