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Skip Navigation LinksHome :: Back Issues :: Deal Insider: A big brown delivery

December 1999

Deal Insider: A big brown delivery


Author: Antony Currie




Issuer: UPS
Amount: $5.47 billion
Type of issue: Initial public offering
Launched: November 10th
Price: $50 per share
Lead manager: Morgan Stanley Dean Witter

Nicknames are dangerous things. If we based our judgements on them, United Parcel Service would be in a pile of trouble. Big Brown is the rather unflattering one appended to UPS. It's the company's fault, of course - they should never have painted their delivery vans that colour, or put their employees in those awful dirt-brown overalls. And everyone has their own delivery horror story, such as when UPS sent the computer for Euromoney's US editor 3000 miles from Long Island to California, instead of 30 miles to New York.

Luckily for them, investors have managed to look beyond that, even though UPS decided that it should get the big brown van out to go on display outside the New York Stock Exchange on the day of the IPO. At least the front section of a UPS Boeing 727 and a huge blow-up of the hand-held computer used by delivery employees managed to distract from the big brown blob.

So much so that when UPS launched its IPO in November it was heavily oversubscribed, and demand for shares was so strong that it was only at 10.15am, 45 minutes after the NYSE starts trading, that any shares traded hands in the secondary market. At more than $5.4 billion, this was the largest ever US IPO, although it was somewhat dwarfed by the $18 billion IPO for the privatization of Italian power company Enel, lead-managed by Merrill Lynch a week earlier.

That shows the power of having a brand. Even if the exact workings of the company are not that well known. "Everyone knew the name, and that UPS was a delivery company," says one banker who worked on the deal. (Arcane SEC rules forbid us from quoting by name the banker for 25 working days after the IPO) "But few, especially outside the US, knew of the breadth and depth of the company's operations."

How many knew, for example, that UPS has a triple-A rating from both of the major credit-rating agencies? Management from CEO Jim Kelly on down have been at pains to point out, however, that this is not a sacred cow. "It was more relevant before they went public," says another anonymous banker. "It helped to maintain a good perception of the private stock, and was a great aid when staff used their stock to hypothecate." That's a fancy word meaning to use their stock as collateral when borrowing money at the bank.

It would appear that Kelly and his team at UPS played a canny hand in getting the deal to market. Bankers on the deal weren't expecting to be able to bring the IPO until the first half of next year, but UPS worked hard to prepare for a 1999 launch. And they managed to get one of the best equities houses to do the deal for a smaller fee than usual, 3.5% rather than the 4% which is more typical for large IPOs. Still, with a large chunk of the $190 million or more in fees, that is a great pay-off for Morgan Stanley Dean Witter. It has been chipping away at UPS, offering free advice, ever since the head of MSDW's global transportation group, James Runde, first called up the company three years ago. The IPO is the first major deal the bank has conducted for UPS. It may have taken the biggest slice of fees UPS will ever pay, unless it now turns to large scale takeovers.

Investors were fed some impressive figures to sell them the IPO: UPS is the world's largest carrier, and is double the size of all its US competitors combined. In the holiday season last year UPS shifted more packages in the US than any other carrier - including the US postal service. It has a committed management team, each having served an average of 28 years at the firm. It has two million customers daily in over 200 countries. And the company spends $1 billion a year on technology.

Unlike its main perceived competitor, Federal Express, document delivery makes up only a small part of its business profile. UPS is more of a mover of parcels and boxes, and 80% of its orders are for business-to-business.

This leaves it in a rather better position than those which are primarily document delivers: e-mail and the proliferation of internet sites allowing companies to post documents on-line are threatening that business. UPS's response for this smaller part of its profile is what it calls Document Exchange: starting at $1 you can send your documents over the internet without fear of them getting lost, being intercepted, or losing format. Whether it wins out over e-mail remains to be seen.

It is in the parcels business that UPS has the big advantage, however. E-commerce may be great for getting discounts and shopping from the comfort of your own office - sorry, home - but it doesn't get the packages to you. "When it comes to packages and parcels, it's that last mile to your door that counts most," says another unquotable banker who worked on the deal. It's hardly rocket science: none of these start-ups either want to or can afford to set up a viable infrastructure to deliver the goods they offer.

And that sets up UPS as one of the potentially most successful support companies - assuming that people and businesses don't suddenly get bored or disillusioned with using the internet to order goods, of course. Just days after the IPO, UPS announced its UPS Worldwide Logistics unit will provide order management services in America for UK-based internet clothes retailer Boo.com. It will also provide logistics support to German internet retailer First On-line Shopping.

Investors loved it, so much so that UPS's management had to split into three groups to cover all the enquiries from investors during the roadshows.

By launch day the price was fixed at $50 a share, having been raised twice in the run-up to the deal. By the end of the day the stock had risen to $67.25, having broken through $70 at one point, and at the end of November was still trying to find its level in the upper $60-range.
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