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

Presented by NURFAZIAN BINTI KASIM ZP00857 SAIDATIL SYAZWANI BINTI ZULKIFFLI ZP00902 HASHIMAH BINTI HASHIM ZP00894

Synopsis and Objectives

Set in June 2004 To assess the financial performance of FedEx Corp. and United Parcel Service, Inc (UPS). The two firms have competed intensely for dominance of the overnight express package industry. This case is intended for use in an introductory discussion of corporate value creation and its sources. It requires no numerical computations; rather, the tasks are to interpret the results and to reflect upon their implications. The contrasting record of the two firms affords a platform to: Assess economic profit analysis (also known as Economic Value Added) and, more generally, the measurement of financial performance and health. The case provides a complete historical economic profit analysis for both firms, and permits comparison with other classic approaches to historical performance analysis. This comparison affords the opportunity to discuss the attributes of healthy and successful companies, and to explore the strengths and weaknesses of economic profit. Key learning points about economic profit include its dependence on the conventions of generally accepted accounting principles (GAAP) and its ignorance of strategic option value. Evaluate the financial implications of rigorous competition and corporate transformation.

The strengths and weaknesses of various financial measures

Strengths 1. Direct inspection of the financial statements Reveals trends Comparison of absolute sizes Weaknesses Does not permit a ready assessment of efficiency Biased by size differences Book, not market, values Influenced by GAAP choices Backward, not forward, looking

2. Financial ratios

Adjusts for size differ-ences (a Based on book, not market, relative, not absolute, measure) values Provides comparative measures Influenced by GAAP choices of efficiency and growth

EPS influenced by GAAP 3. Earnings per share (EPS) and Widely-used measures of price/earnings ratios performance choices Linked to market price of stock EPS is not a cash flow P/E difficult to interpret Sensitive to choice of observation period

The strengths and weaknesses of various financial measures

Strengths 4. Total returns to investors

Weaknesses

Cash flow based Sensitive to choice of Market value based observation period Permits benchmarking vs. other Needs to be risk adjusted investments

5. Economic profit (EVA)

Risk adjusted Permits benchmarking Theoretically linked to market values Logically appealing Increasingly widely used

Influenced by GAAP choices Ignores latent option values

Summary of Comparative Results

FedEx Financial ratio analysis Activity Liquidity Leverage Profitability Growth EPS EPS compound annual growth rate (CAGR) 19932003 EPS compound annual growth rate (CAGR) 19992003 UPS Source (case exhibit number) 2, 3

Improving Improving Declining Worse than UPS High

Weakening Better than FedEx Consistently low Better than FedEx Lower than FedEx 8

27.54% 6.98%

13.89% 34.30% 8

Total market returns Cum. total return (1992 2003) Cum. return net of S&P (19922003) Economic profit EVA 2003 Cumulative for 19922003 EVA Market value added

528.02% 372.83%

705.95% 550.75% 9, 10

(in millions) $170 ($2,252) $11,191

(in millions) $1,195 $4,328 $62,028

Graph of Economic Profit: FedEx Corp.

1992 M ark et v alu e o f eq u ity (U S $ billio n s) .2 2
T EVAM A n n u al E V A (U S $ m illio n s) (2 6 1 ) C u m u lativ e E V A (U S $ m illio n s) (2 6 1 )

1993 2 .7

19 9 4 4.3

1 9 95 3 .4

1996 4 .4

1 9 97 6 .0

1998 9 .5

1999 1 6 .3

2000 1 0 .1

20 0 1 1 1 .9

2 0 02 16 .1

2 00 3 1 9 .1

(24 6 ) (50 7 )

(1 5 4 ) (6 6 1 )

(1 1 5) (7 7 7)

(2 1 9 ) (9 9 5 )

(2 1 5 ) (1 ,2 1 0 )

(1 0 2 ) (1 ,3 1 2 )

(1 9 0 ) (1 ,5 0 2 )

(1 5 1 ) (1 ,6 5 3 )

(39 6 ) (2,0 4 9 )

(3 7 3) (2 ,4 2 2 )

170 (2 ,2 5 2

F e d E x C o rp . E c o n o m ic P ro fit
500 25

0 20 -500 EVA (US$ millions) 15 Market Value (US$ billions)

-1000 A nn u a l E V le ft ax is ,A C u m u la tive E,V Aft a x is le M a rk e t V a lu e o f E ,qrig h t a x is u ity

-1500

10

-2000

5 -2500

-3000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Graph of Economic Profit: United Parcel Service, Inc.

1992 11.0 1993 12.0 1994 13.6 1995 15.0 1996 16.7 1997 17.3 1998 21.9 1999 83.5 2000 66.7 2001 61.1 2002 70.8 2003 84.2

Market value of equity (US$ billions) EVATM Annual EVA (US$ millions) Cumulative EVA (US$ millions)

(70) (70)

(17) (87)

(158) (246)

217 (28)

74 45

(138) (92)

405 313

949 1,262

881 2,143

599 2,741

392 3,133

1,195 4,328

United Parcel Service, Inc. Economic Profit

5000 90 80 4000 Annual EVA left axis , Cumulative EVA left axis , Market Value right axis , 2000 40 1000 30 20 0 10 -1000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 70 60 50 Market Value (US$ billions)

3000 EVA (US$ millions)