UPS' Scott Davis: 'We Needed to Be Public'

UPS had been a private company since its founding in 1907. How did you begin to think about going public?

We do a lot of scenario planning. Essentially, we ask, "What is the world likely to look like 10 years out?" We have about 20 people in the corporate strategy department. They work hand in hand with the management committee, which comprises the 12 most senior officers, and together they discuss four or five possibilities of what world is going to look like. These scenarios can be in the form of research papers or special presentations or even just memos.

In the mid-1990s, we were doing this, and one of our conclusions was that we were entering a brave new world — one that would be friendlier to global trade. We saw trade growing at a fast pace for decades to come, with fewer restrictions. That drove the decision to broaden the charter of UPS, from being a package transportation company to one that enables global commerce. We decided to provide a lot of other solutions and services, such as freight forwarding, contract logistics, and customs brokerage. For many of our customers, particularly in the U.S, where they were accustomed to serving the large domestic market and sourcing from it, supply chains were going to become much more complicated.

How did that connect with the idea of going public?

We took a long look at the capital structure of the company and a look at the capabilities we needed to acquire, and going public became an option we had to look at. At the time, UPS had been a private company for 92 years, so this was a significant decision. Even though we were private, we had 146,000 shareholders among our employees and retirees.

As a private company, you make the market for your equity. Anyone who wanted to buy and sell stock did so through the company. Being private had its benefits; the biggest one was that we were not worried about marketing ourself to Wall Street or educating the street about our business. It's easier to pursue long-term changes, even if they cost a lot of money. But being private also restricted us financially and limited how much risk-taking we could do.

We spent a lot of time working through the pros and cons, but it came down to that we needed more financial flexibility if we were going to go into broader services. UPS at the time did not need to raise cash. But if we needed stock to do an acquisition, being public gave us the option to go to the equity markets. We needed to be public to have currency to make acquisitions.

Who was involved in the decision?

The strategy group, the management committee, and the steering committee decide where we want to go. They ask: What does it mean? Is this the right decision? Will it change the culture? It was a painstaking discussion that took place over a period of months — sometimes formally, sometimes informally. When we decided it was the right decision at the right time, then we turned it over to the M&A group to do the due diligence.

There was a visceral and strong fight among the management committee. Some wondered if we could find some way to pursue our strategy without going public. They worried what would happen to our culture.

A very important part of our culture was built on the premise of employee ownership, so it ultimately came down to devising a "public" structure that preserved employee control; i.e., the two-tier structure in which employees hold A shares and the public holds B shares.

Then what happened?

Once we made the decision, there was a massive internal communications program that touched every employee of the company — domestic and international, part-time, hourly and management. Then the company had to create an investor relations department and conduct a road show around the world to educate investors about the company and the IPO. Of course, people worried that it would change the company, change the way we manage. But I think people came to understand our reasons.

What have been the effects?

We've acquired more than 40 companies since the IPO, including MBE, Challenge Air Cargo, and First International Bancorp.

People both in and outside wonder if we had gone public sooner if we would have been able to stomach the losses we sustained to build international network in the late 80s, early 90s. We started our own airline in 1988; started building a core international network that year — and we didn't show our first profit until 97-98.

How did you choose an investment bank?

This was late 1999, around the frothiest time of the tech bubble. There were a lot of IPOs at the time. Even so, all the banks wanted to be part of this. So we talked to several of them, including Goldman and Merrill, to understand their capabilities and ask about how to structure the syndicate. Morgan Stanley had advised us on quite a few transactions, and they had people we knew and trusted so we decided to go with them.

What could other companies learn from the UPS experience?

For one thing, we went about it in an evolutionary manner. At first, in November 1999, we sold only 10 percent to the public; the other 90 percent was still held by insiders. Today, the figure is about 30 percent insiders, such as retirees. The balance has changed as shareholders — the foundations formed by the founders, or retirees — sold off their stock, to diversify their portfolios. We set it up so that when private shareholders decided to sell their shares, these were automatically converted into public shares.

I think going about such a big decision in a slow way is the right approach. And of course, as it happens, it has been a rather difficult 10 years. We went through the tech bubble bursting the 2001 recession and the Great Recession. It's been a turbulent decade.

Could we have ridden through the last 10 years as a private company? Yes, but having the financial flexibility we gained as a public company has helped us to weather this. Even in 2008, we did not miss a beat; we still had access to the credit markets.

Your first job with UPS was in 1986 and you were named CEO in 2007. So you've been around for a while. How have things changed as a result of being public?

Not as much as you might think. We are still really focused on our customers and employees and we are still looking 10 years ahead. When we were a private company, we liked to invest in times of crisis; as a public company, we do the same.

Still, ten years later, we've had a chance to reflect. We believe we are better positioned as company. There is a lot of protectionist talk, but we still think that global trade is going to expand. Going public was the right strategy.

-As told to Cait Murphy

More from this Decisive Moment:

• Should You Own UPS Stock?
• Retired UPS Exec: 'How the IPO Hurt the Company Culture and My Retirement'