United Parcel Service’s IPO

Case Talking points

Submitted by: Highest Bidders: Marc Brands, Hajime Tamachi, Nobuyasu Sugimoto,
Kunihiro Takahashi, and Yasuhisa Tsurumi

Value of the Knot

We calculated Free Cash Flow and the pre-money NPV based on the same asset beta as
we can derive from FedEx’s equity beta. The NPV is 35.4 billion and share price should
be $31.5 for the current 1,124,000 share outstanding.

Book Building Price

As the book building data suggest, if we choose under $65/share, demands for the new-
issued stock exceed the issuing stocks. Because of that, we recommend a price between:

Share-
$ 65.00 $ 67.50
Price
Deman
d -1,036 739
Surplus
Multiples Approach for valuation

We also tried to calculate the value with multiple approaches. To be more conscious, we
used the “Best of Breed” and applied the P/E ratio to estimate UPS price as the top
companies’ whichone are between 50% and 70% higher than the industry average.

Using P/E Ratios

FedEx values P/E = 1.0*P/E FedEx  $35/share of UPS
Best of Breed: P/E = 1.5*P/E FedEx  $52/share of UPS
P/E = 1.7*P/E FedEx  $59/share of UPS

3 different values due to the different approaches

The prices from the different approaches spreadvaried. High book building price suggest
that the market expects a higher growth rate in longer- term than the average industry and
our estimation. Assuming our 7-year cash flow forecast is the same as the market
forecast, the growth rate after 7 years isare expected to be 8.56%, which is almost same
as the 30-yr US bond.
On the other hand, the market expects less growth rate forom FedEx (1.02%). The most
probable reason for the two different growth rates is because UPS is better than FedEx in
the international marketservices, which will grow much higherfaster than the already
saturated domestic marketservices.
Exhibit-1 (Cash flow forecast - UPS)
Exhibit-2 (Cash Flow Forecast - FedEx)

FedEx Valuation

1995 1996 1997 1998 1999

Revenue 4,619,990 6,150,247 6,647,140 7,087,728
Pre-tax
539,959 650,901 971,518 1,061,064
income
% 12% 11% 15% 15%
Income taxes 232,182 229,761 401,363 429,731
% 43% 35% 41% 41%
Net income 307,777 421,140 570,155 631,333

Depreciation 719,609 928,833 963,732 1,035,118

A/R 1,130 1,272 1,878 1,943 2,153

A/P 619 706 1,000 1,145 1,134
Increase in
54,400 312,100 (80,200) 221,200
WC
2000 ~
Operating CF 972,986 1,037,873 1,614,087 1,445,251 13,879,321

Growth rate 1.017% <--- Growth rate expected by

Cash Flow for
WACC 11.43% investors, given $41.50.
Valuation
NPV ($M) 12,475
Shares Outs'g
300.6
(M)
$
Share Price
41.50