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    Case 2 - 26082019 - 050032

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    of 19
    e Battle for Value, 2016: dEx Corp. versus United cel Service, Inc. 2015 was a transformative year for Fedex with outstanding financial results, more powerful customer solutions, and actions to generate increased long-ierm value for shareowners. We believe FedEx ison a dynamic rajectory that will make 2016 very successful. Our company thas never been better positioned 10 build shareowner value. "—Fedlx CEO Frederick W. Smith, Annual Report 2015, (Our 2015 results demonstrate that UPS can thrive in [today's] challenging environment, as shown by our continued ability 10 meet the expectations of customers and investors alike. The ‘continued execution of our proven strategies will enable UPS to maintain positive momentum {nthe coming year and beyond. UPS CHO David Abney, Amal Report 2015 (On April 29, 2016, FedEx Corp., the American courier delivery company, received final government approval on its bid to acquire TNT Express (TNT), a Dutch logisties and Aelivery firm with road and air delivery services all over the world, for $4.8 billion, Ever since FedEx made the public bid to acquire TNT, many industry insiders expected ‘TNT's strong European road network to bolster FedEx’s presence in a region and market in which it had failed to compete with its long-standing rival, United Parcel Service, Inc. (UPS), for a bigger share of the world’s ever-increasing e-commerce shipments, ‘This public-sourced case was prepared by Jenny Craddock, Senor Case Weiter; Michael chil, Professor of Business Administration; Sean D. Carr, Assistant Professor of Business Administration and Robert F. an Emerita, Iwas ‘Bruner, University Profesor, Distinguished Professor of Business Administration, and writen basis for clas discussion rather than to stra effective or ineffective handing ofan admiis- tative stuton. Copyright © 2017 by the Unversity of Vigna Darden Sehool Foundation, Caretesville, VA. All rights reserved. To onder copies, send an e-mail sales(@dardenbusinesspubishing. com. No part af this publication may be reproduced, stored in arrival system. sed ina spreadsheet, or trait in any orm or by any means-elecrnie, mechanical, photocopying, recoding, oroherwise—without the persion (ofthe Darden Sohoo! Foundation ou Part One Seting Some Themes “The approval came as abitter blow to American package-delivery rival UPS, which had tried to buy TNT in 2013, only to be blocked by European Union regulators who viewed the potential merger as obstructing healthy competition. Still, UPS had plenty to Celebrate. The company had just announced record first-quarter sales of $14.4 billion, tip 3.2% over the same quarter the previous year, driven by growth in both its domestic and international small-package segments. The company was starting to see its recent investments in technology and productivity improvements pay off, with its cost per package falling 1.9% for the same period. This was impressive for a company whose return on equity the previous year was @ whopping 210%. "Against this backdrop, industry observers wondered how the titanic struggle be- tween FedEx and UPS would develop, particularly for investors inthe two firms. Was the performance of the companies in recent years predictive of the future? International reach and extensive logistics services were widely seen as the litmus test for corporate Survival of delivery companies in the new millennium. Which company was better positioned to atract the capital necessary (0 win this competitive batle?” United Parcel Service, Inc. Founded in 1907, UPS was the largest package-delivery company in the world. Con- solidated parcel delivery, both on the ground and through the air, was the primary busi- ness of the company, although increasingly the company offered more-specialized transportation and logistics services. Known in the industry as “Big Brown,” UPS had its roots in Seattle, Washington, where 19-year-old Jim Casey started a bicycle-messenger service called American Messenger Company. After merging with a rival firm, Motoreycle Delivery Company, the company focused on department-store deliveries, and that remained true until the 1940s. Renamed United Parcel Service of America, UPS started an ait-delivery service in 1929 by putting packages on commercial passenger planes, The company centered its strongest period of growth during the post-World War II economic boom and, by 1975, UPS had reached a milestone when it promised package deliv- ery to every address in the continental United States, That same year the company expanded outside the country with its first delivery to Ontario, Canada. The follow- ing year, UPS began service in West Germany with 120 of its trademark-brown delivery vans. "The Key to the suecess of UPS, later headquartered in Atlanta, Georgia, was effi- ciency. According to BusinessWeek, “Every route is timed down to the traffic light. Each vehicle was engineered to exacting specifications. And the drivers .. . endure a daily routine calibrated down to the minute.”” But this demand for machinelike precision met ‘with resistance by UPS’s heavily unionized labor force. For most of the company’s history, UPS stock was owned solely by UPS's manag~ crs, their families, former employees, or charitable foundations owned by UPS. The ‘company acted as the market maker with its own shares, buying or selling shares at a fair “Fed Vogal and Chuck Hevkins, "Can UPS Detiver the Goods ina New Word” BusinessWeek, Jue 4, 1950, (Case 2 The Baile for Value, 2016: FedEx Corp versus United Parcel Service, Ine. 25 ‘market value determined by the board of directors each quarter? By the end of the rillennium, company executives determined that UPS needed the added flexibility of publicly traded stock in order to pursue a more aggressive acquisition strategy. In November 1999, UPS became a public company through a public equity offering and corporate reorganization. Before this reorganization, the financially andl operation- ally conservative company had been perceived as slow and plodding, Although much larger than FedEx, UPS had been unable to effectively compete directly in the over night-delivery market, largely because ofthe enormous cost of building an air fleet, But ater going public, UPS initiated an aggressive series of acquisitions, beginning with a Miami-based freight carrier operating in Latin America and a franchise-based chain of stores providing packing, shipping, and mail services called Mail Boxes Et. (late re- named The UPS Store) with more than 4,300 domestic and international locations. More assertive than ever before, the UPS of the new millennium was the product of| extensive reengineering efforts and a revitalized business focus. Whereas the company bad traditionally been the industry's low-cost provider, UPS now began investing heav- ily ina full ange of highly specialized business services. As a sign ofthis shift, the company revamped its logo forthe frst time since 1961, emphasizing its activities in the wider supply-chain industry. The expansive “What can brown do for you” cam- pign was also launched around this time to promote UPS's business-facing logistics and supply-chain services “Another example was UPS's extensive push into more complex industries like health care. Health care logistic services (which were bucketed into the company's supply-chain and freight segments) allowed pharmaceutical and medieal-device compa- nies to outsource their logistics to UPS pharmacists, who were able o fulfil, pack, and customers’ orders from UPS"s worldwide health care warehouses, even when me feations included temperature specifications of required cross-border transport. By 2015, this seument had experienced huge growth and saw no signs of slowing inthe face of the world’s aging population that increasingly wanted home delivery of health care products Alongside its health care offerings, UPS also looked to emerging markets for growth, In 2014, CEO David Abney claimed that “growing internationally and diver {ying our customer base”? across regions was top priority for UPS. By 2015, interna- tional package operations accounted for 21% of revenues. Exhibit 2.1 presents segment (ground and express) and geographic (international and U.S. domestic) revenue data for both FedEx and UPS. The company also invested in information technology to improve Fin setng its share price, the board considered a variety of factors, including pst and current earings, earings estimates, the rato of UPS's common stock ot eb, the business and oulonk of UPS, and the general economic climate, The opinions of outside advisers were somtimes considered, The stock price had never dereasd in value. The employee sock purchates were often financed with stock hypothecaton loans ‘rom commercial banks, As the shares provide the collateral for thse loans, the assesinnt mae bythe ‘outside lenders provided some external validation for he she price Reuters, "UPS Names Operating Chet David Abney ss New CEO,” CNBC, June 6, 2014, hpiwww. enbe-com/2014/06"06ps-names-operating-chie-davi-abney-s-s-e ce. (accessed Nov. 28, 2016), 6 Part One Seting Some Themes its profitability. In 2013, for example, UPS launched cutting-edge route-optimization software for its drivers that was intended to set the stage for even more personalized service offerings and efficient deliveries when its rollout was complete in 2017. By 2015, UPS offered package-delivery services in more than 220 countries and ter- ritories (with every address inthe United States and Europe covered) and was moving more than 18 milion packages and documents through its network every day. Its immense vol- ‘umes in the higher-margin ground segment and aligned assets that served both ground and. express shipments gave it a margin advantage compared to FedEx. UPS employed 440,000 people and had 104,926 vehicles and 650 jt aircraft" UPS reported revenues of $58 billion and net profit of neatly $5 billion, Exhibit 2.2 provides recent operating results for UPS. FedEx Corporation FedEx first took form as Fred Smith's undergraduate term paper for a Yale University ‘economics class. Smith’s strategy dictated that FedEx would purchase the planes that it required to transport packages, whereas all other competitors used the cargo space available on passenger airlines, In addition to using his own planes, Smith's key innova- tion was a hub-and-spoke distribution pattern, which permitted cheaper and faster ser- vice to more locations than his competitors could offer. In 1971, Smith invested his $84 million inheritance and raised $91 million in venture capital to launch the firm—the largest venture-capital start-up at the time. In 1973, on the first night of continuous operation, 389 FedEx employees delivered. 186 packages overnight to 25 U.S. cities. In those early years, FedEx, then known as Federal Express Corporation, experienced severe losses, and Smith was nearly ousted from his chair position, By 1976, FedEx finally saw a modest profit of $3.6 million on aan average daily volume of 19,000 packages. Through the rest of the 1970s, FedEx continued to grow by expanding services, acquiring more trucks and aircraft, and rais- ing capital, The formula was successful. In 1981, FedEx generated more revenue than any other U.S. air-delivery company. By 1981, competition in the industry had started to rise. Emery Air Freight began to imitate FedEx’s hub system and to acquire airplanes, and UPS began to move into the ‘overnight air market. The United States Postal Service (USPS) positioned its overnight letter at half the price of FedEx’s, but quality problems and FedEx’s “absolutely posi- tively overnight” ad campaign quelled that potential threat. In 1983, FedEx reached $1 billion in revenues and seemed poised to own the market for express delivery. During the 1990s, FedEx proved itself as an operational leader, even receiving the prestigious Malcolm Baldrige National Quality Award from the president of the United States. FedEx was the first company ever to win in the service category. Part of this) success could be attributed to deregulation and to operational strategy, but credit could also be given to FedEx’s philosophy of “People-Service-Profit,” which reflected its emphasis on customer focus, total quality management, and employee participation. Extensive attitude surveying, a promote-Irom-within policy, effective grievance proce- dures that sometimes resulted in a chat with Fred Smith himself, and an emphasis on SPS Form 10. Ccase2 ‘The Battle for Valu, 2016: FedEx Corp versus United Pace Servi 2 personal responsibility and initiative not only earned FedEx a reputation as a great place to work, but also helped to Keep the firm largely free of unions. FedEx's growth occurred within the context of fundamental change in the business environment. Deregulation of the domestic airline industry after 1977 permitted larger planes to replace smaller ones, thereby permitting FedEx (o purchase several Boeing 47s starting in 1978, which helped reduce its unit costs. Deregulation of the trucking, industry also permitted FedEx to establish an integrated regional trucking system that lowered its unit costs on short-haul tips, enabling the company to compete more effec- tively with UPS. Rising inflation and global competitiveness compelled manufacturers t0 manage inventories more closely and to emulate the just-in-time supply programs of the ‘apanese, creating a heightened demand for FedExs rapid and carefully monitored move- iment of packages. And, finally, technological innovations enabled FedEx to achieve im- portant advances in customer ordering, package tracking, and process monitoring Despite making its name as the pioneer of the overnight-delivery market, FedEx continued to expand beyond its lower-margin express offerings throughout the first de- ‘cade of the 2000s. In addition to purchasing Kinko's 1,200 retail stores and eventually rebranding them as FedEx Office (a full-service print-and-ship retail chain), in 2012, FedEx started to move its capex focus from its crown-jewel express segment (where capital expenditures from 2013 to 2015 were mainly used to modemize its outdated fleet) to higher-margin ground services in order to increase capacity in its U.S. ground network By 2015, these efforts had paid off: FedEx Grounds revenues had grown significantly over the past five years, and the company was providing faster deliveries to more U.S locations than its competition, in large part due to its industry-leading automation-optimized efficiency. The ground segment’s independent operation of drivers ‘and tricks as separate from its parallel express-network assets, however, gave rival UPS ‘and its integrated asset system the margin advantage.® By the end of 2015, FedEx had net income of over $1 billion on revenues of about $48 billion, Exhibit 2.3 provides recent operating results for FedEx. FedEx Express’s aircraft fleet consisted of 647 aircraft, FedEx Ground had about 95,000 ground vehicles ‘and trailers, and FedEx Freight operated approximately 65,000 vehicles and trailers. ‘The company operated with more than 325,000 team members and handled more than 111 million packages daily across its ground and express services.” ‘The U.S. Delivery Market-Changing Shape Barclays estimated the 2015 U.S. package delivery market to be $90 billion.* The market ‘was commonly segmented along three dimensions: weight, mode of transit and timeli- hess of service, The weight categories consisted of letters (weighing 0-2.0 pounds), Tpaison Landry, Daniel Schuster and Kenneth Ryn, "Fex Corporation Ground isthe New Black Cedi Suisse, February 27,2015, Keith Schoonmakr, “UPS, Inc,” Morningstar, No. 27249776 om Invesext Current Reports database FedEx Corporation annus report, 2015. ‘Brandon Oplensk, Eric Morgan and Van Kegel, "North American Transportation and Shipping Faulty Research,” Burlay, May 2, 2016 28 Part One Seting Some Themes packages 2.0150 pounds), and freight (ver 151 pounds). The mode of transit catego- fies were air (.., express) and ground, Time categories were overnight, deferred de- livery (econd-day delivery, three-day delivery, and, lastly, regular delivery, which occured our or more days afte pickup. “The rise of e-commerce had created a colossal shift in package-delivery density, as low-density residential deliveries from e-commerce sales had overtaken higherdensity bousiness-10-business package deliveries that had once driven sales atthe large shipping companies. As online retailers outpaced ther brick-and-mortar peers, e-commerce sales skyrocketed; in 2015 alone, e-commerce sales grew 14.6%, according to the US. Department of Commerce." Many believed that FedEx’s package volume was poised to benefit most from this growth due to the numerous online retailers that employed FedEx fortimely deliveries, but recently it was UPS that had the upper hand, with mar= ket share of 54% for U.S. e-commerce shipments in 2014, leaving FedEx with 30%, and) USPS the remaining 16%." i {As the booming e-commerce market grew, many high-volume e-ailrs, such a) Amazon, commanded bigger discounts from their shipping partners. In 2012, Amazon had launched Amazon Logistics, with its own delivery-van network. A growing numbe! af retailers, such as Wal-Mart and Amazon, were even stating to explore unmanned) terial vehicles asa potential alternative means of delivery. By 2014, Amazon was Staging its private shipping vendors by offering Sunday delivery and same-day deliv service in Various cites though the USPS. As retailers looked fr downstream soluto to managing deliveries an expectation arose that the delivery marke, already polar between high-value, next-day guaranteed services and economy options, could see economy segment suffer at the expense of retailers’ own initiatives.”” Others expect Shippers to experience a potential shift in demand away from pricier express deliv as consumers favored fee shipping on ther online orders through ground service. Competition ‘Amid these mixed expectations for future demand, a closer look atthe industry's 201 revenues in the United States revealed that the air-express segment’s revenues fairly evenly split across FedEx and UPS, whereas in the ground segment, UPS reay the majority of sales. See Figure 2.1 "Although higher-margin ground operations were atractive to shippers, compli tions in the segment arose from the lower density of residential deliveries co among ground orders. To continue to grow their ground operations without focusing. those low-density last-mile trips, both UPS and FedEx contracted USPS’s Parcel Se Ground service, which helped businesses move shipments at the backend oftheir de cries. Through the service, the private companies delivered packages tothe local ‘Setany Zaroban, “U.S. E-commerce Grows 146% in 2015" Imernet Retailer, February 17,2016, tps ww inernetetalercommobie/2016102/1Ths-e-commerce-grows-146-2015 (accessed fan, 23,2017). eobert Lazich, el, Market Share Reporter, 26h ed, vol. I (Farmington Hills, MI: Gale, 2016): 719. "git Pinmer “E-commerce Groups Rush to Deliver the Goods" Financial Tomes, December 19, 201 ups ft comncomten06 14538-8761 Lethe GOL Atfeabse0 (accessed Dec. 10, 2016). Case2. The Battle for Value, 2016; FedEx Corp. versus Unite Pace Servie, Inc, 29 FIGURE 2.1/1 US. package market revenue share (%), by segment—2015, Ground Revenue Express Revenue uses uses \ ps: Feat ee Data source: Brandon Oginski re Morgan and font Ararcsn Transporation and Shipping Equly Resoaren”Batlys, May 2. 2016-31 office, after which USPS handled the last-mile drop-off. FedEx referred to this partner- ship with USPS, which launched in 2009, as SmartPost, while UPS's version, launched in 2011, was offered as SurePost, and the service allowed the shipping companies to offer customers even cheaper pricing without wasting van and driver resources, This similarity of execution on these partnered ground operations reflected the long-standing competition between FedEx and UPS and their frequently parallel strate- ies. Exhibit 2.4 provides detailed summary of the major events marking the eom= petitive rivalry between FedEx and UPS. Significant dimensions ofthis rivalry included the following: * Customer focus. Both companies emphasized theit focus on the customer. Tis ‘meant listening carefully to the customer’s needs, providing customized solutions rather than standardized products, and committing to service relationships. + Pricing. The shipping rivals always moved in lockstep on parcel-pricing fees, In the face of e-commerce retailers adopting the frequent use of large packages for lightweight products, however, the shippers who priced parcels by weight alone started to take a margin hit when those poorly priced packages took up valuable space in delivery trucks. In order to maximize the profitability of e-commerce deliveries, in May 2014, FedEx announced that it would start using dimensional ‘weight to calculate the billable price for all ground packages, effective atthe start of 2015. UPS quickly followed with the same announcement the following month, + Operational reengineering. Given the intense price competition, the reduction ‘of unit costs became a priority. Cost reduction was achieved through the exploi- tation of economies of scale, investment in technology, and business-process reengineering, which sought to squeeze unnecessary steps and costs out of the service process, 30 art One Seting Some Themes ‘+ Information technology. Information management became central tothe opera- tions of both UPS and FedEx. Every package handled by FedEx, for instance, was logged into COSMOS (Customer, Operations, Service, Master Online System), \which transmitted data from package movements, customer pickups, invoices, and deliveries to a central database at the Memphis, Tennessee, headquarters. UPS re- lied on DIADs (Delivery Information Acquisition Devices), which were handheld units that drivers used to scan package barcodes and record customer signatures. + Service expansion. FedEx and UPS increasingly pecked at each other's service offerings. In 2011, for example, UPS launched MyChoice, which allowed customers to control the time of their deliveries online. FedEx quickly followed suit in 2013, launching Delivery Manager, which allowed customers to schedule dates, times, ‘and locations of deliveries from their phones. FedEx even launched a repair shop for devices like iPhones and Nooks in 2012, capitalizing on its retail space and existing shipping capabilities, + Logistics services. The largest shipping innovations entailed offering integrated logistics services to large corporate clients. These services were aimed at provid- ing total inventory control to customers, including purchase orders, receipt of ‘goods, order entry and warehousing, inventory accounting, shipping, and accounts receivable. While this service line was initially developed as a model wherein the shippers stored, tracked, and shipped across client’s brick-and-mortar stores, these services eventually expanded to include shipping directly to consumers, as in the health care segment. ‘The impact of the fierce one-upmanship between FedEx and UPS was clearly reflected in their respective investment expenditures. From 2010 to 2015, capital expenditures for FedEx and UPS increased by 54% and 71%, respectively. During this period, FedEx’s aggressive growth strategy, evident in its acquisitions and its investment in the relatively outdated Express aircraft fleet, nearly doubled those of “Big Brown,” which benefited from, its more modern fleet. International Package-Delivery Market In 2015, the global parcel-shipping market was dominated by UPS, FedEx, and DHL, ‘with international services representing 22% and 28% of revenues for UPS and FedEx that year, respectively. FedEx made significant investments in developing European delivery capabilities in the 1980s before eventually relinquishing its European hub in 1992, causing it to rely on local partners to deliver to Europe for the ensuing decade. In 10995, FedEx expanded its routes in Latin America and the Caribbean, and later intro- duced FedEx AsiaOne, a next-business-day service between Asian countries and the United States via a hub in Subic Bay, Philippines. UPS broke into the European market in earnest in 1988, with the acquisition of 10 European courier services. To enhance its intemational delivery systems, UPS cre- ated a system that coded and tracked packages and automatically billed customers for customs duties and taxes. In 2012, UPS expanded its European offerings by purchasing Kiala, a European company that gave customers delivery options at nearby shops and (Case? The Batle for Value, 216: FedEx Corp. versus United Parel Service, ne. 3 gs stations close to their homes, before replicating the service for UK customers the following year. By 2015, the company planned to double its investment in Europe to nearly $2 billion over five years." Much like the U.S. domestic market, the international package-delivery market of the first decade of the 2000s was given its greatest boost by the explosion of e-commerce. Compared to same-country online shopping, cross-border shipping was only a fraction of global e-commerce spending in 2015, but it was the piece that was growing most quickly, at an annual rate of over 25%." Websites like Amazon Market- place and Etsy allowed shoppers to purchase goods from sellers all over the world, ‘hile expecting an ease of shipping similar to that provided by domestic retailers. As a result of this growing segment of online sales, FedEx, UPS, and others were quickly adapting their service offerings to make cross-border shopping as smooth as possible. FedEx, for example, purchased Bongo in 2014, later rebranded as FedEx Cross Border, ‘which aimed to help retailers face cross-border selling issues, including regulatory com pliance and eredit-cand-fraud protection, while connecting them to global consumers. Performance Assessment Virtually all interested observers—customers, suppliers, investors, and employees— watched the competitive struggle between UPS and FedEx for hints about the next stage of the drama, The conventional wisdom was that if a firm were operationally excellent, strong financial performance would follow. Indeed, FedEx had set a goal of producing “superior financial returns,”"* while UPS targeted "a long-term competitive return.” Had the two firms achieved their goals? Moreover, did the trends in financial perfor- ‘mance suggest whether strong performance could be achieved in the future? In pursuit of answers to those questions, the following exhibits afford several possible avenues of analysis. Financial Success ‘The success of the two companies could be evaluated based on a number of financial ‘and market performance measures. Exhibit 2.5 presents the share prices, earnings per share (EPS), and price-earnings ratios for the two firms. Also included are the annual total return from holding each share (percentage gain in share price plus dividend yield) and the economic value add, reflecting the value created or destroyed each year by de- ducting a charge for capital from the firm’s net operating profit after taxes. Exhibits 2.2 and 2.3 present a variety of analytical ratios computed from the financial statements of| each firm, "aura Stevens, “Bocders Mater Less and Lessin E-Commerce,” Wall Sneet Jounal, une 23,2015, hp! sw.cometiclesB1129579363070069476180458101597 394095608 (accessed Nov. 92016), hupfiwww. sj confaricle/SB1 1295793630700694761808581015971594003608, “FedEx website, hup.investors fedex. convnvestor-homeldtuultasp (accessed Jan. 20, 2017. UPS website, hps/pressroom.ups com/pressroonyContentDetils Viewer page?ConceptType=FactShet side 42632 1650156-161 (accessed Jan. 20,2017), PastOne Setting Some Themes ‘The thinking of the several securities analysts who followed FedEx and UPS in 2015 and 2016 reflected the uncertainty surrounding the future performance forthe two archrival shipping companies. Exhibits 2.6 and 2.7 contain excerpts from various equity research reports that indicate the analysts’ outlook held for UPS and FedEx. Operational Success Beyond their financial performance, the rival companies’ strengths and successes could also be examined using various measures of operational excellence: + Marketing: In 2015, brand consultancy Interbrand’s annual ranking of op global brands ranked UPS at number 29 and FedEx at 86,'° representing little change from UPS's rank of 27 and FedEx’s distant 92 for 2014. This favoring of UPS reflected the payoffs of its full-service-promoting campaigns of the early years ofthe 2000s, + Employee satisfaction: Fortune magazine's annual ranking ofthe world’s most- _xdmired companies was based on nine factors related to financial performance And corporate reputation, with four of those factors specifically relating to HR tributes (quality of management, ability o atract and retain talented people, innovation, and product and service quality). In 2015, Fortune awarded FedEx with the number 12 spot overall, with UPS coming in at number 24. FedEx's apparent excellence with regard to talent management was also reflected by the Great Place to Work Institute, naming FedEx Express as one ofthe top global companies to work for for the fourth year in @row."” The more unionized UPS, ‘where strikes were not uncommon, seemed to lag behind its rival in its commit- ment to its employees. + Holiday performance: High-volume holiday-delivery performance was always seen as a strong test of a shipping company’s effectiveness, and FedEx and UPS traditionally adopted different strategies approaching the peak season. Despite the holidays of 2013 and 2014 favoring FedEx’s automation at its hubs, its independent-contractor model (paying ground drivers by package rather than by hout) and practice of turing down peak volumes based on quan- tities eustomers shipped during nonpeak months, by 2015, the tide had turned. ‘That year, UPS finally managed to prove its peak execution capabilities; its strategy of increasing capacity to handle higher volumes allowed it to achieve an on-lime-delivery rate nearing 98% the week before Christmas. For the same period, FedEx struggled to handle a late surge of e-commerce shipments that were delivered after the holiday (though the company wouldn't provide nnumbers)."* i Bese Giobal Brands 2015 report, htpnterbrand comvp-contenoploads!2016/02/Best-Gobal-Brands 2015report pa (accessed Jan. 4, 2017) "Rex Form 10-K, 2015, "Nek Carey, "Third Time's a Charm for UPS at Christmas, but FedEx Stumble," December 29,2015, Intpinww teers eonvatcels-upe-fedex-peksdUSKBNOUCIKP20151229 (accessed Jan, 2017). (Case2 The Battle for Vale, 2016: Feds Corp versus United Parcel Service,Ine. 33 + Customer satisfaction: The American Customer Satisfaction Index (ACSD), the only national, cross-industry measure of companies’ perceptions among consuim- ers, ranked shipping companies each year based on neatly 10,000 customers" re- sponses concerning ease of tracking, package condition on arrival, helpfulness of in-store staff, and other factors related to recent delivery experiences. Until 2009, FedEx was ranked number one, but the two shippers leveled out in recent years, and by 2014 and 2015, both UPS and FedEx remained neck and neck, having jentical ACSI scores of 82, well above USPS's scores of 73 and 75 for the same years." Outlook for FedEx and UPS Observers of the air-express package-delivery industry pondered the recent perfor ‘mance of the two leading firms and their prospects. What had been the impact ofthe intense competition between the two firms? Which firm was doing better? The compa- nies faced a watershed moment with the growth of e-commerce and FedEx's aggressive push into Europe, Might their past performance contain clues about the prospects for future competition? ACSI Uilies, Consumer Shipping, and HealthCare Report 2015, May 12, 2015, pfinesketing thea xpactoattachinen/5152/£.00371 1 ACSI:20UliesS20Consumer%20Shipping’20and20 Heal 20Care%20Repor202015, pa (accessed fan, $, 2016). M_—— Part One Seting Some Themes EXHIBIT 24 | Revenues for FedEx and UPS by Business and Geography Segment (Millions) FedEx 2010 2011 2012, 2013, 2014 2015 Geography US.Domestic Revenue «24852«=«-27.461 «2883730948 «= 32258 4.216, International Revenue gaaz 1184312843 13,339 «13308 13.237 Business Feds Express 21555 2asa1 26515277121 27,299 Fed Ground 7439 (8.485 9573 1087814617 12.984 Fedex Freight 4321 agit 5.282 5.401 5787 east Fedex Services" 1419 1,327 4310 137 1972 11.039 ups 2010 2011 2012 2013 20142015 ‘Geoarephy US.DomesticRevenue 36,795 39,347 40,828 «41,772 43.840 45,209, International Revenue 12,750 13,758 «13.699 13666 «14,302 13,054 Business US. Domestic Package Next Day Air 5835 6.229 64126443 6sa1 6570 Deferred 2975 3,209 33923437 3672 3.903 Grou 20932 2218923052 2.194 «25598-26274 Intemational Package 14933 12.2490 12nze 12429 ges 12149 Supaly-Chain & Freight 8670 9,139, 9.147 3935 9,303 9.467 “ects Seviees provides backoie sport to FedEx thee tansportaton segment ns pining end eal supporto customers trough Fe otc, Data source: Company SEC ings (Case 2 The Battle For Va, 2016; FedEx Corp versus United Parcel Service, Ine. 38 EXHIBIT 2.21 Operating Results for UPS Inc. (period ending Dec. 31, ia milions) 2010 201120122013 aoa 2018 Revenue 49545 $3105 $4,127 55438 e732 Sa60 Operating Income (EBT) Beet 6080 1343 7028 4968 7.668 Interest Bxpence 384 383030053 aa Netincome 3ave 3g0¢ 80743723092 aad pital espendtces 1389 20052153 2068 2328 2379, | Gashand Merkebie Secuiies 408142757924 5.248 32834726 | Accouns Receivable Si17 6288 61116502 66617134 | Total Curent sets 11869 12284 15531 13.387 1.218 13208 Net Prop. Plant ensEqup, 17.387 17.621 17.094 17.961 sa281 i882 | Toto Asssete 33897 34077 38818 35553 asad 38.311 Curent abies 5902 651¢ 8300 7431 8621 10686 Total Debt soeds 11128 12970 10.872 10773 14334 TotiStocthotiers'Equty 0477.08 «4733 G88 258207 201020112012 2013820142015, crown cagn ri0- ee 119k ak soma Tout ann Gen ie aoe ame com am aoe [Operating income Growth ‘78% -779% (4238% -294% 54.3% 35.9% | Netincome Growth 140% -788% 441.8% -306% s9g% 451% Aust teeny ates | ernociinimoer 87827583 na4 232 gemma at -cen) ree tere 230 kana 7ag neem | Copital Expenciture 28% 3.8% 40% 37% 4.0% 4.1% — Capital Exp/Revenve Toolset Tue tse te te NEN peenatennnty [> cy and ewe Reon oven are 2001988 tata camera can tuto 07 a7 os orca aa aon cur F Totei Deeetquity Ratio 13 18 27 1 50 5.8 Total DebvTotol St. Eq. JP tines mertenmee we 78 3a estan on emanmenty [tay rates Corina tang 1 ue ake mak carnovene 1 net Prott Margin ™% % 1% 8x 8% 6% Not Income/Revenue [rer aces WS kame rem ae fenrvoreasy se Sx oe am tain toon emmcmerce Economic Profit (milllons)* $1873 $2,189 $602 $2832 $1,946 $3,255 | svonc om vas eacaued es 1-9 = Con. FT S Ea wheels wanseueoen | Data source: Capt O, Morningstar, coneany annual epots 36 PartOne Setting Some Themes EXHIBIT 2.3 | Operating Results for FedEx Corp. (period ending May 31, in milions) 010 20112012 =« 2013 zota— 2018 Rovere 34734 39304 42690 44207 45567 47453 ‘Operating Income (87) 1998 2378 ©3186 dase 3S 1.867 Interest Expense 7386 S22 16025 Netincome tage 1482 2082-278 2328 1.050 Capital Expenatres 2a 244 ©4007 3.375 38334347 CesnanaWarketable Secuites 1952 2328 2843 «4917-2908 3763, 4 ‘Accounts Recewable 41634581470 50445460 5.719 Total Curent assels 720 825 S058 11274 9368310941 NetProp. Plan. andEqu, 1438515543 17.288 «8484 19550 20875 Total Assets 2asoz 27385 29903 33567 33070 37.008 Curent nbs 4045 4902 53745750 5,312 5857 Tot! Dobe 1930 1685 1687-2990 4737 7.268 Toulsioctolse cquly 13811 15220 1472717398 1527714993 oro 2011 2012,=« 01a ota at ‘ Grom cage (10-15) Total Asete Grows 897% 919% 12.25% 1.48% 12008% —a8.a6K ‘operating income Growth 1902 3998% 3817% -13958 Sosy Esse NetIncome Groth 2264% 3994 3265 ~1449% BAER 112% ‘Asst Eency Ratios Wirking Capa Turnover 1316 1155 11598021042, 9.52 _—RovanuefC. Assets = PPE Turnover 21252247 240239227 ReveruelPPE Coptal Expendtue 81% 87% 84H 78H 7.8H_—-BZK__ Capital Exp-Reveru eset Tumover 439 Mae 143132138128 RevenuerTota Assis Liqulsty and Leverage Ratios Curent Ratio 157 170168196 182184 Asse Lab, osm ravo 042 048 0538S ORS Caen Mia SecsC Total Debuquty Ratio 01 on 01 020305. TotalDebTota SE Tes Interest Eamed 252-277-613. S44. 228-79 Op. Incomanteret Protabity Analysis perating Marie 575% 60S% 746% TOOT BST 3.93% _EBTReverue Net Pett Margin 341% 360% TSE 613K S.1OK 221% NetincomaRevenie etn on assets SOM S62 «OTR BA 7SIK BATH Mine + ML BIT Retun on Ey BSTK 954% 138% ISIE 15.21% 7.00% Net ncamasTot St Economie Pot lore “$60 $74 -$800«$1,029 S688 $661 “Economic Profi EVA) is eaeuloled 8 EBT (1 ~~ CofC X(T. Debt + TS. Eh where t= 40% and CokC = Data source: Capt 0, Meninosar,compeny annua repens (Case 2 The Batle for Value, 2016: FedEx Corp, versus United Parcel Service, nc. 37 EXHIBIT 2.4 | Timeline of Selective Competitive Developments FedEx Corp. United Parcel Service, ine. + Offers 10:30 am. delivery + Acquires Geleo Express and launches operations in Asia-Pacic + Estabishes European hub in Brussels + Introduces handheld barcode scanner to capture \detalled package Information + Offers warehouse services for IBM, National ‘Semiconductor, Laura Ashley + Acquires Tiger International to expand its International presence + Wins Malcolm Baldrige National Quality Award + Offers two-day delivery + Launches website for package tracking + Acquires aieroutes serving China «Establishes Latin American division + Creates now hub at Roissy=Charies de Gaulle Airportin France + Launches business-o-cansumer home-delveny + Carries US. Postal Service packages + Acquires American Frelghtways Core + Expands home delivery to cover 100% ofthe US. population + Acquires Kinko's etal ranchise + Establishes Chinese headquarters + Acquires Parcel Direct, leading parcel consoldator + Launches around:the.wore fights + Develops new Asia-Pacific hub in Ghangzhou, china + Acquires UK domestic express company ANC ‘and Fiying-Cargo Hungary + Acquires Prakash Air Freight in Inca 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1998 1995 1999 2000 2001 2002 2003 2004 2005 + Establishes nex-day ar service + Begins intercontinental air service between Unted States and Europe + Establishes UPS‘ first airfleat + Offers automates customs service + Expands international ar service to 180 counties + Introduces 10:30 am. guarantee for next-day ar + Bagins Saturday delivery + Offers electronie-signature tracking + Expands delivery to over 200 countries + Provides supply-chaln solutions through UPS Logistics Group + Launches website for package tracking + Offers guaranteed 8 am, overnight delivery + Males UPS stock avallable through a public offering + Acquires al-cargo air service in Latin America + Acquires Mall Boxes Ete. etal tanchise + Begins direct ght 0 China + Offers queranteed next-day home delivery + Reduces domestic ground-letivery time + Purchases Menlo Worldwide Forwarding, adding hesyy-airsreignt shioment capadlity + Acquires Overnite, expanding ground eight services in North America + Launches fist nonstop devery service between the US. and Guangzhou, China (continued) 38 Part One Setting Some Themes EXHIBIT 2.4 | Timeline of Selective Competitive Developments (continued) Featx corp, United Parcel Service, Ine. + Launches HealthCare Services 2007 + Launches Fedéx Freight AM, aflatate service 2008 with @ money-back guarantee delvery by 10:30am 2009 2010 + Launches HenthCare Solstions, offering 2014 shipping and supply-chain manegement for heats companies, + Launches new brand platform to promote ‘expanded logistics and supply-chain manage ment ables + Launches TechConnect, pal shop for con- + Launches UPS MyChoiee, allowing consumers to sumer electronics control package deliveries onine + Launches FedEx Dalivery Manager. giving US. 2012 | customers lexible options to schedule delivory | + Acquires GENCO, thichpany logics providers 2012» Acquires Kise, a European company allowing ln North America, expanding ground service retailers to delver goods to shoppers chosen Fetal location | + Acquires Bongo Intemational a cross-border en- 2014 « Launches ORION, proprietary route-optimization ablement technology software for drivers, and UPS Access Point, 8 convenient local-store alemative to home every 2016 Acquires -parcel, allowing forelgn shoppers to. teasily purchase goods on 2 retalle’s site + Acquires trucker broker, Coyote Logistics, ‘expanding freight logistics Data source: Compiled by author ftom company documents and news outlets IT2.8 | Financial and Market Performance ‘Case? The Bate for Value, 2016: FedEx Corp. versus United Parcel Service ne 2012 2013, 2014 2015 Stock Price, Dee. 31 Close: 917214377 ~—=«7366 «14899 ‘Dividends Declared in $ Per Share 052 ose 06 8 {asic EPS [period ending May 31) om 861 758 a7 Common Shares Outstanding Mil) 3170-80870 PrcelEarnings 147 278 220 373 Annual Return 874% RAB ‘Cum. Annual Return 574% 786% BAB UPS, 2012 2013 2014 2015 ‘Stock Price, Dee. 31 Close 7a73.—«10508~=S.A7._—=SC« ZB Dividends Declared in $ Per Share 228 2.48 268 292 Basic EPS 08a 465 331 538 Common Shares Outstanding (Mil) 9530 92400050860 PricelEamings. 335 67.1 276 220 Annual Return 459% 83% -108% ‘Cumul Annual Return 459% SAK 3.45 ‘Standard & Poor's 500 Indox 2012 2013 2014 2045 Index Level, Dec. 31 Close 142619 1,848.36 2.08890 2043.94 ‘Annual Return 2368 1148 0.7% Curl. Annual Return 296% 410% = 40.3%, ‘te rource: Googie France, Norangetar, Vale Une and Capra » 40 PactOve Setting Some Themes EXHIBIT 2. Morgan Stanley ‘Macquarie Recent Equity Analysts’ Outlook for UPS “The USPS iso reo! competitor in the B2C market, and has lower unt delivery costs than el ther UPS or FedEx. While USPS service may not be as good, the goverment operated net- work can stil affect the parcel market pricing... The most Important stretegic question facing UPS i: Wat is more Important to UPS-to maintain margin even inthe face of marketshare losses orto maintain market share dominance even if that means lower margins over time? \e suspect UPS wl im to minimize marketshare losses while maintaining a high ROIC. ‘Over the long cun, It may not be possible to achieve bath, whichis why we think UPS shows (90 after market shove aggressively." 1 “its tough to be negative on UPS given Is impressive return and cash flow metric, but from ‘relative basis, we see much moce upside potential from FDX. We think FDX’s recent undet- performance vs UPS, transports, and the broader market reflects overblown concerms about hts China exposure & Express skepticism"? Morningstar “Despite ls exiensive unionization and asset intensity, UPS produces returns on invested capital about daubleits cost of capital and margins well above its competitors’ we credit the firm's leading package density and outstanding operational efficiency, enhanced by years of consistent and extensive technology investment. UPS has tuned to health care markets ang Seveloping nations for grovth, and we think the company hes ample runway left o bul speed, Even existing operations have revenue expansion potential vis pricing power because UPS operates within @ somewat rational olgopoly in Rs largest market, US. high-service parcel delvery™ "ater Greene, Alexander Vecets, and Diane Hung, “GteenaUnted Parcel Sence—The Mast Important Stotesle Queston” Stoney, No. 25356723 or investont Curren Reports eatabaso (accessed Feb, 3,017) 2kaly Dougherty, Mat Frenkel. and Ceo Zagreen,“UPS—W's Al about the Peak Macquarie Group, No, 27249020 from evestet Current Reports database (accosted Feb. 3.2017, alt Sehoonmater,"UPS, Inc.” Morningstar, No, 27249776 ram Investext Curent Reports database fccessed Feb 3, 2017) Source: Analyst repos tom spected sources (Case 2 The Bate for Value, 2016: FedEx Corp. versus United Parcel Service, Ine.” 41 EXHIBIT 2.7 Recent Equity Analysts’ Outlook for FedEx Morningstar “We expect FedBx to increase revenue 4.5% per year on average through fiscal 2020, Our Tevenue projections assume ground sales grow at nearly 10% annually, based on organic ‘ruth neluding from ecommerce shipments) pus clients dowshitng from express and

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