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The Battle for Value:


Federal Express Corporation vs.
United Parcel Service of
America !nc.
"BA# $%&'(
)ovem*er +,,'
+
S-nopsis

Time: .ul- %//&

0ant to assess the financial performance of


Federal Express and UPS

T1o stron2 competitors in the overni2ht


express pac3a2e industr-

)ot a num*er4crunchin2 case rather 1e need


to interpret results and reflect on the
implications
5
"ain !ssues67*8ectives

The definition of 9excellence: from a corporate


finance point of vie1

The use of economic profit anal-sis and the


measurement of financial performance and health
;
Economic profit anal-sis vs. other classic approaches
such as financial reports and ratios and stoc3 price
performance.
;
The opportunit- to discuss the attri*utes of health- and
successful companies and to explore the stren2ths and
1ea3nesses of economic profit.
<
"ain !ssues67*8ectives
;
=e- learnin2 points a*out economic profit: >%? its
dependence on @AAP conventions and >+? its i2norance
of strate2ic option value.
;
Business se2ment anal-sis to identif- stron2 and 1ea3
sectors.

The financial implications of ri2orous competition


and corporate transformation
;
Corporate transformation: customer focus total Aualit-
mana2ement product innovation re4en2ineerin2
alliancesBand so on.
&
EVA

EVA: Economic Value Added

EVA C )7PAT 4 CD >TC?


;
1here )7PAT C net operatin2 profits after taxes
;
CD C percenta2e cost of capital
;
TC C total capital

@AAP : @enerall- Accepted Accountin2


Principles
$
"ission Statement

7*8ectives
;
stoc3 price
;
mar3et share
;
profits
;
EPS P6E ratio
;
siEe of the firm >assets?
;
Aualit- products6services
;
*est in technolo2-
;
BB.etc.
'
0a-s to "easure Financial
Excellence

#irect inspection of the financial statements

Financial ratios

EPS and P6E ratios

Total returns to investors

Economic Profit >Economic Value Added?


F
An !mportant Event

.ul- %, %//&

..C. Penne- announced the a1ard to UPS of


a G% *illion five4-ear contract for deliver-
services.

At the announcement the stoc3 price of


FedEx fell +.55 percent CH total mar3et
value of eAuit- declined *- GF& million.
/
Surprised *- the EventI

FedEx 1as perceived as innovative


entrepreneurial and an operational leader
;
Aualit- is 1hat the- are sellin2 >time definite
transportation?
;
UPS had the reputation as a *i2 *ureaucratic
industr- follo1er. UPS 1as tr-in2 to shed this
ima2e and to ma3e a transition to *e an innovator
and competitive in the ne1 1orld of air4express
pac3a2e industr-.
%,
Future Trends

Focus on product innovation customersJ


needs Aualit- and reen2ineerin2

Capital4intensive investments

Shiftin2 mar3et shares


%%
Anal-sis: Part %

#escri*e the competition in the overni2ht


pac3a2e deliver- industr- and the strate2ies *-
1hich these t1o firms are meetin2 the
competition. 0hat are the ena*lin2 and
inhi*itin2 factors facin2 the t1o firms as the-
pursue their 2oalsI #o -ou thin3 either firm can
attain sustaina*le competitive advanta2e in this
*usinessI

7*8ective: Explore the historical ori2ins of the


t1o firms
%+
Anal-sis: Part +

0h- did FedExJs stoc3 price decline at


..C. Penne-Js announcementI Assumin2 a
perfectl- efficient stoc3 mar3et ho1
mi2ht on interpret this loss of GF& million
in FedExJs mar3et value of eAuit-I

7*8ective: Explore a *asic idea a*out


stoc3 price
%5
Anal-sis: Part 5

(o1 have Federal Express and United Parcel Service


performed since the mid4%/F,sI 0hich firm is doin2
*etterI #iscuss the insi2hts -ou derived from the t1o
firmsJ financial statements financial ratios stoc3
price performance and economic profit >or EVA?.
Also descri*e ho1 EVA is estimated and its stren2ths
and 1ea3nesses as a measure of performance.

7*8ective: Evaluate firm performances *ased on


various measures
%<
Anal-sis: Part <

!f -ou had to identif- one of these


companies as 9excellent: 1hich 1ould
-ou chooseI 7n 1hat *asisI "ore
2enerall- 1hat is 9excellence: in
*usinessI

7*8ective: A reflection on the normative


implications of financial and operational
performance.
%&
#iscussion: Part %
Compan- 7ri2ins and Strate2ic
Forces of the !ndustr-

An- assessment of financial performance and


health of the t1o firms must *e *ased on the
3e- drivers of expectations and contin2encies.

UPS 1as the dominant firm in the


oli2opolistic industr-.

FedEx rose as an innovator in the industr-


%$
=e- Features of the !ndustr-

Before %//,

sta*le settin2

economies of scale and


hi2her profits

consistent thin3in2

committed to a dominant
product or desi2n

resist adoptin2
innovations

%//,s

competition on all
functional areas includin2
service innovation Aualit-
and 2eo2raph-

customer focus

totall- Aualit- m2t

info technolo2-

2lo*aliEation

strate2ic alliances
%'
#iscussion: Part %
Compan- 7ri2ins and Strate2ic
Forces of the !ndustr-

The tur*ulent chan2e 1ithin the industr- must


*e a ma8or influence on investor expectations
and assessments of contin2ent value
%F
#iscussion: Part +
FedExJs Stoc3 Price Keaction

Stoc3 price: the sum of the PV of predicta*le


future CFs >dividends and terminal value? to
shareholders plus a contin2ent component

0h- terminal value and6or contin2ent component


mi2ht decline at the Penne- announcementI

Loss of expected profits from Penne- and


restriction of FedExJs a*ilit- to finance internall-
%/
#iscussion: Part +
FedExJs Stoc3 Price Keaction

#en-in2 to FedEx some future *usiness 1ith


Penne-M UPSJs 2ain is FedExJs lossM Nero4sum
competition in air express

Si2nal of competitive disadvanta2e of FedEx


relative to UPS. 0hether or not the relationship
1ith Penne- 1as actuall- profita*le for FedEx
the failure to 1in *usiness ma- su22est that
FedEx is slippin2 competitivel-.
+,
#iscussion: Part 5
The Financial Performance of
FedEx and UPS

The relative stren2ths and 1ea3nesses of the


various criteria used to compare these t1o
firms

!nterpretation of the results and assessment of


the implications
+%
#iscussion: Part 5
The Financial Performance of
FedEx and UPS

Financial criteria: stren2ths and 1ea3nesses


>Ta*le %?

!nterpretin2 the comparative results: Ta*le +M


!nsi2hts from this ta*le:
;
FedEx is 2ro1in2 faster than UPS on most criteria
except in *oo3 assets and income >could *e
attri*uted to difference in culture scale or life4
c-cle
++
#iscussion: Part 5
The Financial Performance of
FedEx and UPS
;
A Ored fla2:: UPS has a hi2her EPS 2ro1th than
FedEx CH FedEx has *een una*le to translate net
income 2ro1th into hi2h EPS 2ro1th
;
Sustaina*ilit-: FedEx had an avera2e of $.%D
return on eAuit- over %/F&4/< 1ith %%./FD 2ro1th
in *oo3 assets CH need si2nificant amounts of
eAuit- and de*t for financin2M UPS earned ++.+D
on eAuit- 1hile 2ro1in2 at a %$.%+D in *oo3
assets in the same period CH the 2ro1th is self4
sustaina*le even 1ith a +'D dividend pa-out ratio
+5
#iscussion: Part 5
The Financial Performance of
FedEx and UPS
;
Keturn to investors:
G% invested in %/F+ in FedEx UPS
Be 1orth II !n %//& G%./< G<,./+
Be 1orth I !n %//& G&.5< G5<.$5
after ad8usted for less than more than
opportunit- costs SPP &,, SPP &,,
+<
#iscussion: Part 5
The Financial Performance of
FedEx and UPS
;
EVA anal-sis: Ta*le < and &
Q
%//,4%//% declineII
Q
EVA results ma- reveal a 1ar of attrition CH the
1inners of such 1ars tend to *e the contestants 1ith
the 2reater resources
+&
#iscussion: Part 5
EVA vs "VA

7ne hint from Ta*le + that the demise is not


FedExJs fate -etB.. CH 0hile EVA 1as
G%.5F' *illion "VA declined onl-
G,.$<%*illion. The capital mar3ets is 9more
optimistic: than the EVA num*ers. 0h-II

Estimation error in )7PAT and capital


investment resultin2 from reliance on @AAP
fi2ures
+$
#iscussion: Part 5
EVA vs "VA

!2norance of terminal value and option value


;
EVA is a one4-ear measure and *ac31ard4loo3in2
;
!2nores potential future )7PAT
;
!2nores uncertain outcomes or options
;
Ste1art "-ers >%/''?: firms have t1o 3inds of
assets CH assets in place and 2ro1th
opportunities. EVA onl- help us understand the
value of assets in place
+'
#iscussion: Part 5
EVA vs "VA

0a-s in 1hich FedEx can create option value


;
The master- of special s3ills and technolo2iesM
hu2e investments in process improvement and ne1
technolo2iesCH financiall- sensi*le investments of
human capital
;
!nternational expansion: Ta*le 5 sho1s a summar-
comparison of domestic and international se2ments
for *oth firmsM !nternational se2ment can *e vie1ed
as a option that could create value in the future
+F
#iscussion: Part 5
EVA vs "VA

Capital "ar3et !nefficienc-: The difference


*et1een FedExJs EVA and "VA could *e due
to overoptimism of the investors.
+/
#iscussion: Part <
0hich Firm is 9Excellent:I

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