Investors Await UPS' Next Big Delivery -- Its IPO

United Parcel Service is known for its plain trucks and staid uniforms, but there's nothing conservative about its initial public offering.

The packaging giant and world's largest express carrier is expected to burst onto the public market Wednesday in a mammoth $5.25 billion deal, the largest IPO ever in the U.S. and the eighth-largest worldwide. The deal is expected to be priced Tuesday evening.

The Atlanta-based delivery service plans to offer 109.4 million shares at an expected price range of 47 to 49, up from the 36-to-42 range at which they were priced over two weeks ago. That would be the third-highest offer price this year, behind Genentech (DNA), which priced at 97, and Goldman Sachs (GS), which priced at 53, according to Thomson Financial Securities Data.

Add the backing of Morgan Stanley Dean Witter, Goldman Sachs and Merrill Lynch, among others, and there's enough hype surrounding the offering to make it sound like the next hot dot-com. Indeed, there's even an Internet tie-in: UPS delivers many of the packages ordered online, and it has its own Web-based document-delivery service.

But unlike the dot-coms, this company makes money and has a history longer than a fruit fly's life span. Founded 92 years ago, UPS earned $222 million in the nine months ended Sept. 30, on $19.61 billion in revenue.

The company has positioned itself as a business-to-business and business-to-consumer player in the e-commerce market.

UPS shipped 55% of all online purchases last Christmas, according to Redwood City, Calif.-based analysis firm Zona Research, compared with 10% by FedEx, a subsidiary of FDX (FDX), and 32% by the U.S. Postal Service. (The U.S. Postal Service is a Zona client, but Zona hasn't done consulting for FDX or UPS.)

The reason for UPS' dominance is simple: Most Internet shoppers don't mind waiting a few days to receive books or music ordered online, making UPS' low-cost, three-day shipping service ideal for e-commerce sites. FedEx and Airborne Freight (ABF) have focused on more expensive, next-day air deliveries.

All this bodes well for UPS this holiday season. Shopping online is expected to pull in $9.5 billion in the fourth quarter, almost 3 times the $3.5 billion spent online during the same quarter in 1998, according to e-commerce consultants Gomez Advisors in Lincoln, Mass.

Recognizing the profits to be made in the online shipping game, UPS' competitors are playing catch-up.

The U.S. Postal Service is spending millions of dollars on e-commerce initiatives, including Priority Mail, its two- and three-day delivery service. FedEx has invested $500 million in RPS, a business-to-business delivery network it acquired 1997. Like UPS, the company delivers packages quickly and cheaply and will eventually be used to deliver e-commerce packages to consumers.

But delivering packages is just the beginning.

According to the Aberdeen Group, an information-technology consulting firm in Boston, of the 21 million express packages of documents that are delivered each day, 31% will migrate to electronic delivery by 2003.

UPS has a Web-based document-delivery service using technology supplied by Tumbleweed Communications (TMWD) in Redwood City. Using Tumbleweed's software, companies like UPS can offer secure document delivery at a fraction of the cost of sending a traditional overnight package by air.

None of this is good news for FDX, which announced in September that it might not meet its profit forecast this year. At the time, analysts projected the company would earn $2.44 per share for the fiscal year ending in May, according to First Call/Thomson Financial. Today, they expect FDX to earn $2.17 per share.

"The growth rate of air shipments has slowed while ground-based deliveries are starting to increase," says Ed Wolfe, an analyst at Bear Stearns. (Bear Stearns has a neutral rating on FDX, and hasn't performed underwriting for it. The firm's not an underwriter on the UPS IPO.)

FDX says it's focusing on the business-to-business area. "We have been in the electronic-commerce business for many, many years," says a spokeswoman for the company.

But despite a clean balance sheet and a strong lead in the packaging industry, UPS still raises some concern with its IPO. "The big thing is it's never been public before, and it's kind of an old-school management team," says Randall Roth, a senior analyst with Renaissance Capital's (IPOSX)IPO Plus Aftermarket fund.

Still, the packaging giant will have no problem finding investors. "UPS is a company that people have wanted to invest in for a long time," says Internet IPO analyst Tom Taulli of internet.com.

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