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

Jonathan Mihalcin Amber Paul Adam FIN 4410 Professor Cook

1. On June 18, 2004, the United States and China reached an air-transportation agreement that impacted the global air-cargo market by allowing an increase in the number of flights between the two nations (Bruner). This agreement was suppose to impact many companies around the world due to the predicted future growth of Chinas domestic and international market. Two of the largest predicted beneficiaries of this agreement were FedEx Corporation and United Parcel Service, Inc. and investors confidence in the opportunity could be seen through their stock prices in 2004. In 2004, FedExs stock price outperformed UPS and the S&P500 by a significant factor. UPS on the other hand, almost mimicked the S&P500 throughout the year as see in Chart 1. On Chart 2, we see that in 2004, FedExs stock price went from a low of $65 to a high of $100. On Chart 3, we see that in 2004, UPSs stock price went from a low of $68 to a high of $86. Chart 1: FedEx vs. UPS vs. S&P500 in 2004

Google Charts

Chart 2: FedExs stock price in 2004

Google Charts

Chart 3: UPS Stock Price in 2004

Google Charts

There are several reasons why both FedEx and UPSs stock prices rose during 2004. The most important factor was the new air-cargo agreement between the United States and China. This was seen as a huge benefit to both companies through new growth and larger profits. A second reason is because each company was poised to attract extra capital, so investors were betting that extra investment will occur greatly benefiting each company. As one can see, FedExs stock greatly outpaced UPSs stock as well as the S&P500. There are several reasons for this. First, according to the case, FedEx was looked upon as being agile, innovative, and entrepreneurial while UPS was looked upon as being a large, bureaucratic, and an industry following company. This lead investors to believe that FedEx will overtake UPS as a world cargo company and the largest company in China due to its entrepreneurial spirit. Second, FedEx had better financials than UPS if past years were predictive of future years. As seen in Table 1, FedEx had a better net income growth, better operating income growth, and lower average days outstanding. If we assume past data will be representative of future performance, we can see that FedEx is well positioned to take advantage of the cargo market in China. On the other hand, UPS had a higher ROA and ROE. Even though FedEx had a lower ROA and ROE, it was assumed that its innovative abilities will help it succeed in China leading to huge increases in future growth and a better performance than UPS. A third reason why FedEx performed better in 2004 was because of the current geographic segment. According to Table 2, FedEx makes 30% of its revenue from the international market while UPS only makes 24% of its revenue from the international market possibly leading investors to believe FedEx understands international markets better than UPS and thus has a better chance of succeeding in China (Bruner). Table 1: Financials Net Income Growth Operating Income Growth Average Days Outstanding Return on Assets Return on Total Equity UPS (8.93%) 10.01% 51.60 days 10.44% 19.51% FedEx 16.9% 23.30% 41.54 days 6.3% 11.39%
Bruner

Table 2: Geographic Data Domestic Revenue International Revenue International as % of Domestic

UPS $26,968 $6,517 24.16%

FedEx $17,277 $5,210 30.16%

Bruner

There are a couple of ways we can interpret FedExs 14% increase in market value. First we assume that all investors have the same data and it is freely accessible so that all investors are on a level playing field. We can assume that the market views FedEx as a better potential company to take advantage of the growth in China. Second we can assume also that investors are viewing past data as future performance and due to FedExs innovative management and large overseas presence they are viewed as a better company than UPS to take advantage of the global changes in the economy. Third, we see that Morgan Stanleys analyst believes that FedEx is able to become successful in China because they have viewed all aspects of the investment. They did not just look at the size of the market; they looked at the issues they would face such as, legal framework, nonperforming loans, liability, standards of living, transportation infrastructure, and commercial relationships (Bruner). Analysts also looked at FedExs cost structure and stated that any increase in volume would flow directly to the firms bottom line leading to large revenue growth. On the other hand, UPS did not expressly look at the downsides of China and were focused on a specific product rather than a range of products leading to the possibility of unexpected events affecting the company and limited growth. Overall, in an efficient market all participants had the same information and as we can see, they ran FedExs stock price up leading to them believing that it had a better chance of succeeding in China due to its large overseas presence, indepth research on the country, and its broad product offering. 2. Both FedEx and UPS had different visions about how each firm should operate and what global changes were the best to take advantage of. UPS was founded in 1907 and grew into a large organization that believed that putting packages on commercial planes was the best approach to the transportation of cargo. They also believed this would limit their expenses and still provide its customers with a high quality service. FedEx on the other hand, had a different approach. FedEx was started in 1971, and entered the market with its own airplanes and fleet of vehicles. This was a revolutionary concept at the time because it ran the whole operation rather than subcontracting it out. Over the years, both companies altered their plans and took ideas from each other to create sustainable enterprises. One of the most important innovations that FedEx started was overnight delivery. Although UPS saw the potential they did not enter the market for several years and this was due to three reasons. First, UPS did not have the logistics or equipment to enter the market as quickly as FedEx. Second, UPS was a bureaucratic organization which stifled growth and limited rapid changes. Lastly, UPS was working on developing the European market rather than focusing on product services. Overall, these three aspects caused UPS to fall behind FedEx in the overnight delivery market. On the other hand, FedEx was able to enter the market very quickly because of several reasons. First, FedEx was an innovative company that was able to quickly adapt to market changes. Second, it developed its own fleet of aircraft so that it was not relying on other companies for service. Lastly, FedEx was willing to run up expenses to capture the market which UPS was not willing to do. Overall, due to the differences between UPS and FedEx, each company took a different approach to market and product development but in the end, both companies became financially stable and successful.

Bibliography Bruner, Robert, and Sean Carr. The Battle for Value, 2004; FedEx Corp. vs. United Parcel Service, Inc.. Charlottesville: University of Virginia Darden School Foundation, 2005.