Amazon acquisition project

Amazon.com

Acquisition Project Mergers & Acquisitions 12/09/2013

Team Members Mudiyanselage Ruwanthi Hearth William PĂŠrico Neto Darian Tucker Zeynel Burak Lito Valdivia

Executive Summary Amazon.com is the world’s largest online retailer. Originally founded in the mid-1990s as the world’s largest bookstore, the company has since expanded its product offering into other segments, such as in electronics, clothing, and personal care. Despite already being a leader of e-commerce, Amazon is expanding in new segments as well, particularly in cloud computing, online video streaming, and fresh produce. Amazon’s overall long-term strategy entails expanding its product offering in all aforementioned segments (new and old) while expanding its distribution network for faster and efficient delivery service. Amazon’s opportunity in this network can be best achieved through the acquisition of UPS. Based on the consolidated financial statements, Amazon can finance the proposed offer price to UPS without putting the combined firm’s credit worthiness in risk or eroding its short-term profitability and cash flow. Three factors contribute to justify and reinforce this argument: 1) The relative size of the two companies, since Amazon’s market cap is $167.6 Billion dollars, while UPS’ is $96.2 Billion dollars, which corresponds to 57% of Amazon’s size; 2) The potential synergies generated in terms of both sales growth and cost savings, which can not only provide significant competitive advantages for both companies, but also ensure the combined company’s capability of paying any financial obligations assumed to make the deal feasible; and 3) The effects of the acquisition to the company’s D/E ratio, which would decrease from Amazon’s current ratio of 300% to 123% for the combined company. As a result, it is our belief that the even though this transaction could consist on a very expensive investment for Amazon, the fact that it will be able to acquire a target of similar revenue streams and total assets as Amazon’s for an amount that is close to half of its market cap represents a great alternative to achieve even higher growth rates in the future.

Amazon should negotiate for an agreement with a stock-for-stock deal, mainly because Amazon's stock is believed to be highly overvalued and because the risks associated with making a cash deal are very significant due to size of the deal. Furthermore, such transaction will be tax-free. The acquisition should be made in a way to favor Amazon's current operations by both saving delivery costs in the long-term and to help Amazon further expand operations abroad. Therefore, to be able to have a major control over UPS, we suggest that Amazon negotiate for launching a C-Corporation agreement with a maximum of 20 percent premium over its stock price.

UPS would continue its operations as a wholly owned subsidiary but a high priority would be given to Amazon's delivery service.

Because Amazon and UPS both have similar cultures, the integration process should flow relatively smoothly.

Amazon and UPS both believe in high quality output, effective leadership at all levels, and diversity of the workforce. The integration plan will begin immediately post-acquisition with an integration team being formed by managers of both companies. The team will discuss and vote on how to proceed with integration ideas in an open environment. One objective that the team should have is to stress test UPS warehouses and distribution centers by routing more and more Amazon packages through them. This will provide Amazon with data which will allow the company to determine which centers to take control of after a one-year period. At the same time, Amazon will work on a new website that will combine features from both the UPS and Amazon websites into one to provide consumers and sellers more options throughout the buying process. It is hoped that these efforts will be completed in a timely manner of 1-2 years, ultimately resulting in a successful acquisition for Amazon.

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Company and Industry Analysis Acquiring Company Amazon.com (hereafter referred to as “Amazon”) is the world’s largest online retailer. Originally founded in the mid-1990s as the world’s largest bookstore, the company has since expanded its product offering into other segments, such as in electronics, clothing, and personal care. Despite already being a leader of e-commerce, Amazon is expanding in new segments as well, particularly in cloud computing, online video streaming, and fresh produce. Amazon’s overall long-term strategy entails expanding its product offering in all aforementioned segments (new and old) while expanding its distribution network for faster and efficient delivery service.

Industry/Market Definition Amazon’s product offerings overlap through many industries. The company’s greatest share is in the ecommerce and online auction industry, which involves the selling of goods through an online platform or auction website. Online retail is one of the fastest growing industries in the United States. From 2008 until 2013, industry revenue grew at an average annualized rate of 11.6 percent and industry profit margins increased from 5 to 6.8 percent. A key trait of this industry is the depth of product differentiation. A diversified product offering maintains an e-commerce company’s competitive advantage.

External Analysis Customers The growth of consumer spending in the e-commerce industry is largely driven by the following factors: 

Technology: The growth of technology has led to more secure payment options for customers, a reduction in computer/tablet sales, and an expansion of the national broadband network. About 85 percent of US households are expected to have broadband Internet connections by 2018.



Consumer Preferences: More consumers are shifting away from in-store to online shopping as they gain faster access to the Internet and are able to more easily compare prices 3



Economic Recovery: As the economy slowly recovers and employment increases, disposable income is expected to rise with improved consumer sentiment, which together will drive consumers’ likelihood to shop for new products

According to IBIS World, these factors alone are expected to drive industry growth at an average annual rate of 6.2 percent over the next five years.

Competitors At 15.3 percent, Amazon holds the greatest market share in the e-commerce industry. Amazon’s main competitor in this industry is eBay, which holds an 8.2 percent market share. The first table below summarizes industries in which Amazon is a major player. The second table summarizes additional industries in which Amazon competes.

Rank 1 1 1 1 1 2* 3

Industry e-commerce and online auctions Online computer and tablet sales Online television sales Online shoe sales Online baby product sales Daily deal sites Laptop computers retail market

Market Share Percentage Major Competitors 15.3% eBay 35.3% Apple, Dell 24% Best Buy 10.7% Foot Locker 39.9% Toys R Us 16.6% Groupon 3.5% Best Buy, Walmart *Ranking is through company LivingSocial, in which Amazon holds major stake

Industry e-Readers Movies and online video streaming Home improvement and construction retail Fashion retail Drugs and cosmetics retail

Competitors Barnes & Noble, Books-A-Million Netflix, Hulu, Vudu, Apple, Google Home Depot, Lowe’s, Sears Macy’s, Nordstrom, Gap, Shoebuy.com Walgreens, CVS, L'Oréal, Estée Lauder

Potential Entrants The threat of potential entrants in this industry is low. Although new entrants can establish e-commerce sites at low costs, the industry is highly competitive as it is largely dominated by Amazon, eBay, and numerous minor e-commerce companies. Additionally, the industry is highly capital-intensive because consumers expect a diversified product line. As a result, it would be difficult to maintain high operational costs and establish even a

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niche market without such differentiation. Market entry could also be prevented in regards to suppliers, elaborated upon later.

Product/Service Substitutes The e-commerce industry is largely measured by the

Category e-reader

extent of product differentiation. The table to the right Digital music

compares Amazon’s internally developed products against those of its competitors. Amazon accounts for 22

Online video streaming

Amazon Product Kindle product line Amazon Cloud Player Amazon Instant Video

Competing Substitutes Nook (Barnes & Noble) iTunes (Apple) Netflix

percent of the digital music market; the development of the Kindle e-reader increased revenue by 40.5 percent in 2011.

Suppliers The level of sophistication and type of suppliers in the e-commerce industry vary depending on the range of product offerings by each player. Amazon’s sales consist of products sold from its own inventory and those sold by third-party operators. The latter of these products (categorized as “service sales”) are sold and shipped on the responsibility of the third-party operator. Amazon’s inventory is stored in its warehouses, known as “fulfillment centers.” To maintain the most efficient use of space, Amazon’s products in its fulfillment centers are meticulously organized according to size rather than category. In many of these centers, the products are organized through the use of robots specifically designed for warehouse automation. In the past few years, Amazon has ramped up its fulfillment center distribution network. The company currently has centers in 15 states and recently announced expansions into Florida and Maryland (refer to image). It is expected that the expansion of these fulfillment centers will aid in the distribution of its products and reduce delivery time across the nation.

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Suppliers are of particular importance in the e-commerce industry. The extent of the relationship between companies and suppliers could affect how the line of credit set up between the two parties as well as the availability of low-priced inventory space and delivery in distribution trucks, planes, and freight. Amazon currently holds a strong relationship with UPS. Amazon users enrolled in the UPS Savings Program can potentially receive discounts up to 37 percent off shipping rates. A similar program for Amazon users is offered

by FedEx, but only promotionally until December 19, 2013.

Internal Analysis Strengths and Potential Opportunities Amazon’s strengths are characterized by the following: 

Cost Leadership Strategy: Amazon achieves economies of scale through this strategy. Having such a diversified product offering allows the company to continue selling them at low prices



Extensive Distribution Network: Amazon already has an efficient fulfillment center network and is opening more across the country; the operations within its warehouses epitomize the company’s efficiency in shipping and logistics management. It is important to note that the extent to which the expansion of these centers are successful will largely determine Amazon’s opportunities in entering new product segments.



High Brand Equity: Amazon has firmly established itself as a household brand name. As the preferred online retailer for most American consumers, the company has ranked as the top company for customer satisfaction for eight consecutive years

Weaknesses and Potential Threats Amazon faces potential setbacks if the following weaknesses impeded the company’s abilities to grow sales: 

Lack of Physical Storefront: Although consumers are slowly shifting to online shopping, Amazon would still have difficulty in attracting consumers that lack easy access to the Internet or that prefer to buy certain products in-store (e.g., fresh produce or difficult-to-size articles of clothing). These setbacks 6

could potentially prevent Amazon from taking away market share from competitors such as Walmart and Barnes & Noble, both of which carry significant consumer traffic 

Risks in Zero Margin Strategy: Amazon sells at cost to push competition out of the market and gain market share at the expense of foregoing profits in the short-run. This strategy can work against Amazon if competitors are able to recover from the brunt of Amazon’s initial assault and counter with a differentiation strategy. It could compromise short- and long-term profits if the company attempts this strategy in various segments and fails repeatedly.



Potential Inability to Keep Up with Demand: There are concerns that Amazon may not be able to keep up with demand if the e-commerce industry grows at a rate faster than what the company’s fulfillment centers can accommodate. It is important to note that the company also runs the risk of not being able to provide its product offerings quickly and efficiently if delivery services such as UPS and FedEx demand higher expenses for Amazon to maintain low shipping costs for its consumers; as such, Amazon runs the risk of being potentially over dependent on delivery companies.

Potential Targets Objective 

Increase stock price by 20 percent by the end of the next fiscal year (December 31, 2014)

Goals 

Increase long-term shareholder value



Enhance customer value proposition

When compared to the market, Amazon is already growing at a relatively faster pace; the company anticipates additional growth in the next year through a successfully completed acquisition or merger. The time is right for Amazon to offset any potential future setbacks dormant in its weaknesses and to solidify its strategy in expanding and solidifying its product offering at a faster delivery speed. Moreover, the company’s end-goals

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will serve as a constant but important reminder to ensure that the acquisition or merger proceeds quickly and efficiently.

Search Plan Amazon can see expedited growth by proceeding with an acquisition related to the expansion of its distribution centers.

Distribution Network Expansion As previously suggested, Amazon sees great opportunity in its fulfillment center network. The amount of money invested in the expansion, upkeep, and operations of these centers allow the company to continue providing an extensive array of products. The delivery of these products could be severely compromised if arrangements between Amazon and delivery service providers such as UPS and FedEx were to cease or if the delivery companies demanded fees higher than what Amazon could pay to turn a profit. Moreover, Amazon’s recent exploration into drones as a method of delivery in 30 minutes or less could potentially alienate delivery partners as they may seek alliances elsewhere or seek out their own drone development. Either of these potential routes would then set Amazon back in the delivery of large packages that would not otherwise fit on its drones.

Amazon would also potentially be set back if idea of using drones as standard delivery is not approved by the Federal Aviation Administration in 2015. The inherent risks in Amazon’s current plans would be lessened if Amazon managed to gain greater control in the delivery process, which should be done through the acquisition of either FedEx or UPS. A comparison of both companies is summarized on the next page.

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FEDEX

UPS

Financials and Valuation Currently the stock price of Amazon is about 3.5 times higher than the stock price of UPS and FedEx; all company stock prices are experiencing an upward trend.

450 400

Stock Price

350 300 250

AMZN

200

UPS

150

FDX

100 50 0

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The following table represents the basic financials for latest financial year for Amazon and the potential targets UPS and FedEx. For detailed pro forma financial statements refer appendix.

Latest Financial Year AMZN

UPS

5 Year Average (Projected) FDX

AMZN

UPS

FDX

35.73%

6.16%

8.50%

Sales

61,093

54,127

44,287

167,402

64,995

56,951

Cost of Goods Sold

44,271

49,974

33,018

121,307

55,196

42,460

Gross Profit

16,822

4,153

11,269

46,094

9,799

14,491

Operating Profit

672

2,295

3,211

2,998

7,568

4,129

Net Income

(39)

807

1,558

1,445

4,686

2,443

Current Assets

21,296

15,591

11,274

58,353

13,990

14,498

Fixed Assets

11,259

23,272

22,293

25,374

27,945

28,668

Total Assets

32,555

38,863

33,567

83,728

41,935

43,166

Current Liabilities

19,002

8,390

5,750

52,068

8,818

7,394

Long Term Liabilities

5,361

25,740

10,419

14,690

30,908

13,398

Stockholders’ Equity

8,192

4,733

17,398

16,971

2,209

22,373

32,555

38,863

33,567

83,728

41,935

43,166

Revenue Growth

Total Liabilities & Equity

Based on the projected 5 year income, balance sheet and free cash flow estimations, we value Amazon at $349.26 which is slightly below than the current market price ($369.17 as of 11/15/2013).

The table below represents the Discount cash flow based valuations and market based valuations for the potential targets UPS and FedEx. Refer appendix for detailed valuations.

Discount Cash Flow Valuation Market based Valuation Value/Revenue Value/Operating Income Value/Net Income Average MB Valuation

UPS 84.63

FedEx 65.50

38.79 81.98 82.61 67.79

83.68 213.28 208.90 168.62

Comparing the valuations, synergies, growth estimations and other qualitative factors we believe that UPS is a better target for Amazon. We believe that the market has overvalued the stocks of all three companies.

Therefore the minimum price for UPS would be its current share price $100.94 and the maximum price is

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estimated to be $131.22 which is current market price plus a premium of 30%. The initial offer price we would like to suggest Amazon would be current market price a premium of 20% which is $121.13. Considering the growth potential of these two companies we believe that a 20% premium would satisfy the needs of both Amazon and UPS shareholders.

Revenue synergies were estimated to be 6.5% due two primary reasons. Firstly, the vertical merger between UPS and Amazon will provide higher revenue to UPS due to the transferability of amazon sales to UPS. Additionally, Amazon will increase revenue primarily through increased Amazon Prime subscriptions marketable with better shipping deals. The number of prime accounts has doubled over the past two years and it is estimated to double by 2017. Therefore we believe the merger with UPS will allow the subscriptions growth to be even higher.

We have estimated cost synergies as 3% as the merger will help to provide operating efficiencies especially in shipping cost of Amazon. Also Amazon will be able to combine the warehouse tracking and inventory management systems with UPS. Incorporating the above mentioned synergies to the combined valuation of Amazon and UPS we have estimated value per share as $453.70, this is a 22.9% increase compared to the current Amazon stock price. Therefore through this merger we believe that Amazon would achieve the goal of 20% increase in share price.

Financing Plan The proposed offer price of $121.13 represents a premium of 20% over UPS’ current stock price, and would demand a total investment of $115 Billion dollars for the complete acquisition of the company. As previously explained, the transaction will be completed through a stock exchange in which UPS’ shareholders will have each of their shares converted into 0.27 of Amazon’s stocks.

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Based on the consolidated financial statements, Amazon can finance the proposed offer price to UPS without putting the combined firm’s credit worthiness in risk or eroding its short-term profitability and cash flow. Three factors contribute to justify and reinforce this argument, the first of them being the relative size of the two companies. Amazon’s market cap is $167.6 Billion dollars, while UPS’ is $96.2 Billion dollars, which corresponds to 57% of Amazon’s size.

Secondly, the acquisition of UPS would provide amazon with significant synergies in terms of both sales growth and cost savings, which can not only provide significant competitive advantages for both companies, but also ensure the combined company’s capability of paying any financial obligations assumed to make the deal feasible.

By simply combining both companies’ sales, Amazon’s revenues would increase from almost $61 Billion dollars to $115 Billion, which corresponds to an 88% increase in sales revenue without taking into consideration any sales growth as a result from the combination of both companies. Considering that UPS would become the sole carrier for all Amazon sales after the acquisition is completed, it is safe to assume that the combination of the two companies would result in significant sales growth, especially for the UPS subsidiary.

Besides sales growth, the acquisition of UPS would provide Amazon with significant synergies in terms of cost savings. These synergies will be achieved by the combination and elimination of any overlapping functions and departments within the companies, such as sales, marketing, and customer service. Also, deep analysis and comparison of internal practices of both companies should be performed by the implementation planning team immediately after the acquisition is completed with the objective of identifying and standardizing best practices on both companies, thus significantly increasing efficiency and reducing costs. Lastly, UPS’ 2,400 distribution centers would provide Amazon with access to one of its high-priority objectives of having distribution centers in all states of the country. The target’s great infrastructure will provide Amazon with a national-wide readily

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available footprint, thus saving both costs and time necessary to actually build such infrastructure. Besides, the fact that Amazon will be able to use UPS’ distribution centers to ship their own products will also provide the combined company with significant cost saving synergies, as products will be shipped directly from the carrier’s distribution center, rather than from Amazon’s distribution center to a carrier’s, and then to final customers. All of these factors contribute not only to significantly save costs and future investments for Amazon, but also to expedite its growth strategy of establishing distribution centers in every state of the country.

Lastly, a comparison between Amazon’s Debt to Equity Ratio and the combined company’s ratio was performed. Amazon’s D/E Ratio has grown during the last three years, and was close to 300% in 2012, which indicates that the company has almost three times more liabilities than shareholders equity. The combined company’s D/E Ratio, which was computed by simply merging both companies’ financial statements, would be around 123%. Considering Amazon’s size, reputation, and growth, as well as the fact that it will be acquiring a company that has comparable annual sales revenues ($61 Billion for Amazon vs. $54 Billion for UPS in 2012) and total assets ($32 Billion for Amazon vs. $39 Billion for UPS, also in 2012), we consider that the change in D/E Ratio for the combined company does not offer significant risk for the acquirer in terms of credit worthiness or future cash flows. Moreover, as previously mentioned, it is our belief that the strategically alignment between both companies, as well as all potential synergies allowed by the acquisition, will make the combined company grow at a faster rate, and operate with more efficiency and lower costs.

As a result, it is our belief that the even though this transaction could consist on a very expensive investment for Amazon, the fact that it will be able to acquire a target of similar revenue streams and total assets as Amazon’s for an amount that is close to half of its market cap represents a great alternative to achieve even higher growth rates in the future. Also, the fact that UPS would provide significant cost savings and is will aligned with Amazon’s current growth strategy could provide the company with significant competitive advantages, which is

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fundamental if Amazon wishes to remain competitive and leading the market with increasing competition from both direct and indirect competitors.

Deal Structure Key Issues The acquisition of UPS would provide Amazon with significant long-term cost savings. Having the company under its wing could decrease the amount of time and effort needed to share information between the two companies, leading to a smoother and simpler operation process. It is the best option for Amazon to run UPS in its current form (brand, stores, website, and all existing operations). Getting rid of the UPS brand for an Amazon logo could scare off UPS management during negotiation, as the management of UPS would not want its company to “disappear.�

The removal of the UPS brand could also be a high financial risk for Amazon. UPS is over 100 years old.

Although a majority of its operations are in the United States, the company also operates in more than 200 countries with a total of 397,600 employees (322,400 U.S.; 75,200 international). The company delivered more than 4 billion packages and documents worldwide in 2012. Thus, in addition to its high financial value, growth, and operational magnitude, UPS carries high brand equity that has accumulated in the past century. The brand has created considerable intangible value for the company. According to Interbrand, it was ranked as the 27th most valuable brand in the world this year.

Maintaining UPS in its current form is necessary to ensure an increase in Amazon shareholder value. It is for this reason that Amazon should negotiate for a subsidiary agreement. Making sure that the deal is done with ease on both sides would reduce the risk of potential challenges coming up through the process. Amazon already has an ongoing relationship with UPS through its delivery partnerships. Amazon should emphasize priority over protecting the future reputation of UPS. At the same time, however, Amazon needs to have a majority of the controlling power. Therefore, it should offer start offering UPS to have a 20 percent 14

representation on the Board and could go up to giving 40 percent. However, it should guarantee to retain current employees of the company both to secure the continuation of operations without any possible problems in the post-acquisition period and to portray its positive intentions to not make major changes within the company.

Additionally, Amazon’s offer should include assuming all the financial risks, another fact that could not only make the deal happen more easily. It is strongly suggested that this be used also as a concession that will be used during negotiations not to pay as much premium as possible.

Deal Structure The most favorable acquisition vehicle and post-closing organization for Amazon is C-Corporation, because Amazon would seek to maximize control over UPS and integrate the company’s operations to its business model as soon as possible. Although UPS would continue to operate as a delivery company as it does now, its priority would be serving Amazon to help it drive down shipping costs, which in the meantime represents 4.7 percent of Amazon’s net sales, and to help provide customers better deals that could be generated through less shipping costs. Amazon would be able to gain the greatest control of the company, and immediately start the integration process.

Amazon’s stock is thought be highly overvalued, therefore, we suggest an all-stock transaction to be used in terms of the form of payment. By doing so, risks associated with the deal will have been shared by two companies, and the deal will be completely tax-free. Furthermore, convertible common stock should be used to finance the deal, as it provides an upside potential if Amazon’s stock price goes above the conversion point just like it provides protection for the UPS in the form of continuing dividends.

Our studies suggest that the combined stock value of the acquisition is expected to be above Amazon’s current stock price. Although that suggests us to start negotiations with a fixed-share deal, we suggest that Amazon can agree on a fixed-value deal in case of reciprocal concessions take place, because we expect the stock price of the combined firms to go up. Additionally, using the fixed-value method will propel the market to believe that Amazon is confident with the amount of risks that will determine the synergies of the deal. A pre-closing 15

agreement should be negotiated in case UPS backs off the deal once it is finalized, because this might affect Amazon’s stock price negatively. Another concession that can be made would be agreeing on an earn-out clause. Finally, we suggest that Amazon should first offer a premium of 20 percent and go as far as to offer a 30 percent premium after making many concessions on the previous issues discussed above.

Integration Culture Clashes In general, there should be few cultural clashes between Amazon and UPS. Amazon touts the importance of leadership in its business model, where leaders are unafraid to challenge others, take ownership of their work, and strive for the utmost quality in their work. UPS focuses on accepting and promoting diversity in their corporate cultures. Similarly, they also pride themselves on delivering “the highest-quality products possible.”

Since both companies have a hefty focus on leadership, diversity, and high quality output, there should be few issues to integrating their cultures. There is only one way in which the cultures might clash, and this is due to UPS’s promotion from within campaign. Because UPS encourages starting from the bottom and working one’s way up the company ladder, this might need some retooling to fit in with Amazon’s ideal model of leadership at all levels of the organization. More than likely, one system or the other is going to win out here, because seeking leadership at all levels and promoting from within do not mesh as well as one would expect.

Implementation Plan Amazon’s plan is to immediately have managers from both companies get together and form an implementation planning team following the acquisition. In doing so, the confusion and loss of morale from the acquisition process should hopefully be minimized. Managers will express ideas and solutions to each other in a safe, open environment. This meshes well with the leadership focus of both companies, and the idea is to have managers from both firms involved in all decisions throughout the process.

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There are surely some problems to be expected and dealt with throughout the process. For starters, integrating Amazon and UPS together into the website is an IT problem that will take some time to solve. Since Amazon will be making UPS a subsidiary but still retaining the brand and most of the former staff, integration problems should be lessened in intensity. However, some website features may be compromised. For example, though Amazon provides a rudimentary tracking system for packages, it does not contain the full tracking details that the UPS site does. Therefore, it would make sense to leave the UPS and Amazon websites as separate entities and provide links to UPS in order to fully track packages until integration can be achieved on the back end.

Once the two sites can be fully integrated, the new Amazon web site should launch allowing customers the option to place UPS orders and fully track their packages directly through Amazon, while still maintaining the UPS site for consumers and businesses who prefer to deal directly with the company via that resource. In this way, problems from website integration can be caught in the testing period before the site goes live, which should mitigate problems with features not working properly.

A second problem is how Amazon will integrate with UPS’s warehouses and distribution centers. The main reason behind this acquisition is to give Amazon access to these resources, so their integration must be carefully planned to prevent problems from occurring. It is suggested that UPS maintain control of their shipping outlets and distribution centers for a full year post-acquisition. During this time period, more and more Amazon packages will be routed through these outlets to stress test their capability to handle large volumes of orders.

After this period, Amazon will then assume control of key UPS warehouses and distribution centers, identified as those best equipped to serve the greatest number of underserved Amazon customers. By doing so, Amazon can move toward their goal of achieving one-day Prime shipping throughout the United States. Facilities will still be staffed and worked by UPS managers and employees in order to reduce the bumps in the process, but these facilities will be led by an Amazon team member in order to ensure that packages are being delivered quickly and appropriately to their destinations.

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References 

Amazon 10K 2009, 2010, 2011, 2012



Fedex 10K 2012, 2013



UPS 10K 2011, 2012



"Amazon.com: Amazon Values." Amazon.com: Amazon Values. N.p., n.d. Web. 6 Dec. 2013. <http://www.amazon.com/Values-Careers-Homepage/b?node=239365011>.



"The UPS Store : Company Information : Company Culture." The UPS Store : Company Information : Company Culture. N.p., n.d. Web. 6 Dec. 2013. <http://www.theupsstoreprintonline.com/companyinfo/culture.html>.



"UPS Corporate Responsibility." Diversity -. N.p., n.d. Web. 6 Dec. 2013. <http://www.community.ups.com/Diversity>.



"Working at UPS." UPS. N.p., n.d. Web. 6 Dec. 2013. <https://ups.managehr.com/workingatupsfaq.htm>.



http://finance.yahoo.com



http://people.hofstra.edu/geotrans/eng/ch5en/appl5en/ch5a2en.html



http://www.ups.com/content/us/en/about/facts/

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http://finance.yahoo.com/q/hp?a=04&b=16&c=1997&d=11&e=9&f=2013&g=d&s=FDX&ql=1

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http://www.marketwatch.com/story/amazon-buys-diaperscom-parent-in-545-mln-deal-2010-11-08

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http://business.time.com/2013/03/18/amazon-prime-bigger-more-powerful-more-profitable-thananyone-imagined/

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http://www.valueline.com/Stocks/

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http://financials.morningstar.com/valuation/price-ratio.html?t=AMZN

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http://www.treasury.gov/resource-center/data-chart-center/interest rates/Pages/TextView.aspx?data=longtermrate

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Appendix AMAZON VALUATION AMAZON: ANNUAL INCOME STATEMENT ($ MILLIONS) 2011

2012

2013

2014

2015

2016

2017

Revenue Growth

40.56%

27.07%

35.73%

35.73%

35.73%

35.73%

35.73%

Sales

48,077

61,093

82,921

112,549

152,763

207,345

281,429

Cost of Goods Sold

36,288

44,271

60,089

81,559

110,700

150,252

203,937

Gross Profit

11,789

16,822

22,832

30,991

42,063

57,093

77,492

Selling, General, & Administrative Exp.

9,773

14,287

19,392

26,320

35,725

48,489

65,814

Operating Income Before Depreciation

2,016

2,535

3,441

4,670

6,339

8,604

11,678

Depreciation, Depletion, & Amortization

1,149

1,863

1,956

2,654

3,603

4,890

6,637

Operating Profit

867

672

1,485

2,016

2,736

3,713

5,040

Interest Expense

65

92

125

169

230

312

424

120

(191)

(259)

(352)

(478)

(648)

(880)

-

-

-

-

-

-

-

Pretax Income

922

389

1,101

1,494

2,028

2,753

3,737

Total Income Taxes Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

291

428

385

523

710

964

1,308

631

(39)

716

971

1,318

1,789

2,429

631

(39)

716

971

1,318

1,789

2,429

631

(39)

716

971

1,318

1,789

2,429

Savings Due to Common Stock Equiv.

-

-

-

-

-

-

-

Adjusted Available for Common

631

(39)

716

971

1,318

1,789

2,429

Adjusted Net Income

631

(39)

716

971

1,318

1,789

2,429

Non-Operating Income/Expense Special Items

AMAZON: ANNUAL INCOME STATEMENT COMMON SIZE 2011

2012

2013

2014

2015

2016

2017

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Cost of Goods Sold

75.5%

72.5%

72.5%

72.5%

72.5%

72.5%

72.5%

Gross Profit

24.5%

27.5%

27.5%

27.5%

27.5%

27.5%

27.5%

Selling, General, & Administrative Exp. Operating Income Before Depreciation

20.3%

23.4%

23.4%

23.4%

23.4%

23.4%

23.4%

4.2%

4.1%

4.1%

4.1%

4.1%

4.1%

4.1%

Depreciation, Depletion, & Amortization

2.4%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Operating Profit

1.8%

1.1%

1.1%

1.1%

1.1%

1.1%

1.1%

Interest Expense

0.1%

0.2%

0.2%

0.2%

0.2%

0.2%

0.2%

Sales

20

Non-Operating Income/Expense

0.2%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

Special Items

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Pretax Income

1.9%

0.6%

0.6%

0.6%

0.6%

0.6%

0.6%

Total Income Taxes Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

0.6%

0.7%

0.7%

0.7%

0.7%

0.7%

0.7%

1.3%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

1.3%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

1.3%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

Savings Due to Common Stock Equiv.

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Adjusted Available for Common

1.3%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

Adjusted Net Income

1.3%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

AMAZON: ANNUAL BALANCE SHEET ($ MILLIONS) 2011

2012

2013

2014

2015

2016

2017

Cash

1,207

2,595

3,522

4,781

6,489

8,807

11,954

Short-Term Investments

8,369

8,853

12,016

16,310

22,137

30,046

40,782

Net Receivables

2,134

2,600

3,529

4,790

6,501

8,824

11,977

Inventories

4,992

6,031

8,186

11,111

15,081

20,469

27,782

-

-

Other Current Assets

788

1,217

1,652

2,242

3,043

4,130

5,606

Total Current Assets

17,490

21,296

28,905

39,233

53,251

72,277

98,102

5,786

9,582

10,293

13,971

18,962

25,737

34,933

(1,369)

(2,522)

(3,423)

(4,646)

(6,306)

(8,559)

(11,618)

4,417

7,060

6,870

9,324

12,656

17,178

23,316

266

140

190

258

350

475

645

-

-

-

-

-

-

-

2,602

3,277

4,448

6,037

8,194

11,122

15,096

-

-

-

-

-

-

-

503

782

1,061

1,441

1,955

2,654

3,602

25,278

32,555

41,474

56,293

76,406

103,706

140,760

11,145

13,318

18,077

24,535

33,302

45,200

61,350

-

-

-

-

-

-

-

Current Portion of LT Debt

524

1,134

1,539

2,089

2,836

3,849

5,224

Total Current Debt

524

1,134

1,539

2,089

2,836

3,849

5,224

-

-

-

-

-

-

-

-

-

-

-

-

-

ASSETS

Prepaid Expenses

Gross Plant, Property & Equipment Accumulated Depreciation Net Plant, Property & Equipment Investments at Equity Other Investments Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES Accounts Payable Notes Payable & Other ST Borrowings

Income Taxes Payable Accrued Expenses

21

Other Current Liabilities

3,227

4,550

6,176

8,382

11,377

15,442

20,960

Total Other Current Liabilities

3,227

4,550

6,176

8,382

11,377

15,442

20,960

14,896

19,002

25,791

35,007

47,514

64,491

87,534

1,415

3,830

5,198

7,056

9,577

12,999

17,643

-

-

-

-

-

-

1,210

1,531

2,078

2,821

3,828

5,196

7,053

17,521

24,363

33,068

44,883

60,920

82,686

112,230

Preferred Stock - Redeemable

-

-

-

-

-

-

-

Preferred Stock - Nonredeemable

-

-

-

-

-

-

-

Common Stock

5

5

5

5

5

5

5

Capital Surplus

6,990

8,347

8,347

8,347

8,347

8,347

8,347

Retained Earnings

1,639

1,677

1,891

4,895

8,972

14,505

22,015

Less: Treasury Stock

(877)

(1,837)

(1,837)

(1,837)

(1,837)

(1,837)

(1,837)

Common Equity

7,757

8,192

8,406

11,410

15,487

21,020

28,530

Shareholders Equity - Parent

7,757

8,192

8,406

11,410

15,487

21,020

28,530

-

-

-

-

-

-

-

7,757

8,192

8,406

11,410

15,487

21,020

28,530

25,278

32,555

41,474

56,293

76,406

103,706

140,760

Total Current Liabilities Long Term Debt Deferred Taxes & Investment Tax Credit Other Liabilities TOTAL LIABILITIES EQUITY

Total Preferred Stock

Nonredeemable Non-controlling Interest STOCKHOLDERS EQUITY TOTAL TOTAL LIABILITIES & EQUITY

AMAZON: ANNUAL BALANCE SHEET COMMON SIZE 2011

2012

2013

2014

2015

2016

2017

ASSETS Cash

2.5%

4.2%

4.2%

4.2%

4.2%

4.2%

4.2%

17.4%

14.5%

14.5%

14.5%

14.5%

14.5%

14.5%

4.4%

4.3%

4.3%

4.3%

4.3%

4.3%

4.3%

10.4%

9.9%

9.9%

9.9%

9.9%

9.9%

9.9%

Prepaid Expenses

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Current Assets

1.6%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

Total Current Assets

36.4%

34.9%

34.9%

34.9%

34.9%

34.9%

34.9%

Gross Plant, Property & Equipment

12.0%

15.7%

12.4%

12.4%

12.4%

12.4%

12.4%

Accumulated Depreciation

-2.8%

-4.1%

-4.1%

-4.1%

-4.1%

-4.1%

-4.1%

9.2%

11.6%

11.6%

11.6%

11.6%

11.6%

11.6%

Investments at Equity

0.6%

0.2%

0.2%

0.2%

0.2%

0.2%

0.2%

Other Investments

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Intangibles

5.4%

5.4%

5.4%

5.4%

5.4%

5.4%

5.4%

Deferred Charges

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Short-Term Investments Net Receivables Inventories

Net Plant, Property & Equipment

22

Other Assets

1.0%

1.3%

1.3%

1.3%

1.3%

1.3%

1.3%

52.6%

53.3%

53.3%

53.3%

53.3%

53.3%

53.3%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

23.2%

21.8%

21.8%

21.8%

21.8%

21.8%

21.8%

Notes Payable & Other ST Borrowings

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Current Portion of LT Debt

1.1%

1.9%

1.9%

1.9%

1.9%

1.9%

1.9%

Total Current Debt

1.1%

1.9%

1.9%

1.9%

1.9%

1.9%

1.9%

Income Taxes Payable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Accrued Expenses

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Current Liabilities

6.7%

7.4%

7.4%

7.4%

7.4%

7.4%

7.4%

6.7%

7.4%

7.4%

7.4%

7.4%

7.4%

7.4%

31.0%

31.1%

31.1%

31.1%

31.1%

31.1%

31.1%

Long Term Debt

2.9%

6.3%

6.3%

6.3%

6.3%

6.3%

6.3%

Deferred Taxes & Investment Tax Credit

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Liabilities

2.5%

2.5%

2.5%

2.5%

2.5%

2.5%

2.5%

36.4%

39.9%

39.9%

39.9%

39.9%

39.9%

39.9%

EQUITY

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Preferred Stock - Redeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Preferred Stock - Nonredeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Total Preferred Stock

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Common Stock

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Capital Surplus

14.5%

13.7%

13.7%

13.7%

13.7%

13.7%

13.7%

3.4%

2.7%

2.7%

2.7%

2.7%

2.7%

2.7%

Less: Treasury Stock

-1.8%

-3.0%

-3.0%

-3.0%

-3.0%

-3.0%

-3.0%

Common Equity

16.1%

13.4%

13.4%

13.4%

13.4%

13.4%

13.4%

Shareholders Equity - Parent

16.1%

13.4%

13.4%

13.4%

13.4%

13.4%

13.4%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

STOCKHOLDERS EQUITY TOTAL

16.1%

13.4%

13.4%

13.4%

13.4%

13.4%

13.4%

TOTAL LIABILITIES & EQUITY

52.6%

53.3%

53.3%

53.3%

53.3%

53.3%

53.3%

TOTAL ASSETS LIABILITIES Accounts Payable

Total Other Current Liabilities Total Current Liabilities

TOTAL LIABILITIES

Retained Earnings

Nonredeemable Non-controlling Interest

23

AMAZON: DISCOUNT CASHFLOW VALUATION FREE CASH FLOW

2013

2014

2015

2016

2017

EBIT (1-t) Plus: Depreciation and Amortization Less: Gross Capital Expenditures

965

1,310

1,778

2,414

3,276

1,956

2,654

3,603

4,890

6,637

711

3,678

4,992

6,775

9,196

Less: Change in Working Capital

(2,344)

(3,181)

(4,317)

(5,860)

(7,954)

4,554

3,468

4,707

6,389

8,671

FCFF Terminal Value

2018

9,105

220,822

FCFF- Net Net Free Cash Flow

4,554

Enterprise Value

4,707

6,389

229,493

Dollar Value 4,964

Percent 3%

Weighted Cost 0.11%

167,603

97%

9.01%

172,567

100%

9.12%

163,528

Less Long-Term Debt

4,964

Value of Shareholders' Equity

158,564

Number of Shares (Millions) Indicated Value per Share

3,468

454 $

349.26

WACC CALCULATION Cost of Equity Risk Free Rate

3.50%

Market Risk Premium Market Beta

1.05

Market Risk Premium (Book)

5.50%

Market Risk Premium

5.78%

Cost of Equity

9.28%

Tax Rate Number of Stock (Millions) Current Stock Price Long Term Growth Rate Weighted Average Cost of Capital

35.00% 454 $ 369.17 5.00%

Debt

6.15%

After-Tax Cost 4.00%

Equity

9.28%

9.28%

Total

Component Cost

24

UPS VALUATION UPS: ANNUAL INCOME STATEMENT ($ MILLIONS) 2011 Revenue Growth

2012

2013

2014

2015

2016

2017

7.19%

1.92%

6.16%

6.16%

6.16%

6.16%

6.16%

Sales

53,105

54,127

57,463

61,004

64,763

68,754

72,992

Cost of Goods Sold

45,276

49,974

48,799

51,807

54,999

58,389

61,987

7,829

4,153

8,663

9,197

9,764

10,366

11,004

-

-

-

-

-

-

Gross Profit Selling, General, & Administrative Exp. Operating Income Before Depreciation

7,829

4,153

8,663

9,197

9,764

10,366

11,004

Depreciation, Depletion, & Amortization

1,782

1,858

1,973

2,094

2,223

2,360

2,506

Operating Profit

6,047

2,295

6,691

7,103

7,541

8,006

8,499

Interest Expense

365

411

436

463

492

522

554

Non-Operating Income/Expense

61

42

45

47

50

53

57

Special Items

33

(952)

36

38

40

43

46

Pretax Income

5,776

974

6,335

6,725

7,140

7,580

8,047

Total Income Taxes Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

1,972

167

2,192

2,327

2,470

2,623

2,784

3,804

807

4,143

4,398

4,669

4,957

5,263

3,804

807

4,143

4,398

4,669

4,957

5,263

3,804

807

4,143

4,398

4,669

4,957

5,263

Savings Due to Common Stock Equiv.

-

-

-

-

-

-

-

Adjusted Available for Common

3,804

807

4,143

4,398

4,669

4,957

5,263

Adjusted Net Income

3,804

807

4,143

4,398

4,669

4,957

5,263

2011

2012

2013

2014

2015

2016

2017

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Cost of Goods Sold

85.3%

92.3%

84.9%

84.9%

84.9%

84.9%

84.9%

Gross Profit

14.7%

7.7%

12.6%

12.6%

12.6%

12.6%

12.6%

Selling, General, & Administrative Exp.

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Operating Income Before Depreciation

14.7%

7.7%

7.7%

7.7%

7.7%

7.7%

7.7%

3.4%

3.4%

3.4%

3.4%

3.4%

3.4%

3.4%

Operating Profit

11.4%

4.2%

4.2%

4.2%

4.2%

4.2%

4.2%

Interest Expense

0.7%

0.8%

0.8%

0.8%

0.8%

0.8%

0.8%

Non-Operating Income/Expense

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

Special Items

0.1%

-1.8%

0.1%

0.1%

0.1%

0.1%

0.1%

Pretax Income

10.9%

1.8%

1.8%

1.8%

1.8%

1.8%

1.8%

3.7%

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

UPS: ANNUAL INCOME STATEMENT COMMON SIZE

Sales

Depreciation, Depletion, & Amortization

Total Income Taxes

25

Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

7.2%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

7.2%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

7.2%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

Savings Due to Common Stock Equiv.

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Adjusted Available for Common

7.2%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

Adjusted Net Income

7.2%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

2011

2012

2013

2014

2015

2016

2017

Cash & Short-Term Investments

3,034

7,327

3,596

3,817

4,053

4,302

4,567

Short-Term Investments

1,241

597

634

673

714

758

805

Net Receivables

6,246

6,111

6,488

6,887

7,312

7,762

8,241

345

393

417

443

470

499

530

-

-

Other Current Assets

1,418

1,163

1,235

1,311

1,392

1,477

1,568

Total Current Assets

12,284

15,591

12,369

13,131

13,941

14,800

15,712

Gross Plant, Property & Equipment

36,541

38,041

40,385

42,874

45,516

48,321

51,299

(18,920)

(20,147)

(21,389)

(22,707)

(24,106)

(25,592)

(27,169)

17,621

17,894

18,997

20,167

21,410

22,730

24,131

-

-

-

-

-

-

-

17

19

20

21

23

24

26

2,686

2,776

2,947

3,129

3,322

3,526

3,744

-

-

-

-

-

-

-

2,093

2,583

2,742

2,911

3,091

3,281

3,483

34,701

38,863

37,075

39,360

41,786

44,361

47,095

2,300

2,278

2,418

2,567

2,726

2,894

3,072

-

-

-

-

-

-

-

Current Portion of LT Debt

33

1,781

779

827

878

933

990

Total Current Debt

33

1,781

779

827

878

933

990

-

-

-

-

-

-

-

Accrued Expenses

1,843

1,927

2,046

2,172

2,306

2,448

2,599

Other Current Liabilities

2,338

2,404

2,552

2,709

2,876

3,054

3,242

Total Other Current Liabilities

4,181

4,331

4,598

4,881

5,182

5,501

5,840

Total Current Liabilities

6,514

8,390

7,796

8,276

8,786

9,328

9,902

11,095

11,089

11,772

12,498

13,268

14,086

14,954

UPS: ANNUAL BALANCE SHEET ($ MILLIONS)

ASSETS

Inventories Prepaid Expenses

Accumulated Depreciation Net Plant, Property & Equipment Investments at Equity Other Investments Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES Accounts Payable Notes Payable & Other ST Borrowings

Income Taxes Payable

Long Term Debt

26

Deferred Taxes & Investment Tax Credit

1,900

48

51

54

57

61

65

Other Liabilities

8,084

14,603

15,503

16,458

17,473

18,549

19,693

27,593

34,130

35,122

37,286

39,584

42,024

44,613

Preferred Stock - Redeemable

-

-

-

-

-

-

-

Preferred Stock - Nonredeemable

-

-

-

-

-

-

-

Total Preferred Stock

-

-

-

-

-

-

-

Common Stock

10

10

10

10

10

10

10

Capital Surplus

88

78

78

78

78

78

78

7,025

4,643

1,943

2,064

2,191

2,327

2,471

(88)

(78)

(78)

(78)

(78)

(78)

(78)

Common Equity

7,035

4,653

1,953

2,074

2,201

2,337

2,481

Shareholders Equity - Parent Nonredeemable Non-controlling Interest STOCKHOLDERS EQUITY TOTAL

7,035

4,653

1,953

2,074

2,201

2,337

2,481

73

80

80

80

80

80

80

7,108

4,733

1,953

2,074

2,201

2,337

2,481

34,701

38,863

37,075

39,360

41,786

44,361

47,095

TOTAL LIABILITIES EQUITY

Retained Earnings Less: Treasury Stock

TOTAL LIABILITIES & EQUITY

UPS: ANNUAL BALANCE SHEET COMMON SIZE 2011

2012

2013

2014

2015

2016

2017

ASSETS Cash

5.7%

13.5%

6.3%

6.3%

6.3%

6.3%

6.3%

Short-Term Investments

2.3%

1.1%

1.1%

1.1%

1.1%

1.1%

1.1%

11.8%

11.3%

11.3%

11.3%

11.3%

11.3%

11.3%

Inventories

0.6%

0.7%

0.7%

0.7%

0.7%

0.7%

0.7%

Prepaid Expenses

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Current Assets

2.7%

2.1%

2.1%

2.1%

2.1%

2.1%

2.1%

Total Current Assets

23.1%

28.8%

28.8%

28.8%

28.8%

28.8%

28.8%

Gross Plant, Property & Equipment

68.8%

70.3%

70.3%

70.3%

70.3%

70.3%

70.3%

-35.6%

-37.2%

-37.2%

-37.2%

-37.2%

-37.2%

-37.2%

33.2%

33.1%

33.1%

33.1%

33.1%

33.1%

33.1%

Investments at Equity

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Investments

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Intangibles

5.1%

5.1%

5.1%

5.1%

5.1%

5.1%

5.1%

Deferred Charges

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

3.9%

4.8%

4.8%

4.8%

4.8%

4.8%

4.8%

65.3%

71.8%

71.8%

71.8%

71.8%

71.8%

71.8%

Net Receivables

Accumulated Depreciation Net Plant, Property & Equipment

Other Assets TOTAL ASSETS

27

LIABILITIES Accounts Payable

4.3%

4.2%

4.2%

4.2%

4.2%

4.2%

4.2%

Notes Payable & Other ST Borrowings

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Current Portion of LT Debt

0.1%

3.3%

1.4%

1.4%

1.4%

1.4%

1.4%

Total Current Debt

0.1%

3.3%

1.4%

1.4%

1.4%

1.4%

1.4%

Income Taxes Payable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Accrued Expenses

3.5%

3.6%

3.6%

3.6%

3.6%

3.6%

3.6%

Other Current Liabilities

4.4%

4.4%

4.4%

4.4%

4.4%

4.4%

4.4%

7.9%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

Total Current Liabilities

12.3%

15.5%

15.5%

15.5%

15.5%

15.5%

15.5%

Long Term Debt

20.9%

20.5%

20.5%

20.5%

20.5%

20.5%

20.5%

3.6%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

Other Liabilities

15.2%

27.0%

27.0%

27.0%

27.0%

27.0%

27.0%

TOTAL LIABILITIES

52.0%

63.1%

63.1%

63.1%

63.1%

63.1%

63.1%

Preferred Stock - Redeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Preferred Stock - Nonredeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Total Preferred Stock

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Common Stock

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Capital Surplus

0.2%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

Retained Earnings

13.2%

8.6%

8.6%

8.6%

8.6%

8.6%

8.6%

Less: Treasury Stock

-0.2%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

-0.1%

Common Equity

13.2%

8.6%

8.6%

8.6%

8.6%

8.6%

8.6%

Shareholders Equity - Parent

13.2%

8.6%

8.6%

8.6%

8.6%

8.6%

8.6%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

STOCKHOLDERS EQUITY TOTAL

13.4%

8.7%

8.7%

8.7%

8.7%

8.7%

8.7%

TOTAL LIABILITIES & EQUITY

65.3%

71.8%

71.8%

71.8%

71.8%

71.8%

71.8%

Total Other Current Liabilities

Deferred Taxes & Investment Tax Credit

EQUITY

Nonredeemable Non-controlling Interest

28

UPS: DISCOUNT CASHFLOW VALUATION FREE CASH FLOW

2013

2014

2015

2016

2017

EBIT (1-t)

4,376

4,645

4,932

5,236

5,558

Plus: Depreciation and Amortization

1,973

2,094

2,223

2,360

2,506

Less: Gross Capital Expenditures

2,344

2,489

2,642

2,805

2,978

Less: Change in Working Capital

(2,664)

243

258

274

290

FCFF

6,668

4,008

4,255

4,517

4,795

Terminal Value

6,668

4,008

4,255

4,517

4,795

FCFF- Net

2018

4,939

106,571

Net Free Cash Flow

6,668

Enterprise Value

93,521

Less Long-Term Debt

12,870

Value of Shareholders' Equity

80,651

Number of Shares (Millions)

4,008

4,255

4,517

111,367

953

Indicated Value per Share

$ 84.63

WACC CALCULATION Cost of Equity Risk Free Rate

3.50%

Market Risk Premium Market Beta

0.850

Market Risk Premium (Book)

5.50%

Market Risk Premium

4.68%

Cost of Equity

8.18%

Tax Rate

34.60%

Number of Stock (Millions) Current Stock Price Long Term Growth Rate Weighted Average Cost of Capital

953 $ 100.94 3.00% Component Cost

After-Tax Cost

Dollar Value

Percent

Weighted Cost

Debt

5.50%

3.60%

12,870.00

12%

0.42%

Equity

8.18%

8.18%

96,195.82

88%

7.21%

109,065.82

100%

7.63%

Total

29

FEDEX VALUATION FEDEX: ANNUAL INCOME STATEMENT ($ MILLIONS) 2012

2013

2014

2015

2016

2017

2018

8.59%

3.77%

8.50%

8.50%

8.50%

8.50%

8.50%

Sales

42,680

44,287

48,053

52,140

56,573

61,384

66,605

Cost of Goods Sold

31,857

33,018

35,826

38,872

42,178

45,765

49,657

Gross Profit

10,823

11,269

12,227

13,267

14,395

15,620

16,948

Selling, General, & Administrative Exp.

5,456

5,672

6,154

6,678

7,246

7,862

8,530

Operating Income Before Depreciation

5,367

5,597

6,073

6,589

7,150

7,758

8,417

Depreciation, Depletion, & Amortization

2,113

2,386

2,589

2,809

3,048

3,307

3,588

Operating Profit

3,254

3,211

3,484

3,780

4,102

4,451

4,829

Interest Expense

137

127

138

150

162

176

191

92

31

34

36

40

43

47

(68)

(660)

(160)

(174)

(188)

(204)

(222)

Pretax Income

3,141

2,455

3,220

3,494

3,791

4,113

4,463

Total Income Taxes Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

1,109

894

1,155

1,253

1,360

1,476

1,601

2,032

1,561

2,065

2,240

2,431

2,638

2,862

2,032

1,561

2,065

2,240

2,431

2,638

2,862

2,032

1,561

2,065

2,240

2,431

2,638

2,862

Savings Due to Common Stock Equiv.

(3)

(3)

(3)

(4)

(4)

(4)

(5)

Adjusted Available for Common

2,029

1,558

2,062

2,237

2,427

2,634

2,858

Adjusted Net Income

2,029

1,558

2,062

2,237

2,427

2,634

2,858

Revenue Growth

Non-Operating Income/Expense Special Items

FEDEX: ANNUAL INCOME STATEMENT COMMON SIZE 2012

2013

2014

2015

2016

2017

2018

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Cost of Goods Sold

74.6%

74.6%

74.6%

74.6%

74.6%

74.6%

74.6%

Gross Profit

25.4%

25.4%

25.4%

25.4%

25.4%

25.4%

25.4%

Selling, General, & Administrative Exp. Operating Income Before Depreciation

12.8%

12.8%

12.8%

12.8%

12.8%

12.8%

12.8%

12.6%

12.6%

12.6%

12.6%

12.6%

12.6%

12.6%

Depreciation, Depletion, & Amortization

5.0%

5.4%

5.4%

5.4%

5.4%

5.4%

5.4%

Operating Profit

7.6%

7.3%

7.3%

7.3%

7.3%

7.3%

7.3%

Interest Expense

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

0.3%

Non-Operating Income/Expense

0.2%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

Special Items

-0.2%

-1.5%

-0.3%

-0.3%

-0.3%

-0.3%

-0.3%

Pretax Income

7.4%

5.5%

5.5%

5.5%

5.5%

5.5%

5.5%

Sales

30

Total Income Taxes Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common

2.6%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

4.8%

3.5%

3.5%

3.5%

3.5%

3.5%

3.5%

4.8%

3.5%

3.5%

3.5%

3.5%

3.5%

3.5%

4.8%

3.5%

3.5%

3.5%

3.5%

3.5%

3.5%

Savings Due to Common Stock Equiv.

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Adjusted Available for Common

4.8%

3.5%

3.5%

3.5%

3.5%

3.5%

3.5%

Adjusted Net Income

4.8%

3.5%

3.5%

3.5%

3.5%

3.5%

3.5%

2012

2013

2014

2015

2016

2017

2018

2,843

4,917

5,335

5,789

6,281

6,815

7,395

4,704

5,044

5,473

5,938

6,443

6,991

7,586

440

457

496

538

584

633

687

Other Current Assets

1,069

856

929

1,008

1,093

1,186

1,287

Total Current Assets

9,056

11,274

12,233

13,273

14,402

15,626

16,955

36,164

38,109

41,350

44,866

48,682

52,821

57,313

(18,916)

(19,625)

(21,294)

(23,105)

(25,070)

(27,201)

(29,515)

17,248

18,484

20,056

21,761

23,612

25,620

27,799

Investments at Equity

-

-

-

-

-

-

-

Other Investments

-

-

-

-

-

-

-

2,421

2,827

3,067

3,328

3,611

3,918

4,252

-

-

-

-

-

-

-

1,178

982

1,066

1,156

1,254

1,361

1,477

29,903

33,567

36,422

39,519

42,879

46,526

50,482

1,613

1,879

2,039

2,212

2,400

2,604

2,826

-

-

-

-

-

-

-

Current Portion of LT Debt

417

251

272

296

321

348

377

Total Current Debt

417

251

272

296

321

348

377

-

-

-

-

-

-

-

3,344

3,620

3,928

4,262

4,624

5,018

5,444

-

-

-

-

-

-

-

Total Other Current Liabilities

3,344

3,620

3,928

4,262

4,624

5,018

5,444

Total Current Liabilities

5,374

5,750

6,239

6,770

7,345

7,970

8,648

FEDEX: ANNUAL BALANCE SHEET ($ MILLIONS)

ASSETS Cash Cash & Short-Term Investments Net Receivables Inventories Prepaid Expenses

Gross Plant, Property & Equipment Accumulated Depreciation Net Plant, Property & Equipment

Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES Accounts Payable Notes Payable & Other ST Borrowings

Income Taxes Payable Accrued Expenses Other Current Liabilities

31

Long Term Debt

1,250

2,739

2,972

3,225

3,499

3,796

4,119

836

1,652

1,792

1,945

2,110

2,290

2,484

7,716

6,028

6,541

7,097

7,700

8,355

9,066

15,176

16,169

17,544

19,036

20,655

22,411

24,317

Preferred Stock - Redeemable

-

-

-

-

-

-

-

Preferred Stock - Nonredeemable

-

-

-

-

-

-

-

Common Stock

32

32

32

32

32

32

32

Capital Surplus

2,595

2,668

2,668

2,668

2,668

2,668

2,668

12,181

14,699

16,179

17,784

19,526

21,416

23,466

(81)

(1)

(1)

(1)

(1)

(1)

(1)

Common Equity

14,727

17,398

18,878

20,483

22,225

24,115

26,165

Shareholders Equity - Parent

14,727

17,398

18,878

20,483

22,225

24,115

26,165

-

-

-

-

-

-

-

STOCKHOLDERS EQUITY TOTAL

14,727

17,398

18,878

20,483

22,225

24,115

26,165

TOTAL LIABILITIES & EQUITY

29,903

33,567

36,422

39,519

42,879

46,526

50,482

Deferred Taxes & Investment Tax Credit Other Liabilities TOTAL LIABILITIES EQUITY

Total Preferred Stock

Retained Earnings Less: Treasury Stock

Nonredeemable Non-controlling Interest

FEDEX: ANNUAL BALANCE SHEET COMMON SIZE 2012

2013

2014

2015

2016

2017

2018

6.7%

11.1%

11.1%

11.1%

11.1%

11.1%

11.1%

11.0%

11.4%

11.4%

11.4%

11.4%

11.4%

11.4%

Inventories

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

Prepaid Expenses

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Current Assets

2.5%

1.9%

1.9%

1.9%

1.9%

1.9%

1.9%

Total Current Assets

21.2%

25.5%

25.5%

25.5%

25.5%

25.5%

25.5%

Gross Plant, Property & Equipment

84.7%

86.1%

86.1%

86.1%

86.1%

86.1%

86.1%

-44.3%

-44.3%

-44.3%

-44.3%

-44.3%

-44.3%

-44.3%

40.4%

41.7%

41.7%

41.7%

41.7%

41.7%

41.7%

Investments at Equity

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other Investments

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Intangibles

5.7%

6.4%

6.4%

6.4%

6.4%

6.4%

6.4%

Deferred Charges

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

2.8%

2.2%

2.2%

2.2%

2.2%

2.2%

2.2%

70.1%

75.8%

75.8%

75.8%

75.8%

75.8%

75.8%

ASSETS Cash Short-Term Investments Net Receivables

Accumulated Depreciation Net Plant, Property & Equipment

Other Assets TOTAL ASSETS

32

LIABILITIES Accounts Payable

3.8%

4.2%

4.2%

4.2%

4.2%

4.2%

4.2%

Notes Payable & Other ST Borrowings

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Current Portion of LT Debt

1.0%

0.6%

0.6%

0.6%

0.6%

0.6%

0.6%

Total Current Debt

1.0%

0.6%

0.6%

0.6%

0.6%

0.6%

0.6%

Income Taxes Payable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Accrued Expenses

7.8%

8.2%

8.2%

8.2%

8.2%

8.2%

8.2%

Other Current Liabilities

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

7.8%

8.2%

8.2%

8.2%

8.2%

8.2%

8.2%

12.6%

13.0%

13.0%

13.0%

13.0%

13.0%

13.0%

Long Term Debt

2.9%

6.2%

6.2%

6.2%

6.2%

6.2%

6.2%

Deferred Taxes & Investment Tax Credit

2.0%

3.7%

3.7%

3.7%

3.7%

3.7%

3.7%

Other Liabilities

18.1%

13.6%

13.6%

13.6%

13.6%

13.6%

13.6%

TOTAL LIABILITIES

35.6%

36.5%

36.5%

36.5%

36.5%

36.5%

36.5%

Preferred Stock - Redeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Preferred Stock - Nonredeemable

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Total Preferred Stock

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Common Stock

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

Capital Surplus

6.1%

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

Retained Earnings

28.5%

33.2%

33.2%

33.2%

33.2%

33.2%

33.2%

Less: Treasury Stock

-0.2%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Common Equity

34.5%

39.3%

39.3%

39.3%

39.3%

39.3%

39.3%

Shareholders Equity - Parent

34.5%

39.3%

39.3%

39.3%

39.3%

39.3%

39.3%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

STOCKHOLDERS EQUITY TOTAL

34.5%

39.3%

39.3%

39.3%

39.3%

39.3%

39.3%

TOTAL LIABILITIES & EQUITY

70.1%

75.8%

75.8%

75.8%

75.8%

75.8%

75.8%

Total Other Current Liabilities Total Current Liabilities

EQUITY

Nonredeemable Non-controlling Interest

33

FEDEX: DISCOUNT CASHFLOW VALUATION FREE CASH FLOW

2014

2015

2016

2017

2018

2019

EBIT (1-t) Plus: Depreciation and Amortization Less: Gross Capital Expenditures

2,234

2,424

2,630

2,854

3,097

2,589

2,809

3,048

3,307

3,588

3,241

3,516

3,815

4,140

4,492

Less: Change in Working Capital

470

510

553

600

651

1,113

1,207

1,310

1,421

1,542

FCFF Terminal Value

1,588

28,249

FCFF- Net

1,113

Net Free Cash Flow

1,207

1,310

1,421

29,791

23,791

Enterprise Value

2,990

Less Long-Term Debt

2,990

Value of Shareholders' Equity

20,801

Number of Shares (Millions)

318

Indicated Value per Share

$65.50

WACC CALCULATION Cost of Equity Risk Free Rate

3.50%

Market Risk Premium Market Beta

1

Market Risk Premium (Book)

5.50%

Market Risk Premium

5.50%

Cost of Equity

9.00%

Tax Rate

35.87%

Number of Stock (Millions)

317.57

Current Stock Price Long Term Growth Rate Weighted Average Cost of Capital

$ 138.65 3.00%

Debt

4.79%

After-Tax Cost 3.07%

Equity

9.00%

9.00%

Total

Component Cost

Dollar Value 2,990.00

6%

Weighted Cost 0.20%

44,030.66

94%

8.43%

47,020.66

100%

8.62%

Percent

34

COMBINED VALUATION COMBINED ANNUAL INCOME STATEMENT ($ MILLIONS)

Sales

1

Cost of Goods Sold Gross Profit Selling, General, & Administrative Exp.

2

2011

2012

2013

2014

2015

2016

2017

101,182

115,220

149,509

184,834

231,666

294,046

377,458

81,564

94,245

108,888

133,365

165,699

208,641

265,925

19,618

20,975

40,621

51,469

65,967

85,405

111,534

9,773

14,287

18,810

25,531

34,653

47,034

63,840

Operating Income Before Depreciation

9,845

6,688

21,811

25,938

31,314

38,370

47,694

Depreciation, Depletion, & Amortization

2,931

3,721

3,928

4,748

5,826

7,250

9,143

Operating Profit

6,914

2,967

17,883

21,189

25,488

31,120

38,551

Interest Expense

430

503

561

633

722

834

978

Non-Operating Income/Expense

181

(149)

(215)

(305)

(427)

(595)

(823)

33

(952)

36

38

40

43

46

Pretax Income

6,698

1,363

17,143

20,290

24,379

29,734

36,795

Total Income Taxes

2,263

595

6,000

7,102

8,533

10,407

12,878

4,435

768

11,143

13,189

15,846

19,327

23,917

4,435

768

11,143

13,189

15,846

19,327

23,917

4,435

768

11,143

13,189

15,846

19,327

23,917

Special Items

Income Before Extraordinary Items & Non-controlling Interest Income Before Extraordinary Items & Discontinued Operations Available for Common Savings Due to Common Stock Equiv.

-

-

-

-

-

-

-

Adjusted Available for Common

4,435

768

11,143

13,189

15,846

19,327

23,917

Adjusted Net Income

4,435

768

11,143

13,189

15,846

19,327

23,917

1

Revenue Synergies = (Amazon forecast + UPS forecast) *6.5%

2

Cost Synergies = (Amazon forecast + UPS forecast) *-3.0%

35

COMBINED ANNUAL BALANCE SHEET ($ MILLIONS) 2011

2012

2013

2014

2015

2016

2017

Cash

4,241

9,922

7,118

8,598

10,541

13,110

16,522

Short-Term Investments

9,610

9,450

12,650

16,982

22,851

30,805

41,587

Net Receivables

8,380

8,711

10,017

11,677

13,813

16,587

20,218

Inventories

5,337

6,424

8,603

11,554

15,551

20,968

28,312

-

-

-

-

-

-

-

Other Current Assets

2,206

2,380

2,887

3,553

4,435

5,608

7,175

Total Current Assets

29,774

36,887

41,274

52,364

67,191

87,077

113,813

Gross Plant, Property & Equipment

42,327

47,623

50,678

56,845

64,479

74,059

86,233

(20,289)

(22,669)

(24,812)

(27,353)

(30,412)

(34,151)

(38,787)

22,038

24,954

25,867

29,492

34,066

39,908

47,446

Investments at Equity

266

140

190

258

350

475

645

Other Investments

17

19

20

21

23

24

26

5,288

40,837

42,178

43,949

46,299

49,432

53,623

-

-

-

-

-

-

-

Other Assets

2,596

3,365

3,804

4,352

5,046

5,935

7,086

TOTAL ASSETS

59,979

106,202

113,333

130,436

152,975

182,850

222,638

13,445

15,596

20,495

27,103

36,027

48,094

64,422

ASSETS

Prepaid Expenses

Accumulated Depreciation Net Plant, Property & Equipment

Intangibles Deferred Charges

LIABILITIES Accounts Payable Notes Payable & Other ST Borrowings Current Portion of LT Debt

-

-

-

-

-

-

-

557

2,915

2,319

2,917

3,714

4,781

6,214

Total Current Debt

557

2,915

2,319

2,917

3,714

4,781

6,214

-

-

-

-

-

-

-

Accrued Expenses

1,843

1,927

2,046

2,172

2,306

2,448

2,599

Other Current Liabilities

5,565

6,954

8,728

11,092

14,254

18,496

24,202

Total Other Current Liabilities

7,408

8,881

10,774

13,264

16,559

20,944

26,800

Total Current Liabilities

21,410

27,392

33,587

43,283

56,301

73,819

97,436

Long Term Debt

12,510

14,919

16,971

19,554

22,845

27,084

32,597

Deferred Taxes & Investment Tax Credit Other Liabilities

1,900

48

51

54

57

61

65

9,294

16,134

17,581

19,279

21,301

23,745

26,745

TOTAL LIABILITIES

45,114

58,493

68,190

82,169

100,504

124,710

156,843

Preferred Stock - Redeemable

-

-

-

-

-

-

-

Preferred Stock - Nonredeemable

-

-

-

-

-

-

-

Income Taxes Payable

EQUITY

36

Total Preferred Stock

-

-

-

-

-

-

-

Common Stock

15

8

8

8

8

8

8

Capital Surplus

7,078

46,210

39,763

39,763

39,763

39,763

39,763

Retained Earnings

8,664

3,405

7,287

10,410

14,615

20,284

27,938

Less: Treasury Stock

(965)

(1,915)

(1,915)

(1,915)

(1,915)

(1,915)

(1,915)

Common Equity

14,792

47,709

45,143

48,267

52,471

58,140

65,795

Shareholders Equity - Parent

14,792

47,709

45,143

48,267

52,471

58,140

65,795

Nonredeemable Non-controlling Interest STOCKHOLDERS EQUITY TOTAL

73

-

1

2

3

4

5

14,865

47,709

45,142

48,265

52,468

58,136

65,790

TOTAL LIABILITIES & EQUITY

59,979

106,202

113,332

130,434

152,972

182,846

222,633

CALCULATION OF RELATIVE VALUATION Stand-Alone Values

Amazon

UPS

Total

Value of Shareholder Equity ($, mil)

158,564

80,651

239,215

454

953

1407

349.26

84.63

433.89

369.2

100.9

167,603

96,196

Shares (mil) Value Per Share ($) Market Price Per Share ($) Market Cap ($, Mil) 20% premium over market price ($, mil)

19,239

Total Value Given ($, mil)

115,435

Amazon Market Price Per Share ($) Number of Shares (mil) Ownership

263,799

369.2 454

313

767

59.22%

40.78%

100%

Combined Value ($, mil)

347,850

Synergy ($, mil)

73,851

34,784

108,635

Percentage of Synergy

67.98%

32.02%

100%

37

DISCOUNT CASH FLOW VALUATION FREE CASH FLOW

2013

2014

2015

2016

2017

EBIT (1-t) Plus: Depreciation and Amortization Less: Gross Capital Expenditures

11,624

13,773

16,567

20,228

25,058

3,928

4,748

5,826

7,250

9,143

3,055

6,166

7,634

9,580

12,174

Less: Change in Working Capital

(5,008)

(2,938)

(4,060)

(5,586)

(7,663)

15,293

18,819

23,485

29,690

Less: Acquisition Cost

115,435

FCFF

(97,930)

Terminal Value

2018

30,655

587,729

FCFF- Net Net Free Cash Flow

(97,930)

Enterprise Value

365,684

Less Long-Term Debt Value of Shareholders' Equity Number of Shares (Millions) Indicated Value per Share

15,293

18,819

23,485

617,419

Dollar Value 17,834

Percent 5%

Weighted Cost 0.17%

347,850

95%

8.30%

365,684

100%

8.47%

17,834 347,850 767 $ 453.70

WACC CALCULATION Cost of Equity Risk Free Rate

3.50%

Market Risk Premium Market Beta

0.95

Market Risk Premium (Book)

5.50%

Market Risk Premium

5.23%

Cost of Equity

8.73%

Tax Rate Number of Stock (Millions) Long Term Growth Rate Weighted Average Cost of Capital

35.00% 767 3.25%

Debt

5.25%

After-Tax Cost 3.41%

Equity

8.73%

8.73%

Total

Component Cost

38

ASSUMPTIONS FOR THE DISCOUNT CASH FLOW VALUATIONS 

Revenues were projected based on the average annual revenue growth rate for the last 3 years



All other income statement and balance sheet components were forecasted based on the ratio to sales of the immediate previous year



Whenever components contains special items, average of last 3 year ratios were used to forecast the numbers



Beta was extracted from the Value Line



Cost of Debt – Refer Annual Report Notes



Market Risk Premium - 5.5%



Effective tax rates were extracted from the annual report



Current Stock price was extracted from Yahoo Finance – Closing stock price 11/15/2013



Risk free rate was considered as 3.5%

MARKET BASED VALUATIONS

Market Value Outstanding shares Revenue Operating Income Net Income Value/Revenue Value/Operating Income Value/Net Income

DHL

FedEx

16,241 1260 55,512 2,665 1,658

44,031 318 44,287 2,551 1,561

0.29 6.09 9.80

0.99 17.26 28.21

Industry

Market Value Outstanding shares Revenue Operating Income Net Income

UPS

16,241 1260 55,512 2,665 1,658

96,196 953 54,127 1,343 807

UPS Value Projection per share

953 57,463 6,691 4,143 1.30 39.80

Average Value

DHL

UPS Value Projection

Industry

36,971 78,130 78,723

38.79 81.98 82.61

64,608

67.79

FedEx Value Projection

FedEx Value Projection per share

317.57 48,053 3,484 2,062

39

Value/Revenue Value/Operating Income Value/Net Income

0.29 6.09 9.80

0.81 32.79 54.56

Average Value

5.39

29.39

1.30 39.80

26,575 67,730 66,341

83.68 213.28 208.90

53,548

168.62

40