Battle for Value Fedex Vs Ups

PROBLEM IDENTIFICATION

The air traffic deregulation of 2004 allowed for 100 more flights per week from the US to China. This was very beneficial to companies like FedEx and UPS, which can now increase their number of flights from US to China. This opens up a large new market in China for these two competing companies. Both companies have tried to build a presence in the Chinese market, and have increased their share prices. The two companies differ in the way they operate.

UPS, also known as Big Brown in the delivery industry, excels in reducing economies of scale, information technology, and maintaining quality in their services. Although, started early than FedEx, UPS isn’t too far ahead of FedEx in market share and growth. Ever since their strike in the late 1990’s, UPS had issued stock to the public for the first time in the form of a 2-for-1 stock split. They had turned the tables in the stock market and guaranteed “a long-term competitive return”. One of the major problems that UPS has is the unions involved in their company. UPS is unionized, which results on a higher labor cost and can also limit the responsibilities of the work force. They have grown slowly over the decade from the 1990’s to 2000, but FedEx has focused on their growth and has become a fierce competitor with UPS.

FedEx Overall, for being one of the most successful acquisition companies, they have had a rather impressive run over the years. They have been aggressively competitive with opposing companies since Fred Smith began buying out other planes and trucks. Also, a great attribute to FedEx has been their ability to pave the road for other companies to follow their strategy. This is what will help this company succeed in the new Chinese market.

When the new Chinese market opened up, FedEx was able to acquire a large portion of the Chinese market because of their large personal fleet of airplanes. FedEx was able to operate efficiently and almost completely monopolize in China. While UPS only served to specific locations in China, and did not take full advantage of the new market and deregulation. FedEx had stock prices climbing at nearly a rate of five times more than UPS’s stock. This exceeded investors “superior financial returns”. One of FedEx’s biggest accomplishments in the delivery industry is their ability to utilize the hub-and-spoke distribution pattern, which guaranteed cheaper and quicker service to more locations. The hub-and-spoke system involves flying to a central hub in the oversea country that is centralized. From there, the cargo will be separated and put onto a second flight that will arrive close to the destination. This greatly reduces the transportation cost, delivery time, and even carbon emissions since many of the packages will share the same first flight. The acquisition of airplanes and trucks gave FedEx more of a competitive advantage and market share overall. Even though FedEx had a strong market share in China, they had failed to maintain local European businesses which gave UPS a chance in becoming an even bigger threat internationally.

When the Chinese market expanded, FedEx was valued about five times greater than UPS. This great increase in value had to come from higher risk investors that expect FedEx to perform very well in the growing market, since FedEx has been growing rapidly in the US for the last two decades from new innovations like the hub-and-spoke system. Throughout the years, FedEx started to lose some of its market share to UPS in the Chinese market because of their steep research and development costs. UPS gained traction in China Originally, FedEx had the advantage in the Chinese market but did not continue expansion and therefore was surpassed by UPS. FedEx missed the chance to take over the market in China and lacked in the overall delivery of packages.

ANALYSIS AND LIMITATIONS

MVA and EVA

MVA or market value added is the appeal the company presents to the market. FedEx had a positive value, meaning they got increase from the market and investors. In other words it’s the present value for all future EVA’s. It was appealing because they had a high growth rate and were innovative in technology. Downsides to this type of method include increases in leverage and their cost of equity which limit their efficiency.

EVA is the profitability in a company's cost of equity, determined whether it’s positive or negative. In this case we saw FedEx continuously deliver a negative interval in their EVA. This makes sense considering they continuously invested and saw small returns. We saw this in Europe, and China. Cumulative EVA and MVA are both measures of the wealth the company generates for their investors. MVA and EVA can both be negative if their cost of capital exceeds their operating costs or market value of debt and equity. What cumulative MVA and EVA don’t take into account is the operation in the business. Both ratios are simply a measure of the economic performance of the company. Both MVA and EVA provide economical and financial measurements of the company, to provide feedback to the market. Other metrics may provide the feedback of the company such as how much cash they may hold, long-term debt of the company (may be included in economical analysis), and current stock prices. These ratios play an important role in placing the economical and financial ratios together, but MVA and EVA solely measure the performance for their investors and wealth they generate.

Looking at FedEx’s economical profit analysis, the reason why FedEx’s beta is higher than UPS is because of the potential uncertainty in the company of FedEx and their size of growth. Look at it this way, FedEx possesses an incredible amount of growth potential and has the ability of expansion in their domestic and international fleet. A lot of money is invested in FedEx as far as R&D are concerned, and it’s expensive: A lot of growth and money is tied up in this company, if it should fail due to lack of liquidity it becomes an issue for all parties. FedEx isn’t as sound and stable as it’s proclaimed to be. FedEx had a higher presence in China, which should have placed them in the advantage position but their technology and innovation spending became more of a habit. Their WACC has been relatively constant throughout 2003 but their NOPAT is significantly smaller, which results in investors’ funds being rather risky. Usually, companies are required to shut down if the company is putting their shareholders and customers in risk but with the amount of capital invested and possible growth; this is one of the biggest reasons they are one of the leaders in the delivery industry. FedEx’s