Rebeka Ramos
Panther ID - 1948265
ACG – 6175
Case 3: United Parcel Service’s IPO 1. How is UPS performing? Back up your assessment with your financial analysis. What factors are driving this performance?
Since it first opened for business 1907, UPS has proven to be a worthy competitor and more importantly a threat to be taken seriously. By 1999, after almost a century in business, UPS had captured 51% market share of the $43 billion dollar US package delivery industry. That same year they were named “Company of the Year” by Forbes and the “World’s Most Admirable Global Mail, Package, and Freight Delivery Company” by Fortune. They reported over $25 billion in revenue, which they attributed to their loyal employees, extensive geographical reach, and strong customer relations. They had become the largest parcel delivery company in the world, daily having contact with over 1.8 million customers, picking up 13 million packages, and making delivers to over 6 million business and residential addresses worldwide. Several key factors played a considerable role in UPS’ exceptional performance and industry success. For starters, UPS has always been committed to innovation, beginning as early as 1920 with its invention of the first ever-mechanical sorter and conveyor built system. UPS is also been credited with breaking new ground in delivery logistics, after creating the model for and implementing the practice of consolidating deliveries based on neighborhood groupings. However, the most significant innovation to date was when they spent over $10 billion dollars upgrading its infrastructure so that it could track packages precisely, deliver electronic proof of delivery, and manage shipments online. This sizeable investment also yielded a sophisticated IT system, which streamlined deliveries and allowed the integration of its air and ground operations. The integration of its air and ground operations gave UPS the ability to optimize utilization of its assets as well as provide substantial cost savings, while still meeting customer service requirements. This also lead to the formation of UPS Logistics Group in 1993, a new highly profitable business segment that provides supply chain management solutions and consulting services to customers. Other factors include its AAA credit rating, a direct result of its financial management policy, which focused on the use of operating cash flow, public debt, or long-term capital leases to finance it fleet. Furthermore, between 1997 and 1999, Ups reported average net profit margins of 6.5%, had a ROE of 25.2%, and exhibited 20.16% of sustainable growth. 2. Does it make sense for UPS to carry out an IPO, i.e., what are the cost and benefits to going public for the firm?
In order to stay relevant in a rapidly changing competitive and operating environment, the next logical step for UPS is to carry out an IPO. An IPO will provide UPS with publicly traded equity securities, which are an attractive tax-efficient medium of exchange to fund any subsequent acquisitions or strategic alliances. Also, it will help to fund management’s decision to focus growth in the three emerging trends of globalization, e-commerce, and supply-chain management. Additionally, as a company that prides its self in being predominantly employee owned and has created its corporate cultured around that fact, how the IPO is structured is imperative to employee moral. As such, I agree the IPO should be setup into two classes of stocks: Class A shares were for existing owners and would have 10 votes each share; Class B was to be issued publicly and only carry 1 vote each. As a result of this arrangement current UPS shareowners would own 90% of the firm’s equity and control 99% of the votes. Under this arrangement going public is very smart and strategic while still keeping the company culture and control in the hands of the ones that helped builds the company. 3. Without calculating the following ratios, would you expect UPS or FEDEX to score higher on each of the ratios? And why?

a. Sales growth rate b. NOPAT margin c. Working capital to sales d. Net LT assets to sales e. Leverage
Sales growth rate measures the rate of change in sales from period to period or simply the sustainable growth. When comparing UPS to FEDEX, it is safe to assume UPS would reflect a higher sales growth rate because of the strategic positioning UPS is pursuing to expand operations and focus on growth in UPS in globalization, E-Commerce, and the supply chain management. Although FedEx significant competitive advantage in globalization, UPS is leading the way in e-commerce and supply chain management. Second, the NOPAT margin is an indication of the operating performance of the company that reflects all operating cost but also eliminates the effects of debit policy. Based on this definition again it is safe to assume UPS would have a larger NOPAT margin because the advantage of equity financing of FEDEX over debt financing of UPS would no longer be a factor. Third, working capital to sales ratio indicates a firm’s ability to finance additional sales without incurring additional debit. Based on this definition, UPS would have a higher working capital to debt ratio because currently as a privately owned company UPS are more limited to in how it finances its operations and therefore predominately depends on debit financing. In the fourth ratio, net long-term assets to sales, is defined as company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. Again, UPS would be higher because they have more vehicles and a larger operation in comparison to FedEx; also FedEx leases a most of their vehicles. Lastly, leverage is defined as the use of borrowed money to increase production volume, and thus sales and earnings. It is measured as the ratio of total debt to total assets. The greater the amount of debt, the greater the financial leverage. Once again, UPS would be higher than FedEx because of the debit they raise to fund operations while FedEx is already a publicly traded company and raise money through equity and stocks. 4. Now, calculate the above five ratios. Does actual performance for UPS and FEDEX in 1997/1998 align with your expectations or intuition discussed in question 3?

Yes, all my calculated ratios align with my expectations.

RATIOS | 1997 | 1998 | | UPS | FEDEX | UPS | FEDEX | SALES GROWTH RATE | | | 10.37% | 5.67% | NOPAT MARGIN | 4.35% | 1.71% | 7.37% | 3.60% | WORKING CAPITAL TO SALES RATIO | 2.94% | 1.83% | 1.97% | 0.66% | NET LT ASSETS TO SALES RATIO | 37.86% | 35.36% | 34.80% | 33.20% | LEVERAGE | 2.61 | 2.58 | 2.38 | 2.45 |