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Fool On The Hill

Thursday, July 22, 1999

FOOL ON THE HILL
An Investment Opinion
by Yi-Hsin Chang

UPS Makes Wish Come True

A couple of months ago, as I was brainstorming for a special feature on "Companies Fools Wish Were Public," I chose J. Crew and United Parcel Service, commonly known as UPS. Well, one of them granted my wish -- I won't be so bold as to say I caused the company's sudden change of plans, though it's fun to joke about it.

Yesterday, Atlanta-based shipping giant United Parcel Service of America announced that it has filed a registration statement with the Securities and Exchange Commission (SEC) to make an initial public offering (IPO) of about 10% of the company's shares by the end of this year. If all goes as planned, UPS will trade under the ticker symbol "UPS" on the New York Stock Exchange.

If you read my earlier article on why I wished UPS were public, you'd know that, unlike most privately held companies, UPS is already fairly widely held. About 125,000 employees own stock through the company's employee stock purchase program, meaning that around 38% of its 327,000 employees hold shares in the company. That's quite a substantial number, considering the program is completely voluntary, and employees must work for the company for at least one year to become eligible.

The interesting thing is that, again unlike that of most private companies, UPS stock is not illiquid. The company's board sets the stock price on a quarterly basis -- as of May, the stock was priced at $47 a share and paid a $0.55 dividend twice a year. Employees can purchase shares from and sell shares to the company at the set price. The main difference, of course, is that the company, not a public market, determines what the shares are worth.

With the IPO, UPS will now get a market valuation. Current employee-shareowners will get Class A common stock, and a new class of B shares will be offered to the public. Essentially, Class B shares will cost the same as Class A shares, but Class B shareowners will have only one-tenth the voting power. Class A shares can be converted to Class B shares upon transfer or sale, giving employee-shareowners the ability to sell their shares to anyone, not just to the company.

UPS currently has 550 million shares outstanding, so 10% of that would involve 55 million shares. Rounding up from the May share price of $47, we can guess that the shares might be offered at $50 to $55 a share some time in the next few months. That would gross $2.75 billion to $3 billion, which is nothing to sneeze at, even by a company that generated $24.8 billion in revenues last year.

Incidentally, a quarter before, in February, UPS stock had been valued at $43, so the stock essentially rose 9.3% in one quarter and 38% in one year from $34 a share. Not bad, especially since the public market will likely be more liberal in rewarding the company for strong operating results.

When I talked to Susan Rosenberg in the PR department at UPS back in May, she told me that the company had no plans to go public. So what changed management's mind, and why now?

That's exactly what I wanted to ask UPS Chairman and CEO Jim Kelly when I talked to him today. Here's what he said: "We're doing it now because we operate in a very competitive, global environment, and we're looking to stay ahead and maintain our leadership in the areas in the industries where we conduct business. This will provide us additional financial flexibility to pursue strategic alliances and acquisitions going forward. We think that that'll be necessary to compete in this new environment."

Kelly later explained that "strategic acquisitions" could be related to its core delivery business, its logistics business, or its e-commerce business. "It may be one, or it may be a combination of all three of those areas," he said.

While FDX Corp.'s (NYSE: FDX) Federal Express business got a lot of hype (including the cover of Barron's magazine) a while back, UPS is, in fact, the shipping industry leader in e-commerce and ships for 6 of the top 10 Internet retailers including Amazon.com. According to a Zona Research study, UPS delivered 55% of online purchases during the 1998 holiday season.

But Chairman Kelly declined to speculate on how the market might value UPS and whether it will get a higher valuation because of the vast amount of Internet business it does. "We'd like to be viewed as a 92-year-old company that has a great brand that does a wonderful job at what we do, and that certainly includes electronic commerce."

I am still very impressed with UPS. The IPO will no doubt prove to be incredibly popular. My only reservation thus far is the risk of a strike at the company. As you might recall, the 1997 nationwide strike -- the only one of that magnitude in the company's long history -- hurt the nation's economy, not to mention UPS's revenues and earnings. But Kelly called the strike "ancient history" and said management has worked to establish relationships with truck drivers and the unions. The current contract doesn't expire until 2002.

Now that my wish for UPS to go public is coming true, dare I wish for shares in the IPO?

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