United Parcel Service’s IPO – Case Solution

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United Parcel Service's IPO Case Answers

1. What are the key success factors and risks for United Parcel Service, given its business strategy?

Success factors: United Parcel Service had a loyal workforce with a focus on an operational and service excellence culture. Through part-time positions and educational assistance programs, UPS recruited employees. These employees were carefully trained “and educated about UPS’s time-tested policies and procedures.”

The on-the-job training, the role modeling, and the educational programs all “helped UPS command one of the lowest turnover rates in the industry” and succeed in preparing a portion of its workforce for management positions each year (“promote from within” policy).

UPS had a flexible pricing strategy: it transitioned away from using standard rates to allowing prices to vary across markets and customers based on cost differences.

United Parcel Service made major technology upgrades: constant investment of money to upgrade its infrastructure to track packages precisely, deliver electronic proof of delivery, and manage shipments online. The systems included electronic scanners, barcodes on packages, and computerized clipboards for all UPS drivers.

The company also hired thousands of programmers and technicians to manage its information needs and develop innovative applications and services for its customers.

UPS had a sophisticated IT system that managed the sorting facilities, a fleet of vehicles, hubs, and other operations. Also, it ensured that its deliveries were accurate, safe, and on time.

UPS also made changes in its marketing strategy: it introduced a widely aired new ad campaign that touted “We run the tightest ship in the shipping business,” a marked change from its prior policy of shying away from publicity.

United Parcel Service minimized its expenses by sharing its facilities for both its ground and air operations. All facilities were shared, including the single fleet of trucks that handled the pickup and delivery of all UPS shipments.

This integration of its air and ground operations gave UPS the ability to optimize the utilization of its assets while still meeting customer service requirements.

Risks: One risk for UPS was that it owned trucks and directly employed its drivers. FedEx, UPS’s competitor, outsources this service, and thus, FedEx reduces its operating costs. Furthermore, United Parcel Service is more exposed to union issues than its competitors.

Around 60% of UPS employees belong to the International Brotherhood of Teamsters, meaning that those UPS employees are the biggest constituents of that union.

Historically, UPS has not had major problems with that union except for one 15-day stop in 1997, and this cost the company several hundred million in losses. UPS knows that it is important to be on good terms with the union, and UPS is improving its relationship with the union by paying its employees the highest wages in the industry.

The business decision to concentrate on the three industry opportunities (globalization, e-commerce, and supply chain management), using its operating cash flows, could lower UPS’s efficiency and profitability. Also, even though these emerging trends provide opportunities for the whole industry, they can be potential risks for UPS because its competitors could also make this change and end up surpassing UPS.

The transformation from a private employee-owned company into a publicly traded company is a risk in itself. Being a private employee-owned company has been very beneficial because it enabled the company to grow with capital without using financial services and, therefore, not paying those fees.

UPS may have developed a risk by becoming a publicly traded company because its employees may stop being loyal since the company is decreasing its shares in the company. To avoid the risk of losing the loyalty of its employees, United Parcel Service should educate its employees about the reasonable benefits of becoming a publicly traded company, as well as set a reasonable stock price to prevent constraining the further growth of the company.

UPS was playing “catch-up” in regard to air transport. FedEx offered next-day air express delivery nine years before UPS. Investors may believe that FedEx is more innovative than United Parcel Service, and thus, the stock price may reflect this.

2. What are UPS’s (stock) value estimates based on FedEx’s PB and PE ratios?