Saturday, December 10, 2011

United Parcel Service (UPS) - The Big Brown Machine

The big brown machine, as the United Parcel Service is colloquially known, began its services in 1907 as American Messenger Company. Today, the ubiquitous brown package cars deliver over 15 million packages every day in more than 200 countries across the world. After an illustrious history spanning nearly a hundred years, the transportation company went public in the later part of 1999 to become one of the largest high profile US IPOs of all time. The offering by the Atlanta based company literally took the market by storm at the time of its announcement.

The company initially planned to float about 10% of the shares priced between $36 and $42 per share. Contrary to other major IPOs of its time, the market speculation about this IPO was both positive and negative. The offering was a hit among small investors who saw this as a chance to get a chunk of the blue chip stocks. Moreover, the company had a reputation to boast about. In 1998, the company had made $1.7 billion in profits. Compared to its famous counterparts such as Federal Express Corp. (FedEx) and United States Postal Service (U.S.P.S.), it had achieved a higher return on equity (24%) in 1998. The company had also outperformed its competitors in the newly emerging e-commerce segment. However, there were concerns about the additional costs such as the cost of including more trucks and drivers. Additionally, the dependence on the fluctuating fuel prices and the not-so-pleasant labor relations added to the concerns of the public. The company had been forced to shutdown in 1997 due to a strike by Teamsters.

The company filed a prospectus with SEC in July, 1999 and divided the stakes into two types of shares. The Class A shares, which constituted for 10 votes per share, were distributed among the owners whereas the Class B shares, with a single vote per share, were included in the offering. Morgan Stanley was chosen to be the investment banker with Goldman Sachs and Merrill Lynch acting as co-managers. In October 1999, UPS announced that it would be offering 109.4 million shares (10%) priced between $36 and $42 per share. The increasing popularity among institutional investors caused the investment banking syndicate to hike the offering price to $50 per share. This hike in the stock price reached the peak on the trading day when it was sold at $70. At the end of the trading day, the shares closed at $67.25 taking the company's market value to a staggering $80.9 billion.

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