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TEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDApproachSubmitted By : Debi Prasad Dash, Renuka Bhardwaj, Varun Taneja, Nitin BansalBMWHarley DavidsonIndustry AnalysisAcquisition RationaleKey IssuesCredit AnalysisValuation DriversValuationDeal StructureSynergiesImpact analysisAccretion DilutionAlternatives
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternatives Market Size(2011): $74 billion Forecasted CAGR for next 5 years: 12.1% Industry Market Leaders: Honda andYamaha-24.30%3.20%3.70%-13.50%-12.30%1.40%-6.90%SpainGermanyFranceGreat BritainItalyUSAJapanGrowth of 500cc Motorcycle MarketsGlobal Motorcycle Industry AnalysisAsia-Pacific 3.2%Americas 32.5%Europe 20.5%Middle East & Africa 3.8%Global Markets ShareTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDGlobal cross sector M&A deal in value and Volume in Automotive sectorKey factors that spark automotive M&A growth are: The European Union’s successful resolution of the sovereign debt issues of memberstates Strong economic recovery in developed economies such as the US and Japan Abating inflationary pressures in emerging markets Resumption of trend line economic growth in China and India Successful transition of power to China’s next Government Ageing customer base in North American and European Markets will lead to growth inheavy motorcycles segment.
BMW – Company Overview30%21%17%14%9% 9%BMW - motorcycle markets 2011Germany Italy USAFrance Spain Great BritainTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDIndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternatives2nd Most valuable premium auto brand in 2011 2 motorcycle brands (BMW and Husqvarna)3automobile brands (BMW, MINI and Rolls-Royce) 100000+ associates 150+ countriesFinancial Performance BMW(2011) GrowthRevenue 13.80%Operating Profit 56.88%Volume 14.20%Profit Before Tax 52.1%Mission: The BMW Group is the world’s leading provider of premium products and premium services for individual mobility.75%23%2%AutomobilesFinancialServicesMotorcycles24%20%17%14%8%10%6%Rest of EuropeNorth AmericaGermanyChinaRest of AsiaGreat BritainOther MarketsRegion wise Contribution by SalesSegment EmployeeAutomobiles 91,517Motorcycles 2,867Financial Service 5,801Others(Merchandise etc) 121-20-100102030Sales (in000)BMW motorcycle segment
3785611465992010 2011Operating_Income Net_IncomeIndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternatives67% of the total revenue comes fromonly Motorcycles sales.55.7% Market Share in US(+651 cc category)34.7% of all new Harley-Davidsonmotorcycles sold, were sold outsideof the United States..HARLEY-DAVIDSON – Company OverviewMission : We ride our customers and apply this deep connection in every market we server to create superior value for all of ourstakeholders.2011-2012 OPCO FINCORevenue Growth(%) 11.62 -0.048Operating Expenses 9 -23.9Restructuring Expenses -58% 0%TEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND68%17%5%3%3%REVENUE- 2011US EUROPE JAPAN67%19%5%5%4%REVENUE2010CANADA OTHEREPSDividendPer ShareShares Outstanding Brand PortfolioHarley, H-D, Bar & Shieldlogo, Blast, Cagiva, Dyna, Softail, Sportster, VRSC, Riders Edge, MotorClothes, H.O.G & V-Rod-20%0%20%40%60%2008 2009 2010 2011 2012Return on EquityUNITED STATES 55.7%EUROPE REGION 13.7%MARKET SHARE
Entering to the Emerging Market: Eastern Europe and USA marketing is almost saturatedfor Premium product category in this segment. So Brazil, China, India and some of the Africancountries are now emerging in their economy. So thatmarket is new potential market for premium bikesegment. But this market is price sensitive. The affordability of thepremium bike in countries should be lower by 40-50%.Line Expansion : BMW enjoys the luxury bike segment after acquiring Husqvarna.But they are on in the segment of roadster and sports bike, wherecustomisation of bikes is less and they don’t have any significantpresence in merchandising. After acquiring Harley Davidson , BMW will have great potential toenter in cruiser segment with merchandising.IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesAcquisition Rationale Why BMW should Acquire any Company ???Why anautomotivecompanyacquire ??TechnologicalAdvancement BroadeningtheirgeographicfootprintAugmentingproductrangesBrand/lineexpansionAttainingeconomy ofscale inAccess toEmerging/developingmarketTo getadvantageof Suppliers/ SCM/DistributionchannelReason For BMWMotorcyclesegmentsBMW Harley-DavidsonSports bike, Roadster Cruiser1Average Price ofbike for emergingmarket (Ex: India)BMW Harley-DavidsonINR 9-12 lakh INR 24-26 lakhTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND• Italian Bike Manufacturer• Sports bike mainly for Competitive sports segment• Bike from 125cc to 610ccHusqvarna• Deal Announced: July 2007• Deal Completed: 01st October 2007• Deal Size: 93 million Euros (Reported)Deal• Expand product range, Reach young buyers• Cover the off-road and supermodel segments• Access to a worldwide sales network in the off-road segmentRationale2Recent Acquisition - Husqvarna Motorcycles
Strong DealershipNetwork: Retail 2020 vision ofdealership network 100+ Harley-Davidsonexecutives will spend a weekworking at dealerships with thesole purpose of learning tosupport dealers better. 35 new dealerships in 2012.IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternatives2007 : About 2,700 employees at Harley-Davidson Inc.s largest manufacturingplant in York, PA went on strike after failing to agree on wages and healthbenefits. Finally it affected its production and 440 employees were laid off.2008 : Harley-Davidson announced they had signed a definitive agreementto acquire the MV Agusta Group(the high-performance MV Agusta brandand the lightweight Cagiva brand) for $109M USD (€70M).2009 : Harley-Davidson announced that itwould divest its interest in MV Agusta.2010 : According to Interbrand, the value of the Harley-Davidson brand fell by43% to $4.34 billion in 2009-10. The fall in value is believed to be connected tothe 66% drop in the company profits. Under company-wide restructuring, whichbegan in early 2009 and involved the closing of two factories, one distributioncenter, and the planned elimination of nearly 25% of its total workforce (around3,500 employees).Why BMW should Acquire Harley Davidson ???Restructuring(Organizational/ Capital) It will help Harley Davidson tostrengthen its capitalbase, which has never recoveredfrom the 2008 financialmeltdown. BMW will streamline itsoperations by combiningresearch anddevelopment, design, andmarketing components ofHarley-Davidson’s motorcyclelines.”TEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND3North America Region EMEARegionAsia-PacificRegionLatinAmericaRegionTotalUS CanadaFull Service Dealership 635 69 369 230 44 1347SRLS 71 5 1 44 121Total 706 74 370 274 44 1468Non-Traditional 85 5 23 1 24 1384
Financial BenefitsIndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesEntering into Merchandising Market and Cultural AdvantageTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND56 There is an great opportunity toImprove financial perspective ofthe company after merger. The financial ratios of the combinedunit showing an positive sign forthe growth of the company. Overall Debt equity ratio will bedecrease. For Harley Davidson, Worldwide General Merchandisenet revenue, which includes revenue from MotorClothes® apparel and riding gear, comprised 5.9%,6.2% and 6.6% of net revenue in the Motorcyclessegment in 2011, 2010 and 2009, respectively. But for BMW merchandising contributes less than 1% to its overall revenue.In long run BMW can capitalize the merchandising as a competitiveadvantage over other competitors. One more advantage for BMW is Haley Culture like HOG . Harley Davidsonregards its support of the motorcycling lifestyle across a wide demographicrange through events, rides, rallies including those sponsored by HarleyOwners Group® (H.O.G. ®) as a competitive advantage.Harley Davidson : General Merchandise2010 2011 Increase Growth259125USD274124USD14999USD 5.8%Factor BMW Harley Davidson CombinedLiquidity Cash to CashCycle124 days 146 days 127 daysCurrent Ratio 1.14 1.63 1.22Profitability ROE 226% 242% 155%ROA 57% 59% 56%Solvency Debt to Equity 2.0 2.45 1.99
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesGeographical PresenceTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDGeographical PresenceEmerging Market, Potential to grow : Latin America, African Countries, Asia Pacific(In these countries Harley Davidson has good presence over BMW)Note: The map depicts percentage contribution-2011 to sale of Harley Davidson and BMW in this regionUnited StatesHD BMWSales 68% 19%AfricaHD BMWSales 2%<EuropeHD BMWSales 17% 49%Asia PacificHD BMWSales 8% 28%OthersHD BMWSales 5% 4%Harley DavidsonBMW
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDFINCOHarley Davidson financial service –RetailMotorcycle loan touched $2.2 billion in 2011increased by 17.3% from 2010 The service of HDFS includes1. Wholesale Financial Services 2. Retail Financial Service3. Insurance Service 4. FundingIn 2011, Financial Services generated external salesof €15.7bn (approx $ 20bn) and a margin of 10.1%.• Primary business of Fin Corp are• Lease and credit financing• Retail and fleet customers• Multi-brand financing• Dealer financing• Insurance• BankingThe acquisition of the ICL Group – undertaken as part of anew strategy in the field of fleet business – was an importantaspect of the expansion (€ 3,647 million).Dealer FinancingLong TermGrowth strategyis dependent onincreasing dealernetwork98% of dealersuses HDFS forestablishmentCustomerFinancingHDFS financed51.0% of the newHarley-Davidsonmotorcycles inUS and 30.4% inCANADACreditPerformanceImproved creditperformance inthe retailmotorcyclefinancereceivableportfolioHDFS conducts business principally in the United Statesand Canada primarily through certain subsidiaries such as1. Harley-Davidson Credit Corp.2. Eaglemark Savings Bank3. Harley-Davidson Financial Services ,Canada.4. Harley-Davidson Insurance Services, Inc.7%10%27%41.0%8%11.0%0%5%10%15%20%25%30%35%40%45%2010 2011BMW FinCoHDFSCombinedOperatingMarginWhy acquire HDFS
Shareholding Pattern: As the company has adiversified shareholdingpattern with 761institutional holder and1233 fund owners, it willbe difficult for acquiring.IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDKey Issues0.002,000.004,000.006,000.008,000.0010,000.00Institutions Mutual Funds Insiders8,229.804,704.4010.5Mil USDShare holder’s equity of Harley DavidsonMarket Cap (Mil USD) 9,650Number of Institution Owners 761Number of Fund Owners 1,233%ge Owned by Institutions 82.16%%ge Owned by Funds 46.99%% Owned by Insiders 0.11Convince the Management of BMW Highly volatile economic growth; luxury goods industryin which Harley Davidson operates is highly cyclical. Finding the right time to acquire the company as thefalling share price may lead to reduce the valuation inthe coming time and this may be an overpriced deal.Operational complexities: Consolidation of plants and existing raw material supplies willtake time being most of the major production facilities locatedin two different continents Reliance on third party suppliers to obtain raw materials andcomponent can increase the risk to BMW. Also, it will bedifficult to manage them for BMW.Managing the Brand Portfolio: Managing cruiser bikes Brand Portfolio and largedealer distribution network of Harley Davidson will needa change in strategy. Cannibalization may take place in BMW’s own marketshare of motorbikes.Cultural and Remuneration Issues Geographical difference : As both the companies are fromdifferent countries(UK and Germany), it will take a longertime for cross border acquisition considering governmentpolicies. Workforce synergies would not materialize until theemployees accept the work culture of the organization.Regulatory Issues BMW shall have to notify the acquisition to thecompetition council and the competition authority. To convince all the shareholders for acquisition is difficult partfor the company. But It an advantage for company as there are no majorshareholders.
Factor 1: Scale & DiversificationGrowth in Net Sales 13.80% 8.98% 25.59% 65.99% 9.5%Diversification byMarket.- - - -Product/BrandDiversification- - - -Factor 2: Profitability and efficiencyNPM 9..50% 6.38% 5.46% 10.25% 1.41% 4.2%EBITDA Margin 15.83% 10.44 12.78% 9.46% 6.8%ROA 6.79 3.92 4.11 7.35 1.60 2ROE 16.28 17.31 14.93 31.08 2.28 15.5Interest coverageratio1.41 8.50 - - 5.71 3.09Inventory Turnover 8.64 5.79 4.89 5.46 7.08 5.63Asset Turnover 0.73 0.62 0.75 0.72 0.97 0.53Parameters Industry BMW Daimler Volkswagen Fiat Our Rating Combined Our RatingFactor 3: Financial PolicyNet Debt/EBITDADebt Equity Ratio 108.06 253.27 180.34 169.69 346.19 199.5Current Ratio 1.35 1.02 1.17 1.1 1.5 1.22IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesImpactanalysisAccretionDilutionAlternativesCREDIT ANALYSISTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesCREDIT ANALYSISTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND Stable financial position of theBMW Group. Refinancing funds on competitiveconditions. Best Rating of all European CarManufacturers.BMW’sRating Long-TermShort-Term OutlookMoody’s A2 P-1 StableStandard& Poors A A-1 StableFitchNotRatedNotRatedNotRatedHarleyDavidsonLong-TermShort-Term OutlookMoody’s BAA1 P2 StableStandard& Poors BBB+ A2 StableFitch F2 BBB+ PositiveConclusionStrong creditworthiness underlined bygood ratings, a strong set of financialindicators and investor confidence allcontributed to ensuring that the BMWGroup continued to have excellentaccess to the world’s capital markets.BMW AG has less than 13.688%chance of experiencing financialdistress in the next 2 years ofoperations whereas overall AutoIndustry has less than 27.75%probability of experiencing financialdistress.LOW RISK RATINGBMW 2011 2010Financial StrengthQuick Ratio 0.8 0.8Current Ratio 1.03 1.07Debt/ Equity 2.35 2.55Management EffectivenessReturn on Equity 19.20% 13.9%Return on Assets 4.48%Return on CapitalEmployed 25.6% 19.1%ProfitabilityGross Margin 21.25% 18.1%Operating Margin 11.15% 8.5%Interest Coverage 5.7 3.6BMWPre Acquisition Rating : StablePost Acquisition Rating: StableSource : Macroaxis.com
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND• After the slowdown in motorcyclesales in 2009, the industry isexpected to show positive growthrate till 2016Industry DemandMacro Economic FactorsEfficiency improvements and Synergies• High dependence on distributionnetwork for retail sales• Rising material costsOperational• Harley Davidson has still notrecovered from 2008 slowdownFinancialOther Factors• Harley has strong brand imagecoupled with a loyal customerfollowing• Brand is market leader in 651+ ccmotorcycle segment since 1986Brand Image• Product Recalls in Oct and Feb 2011Quality IssuesValuation Drivers63.4 71.1 74.2 77 81.3 84.70501002010 2011 2012 2013 2014 2015Global Motorcycle Market Value (in billion USD)Global Motorcycle Industry37.04 39.55 40.71 41.82 43.68 45.190.0020.0040.0060.002010 2011 2012 2013 2014 2015Global Motorcycle Units forecast (in million)European Motorcycle IndustryMarket volumeThe European motorcycles market shrank by8.3% in 2010 to reach a volume of 2,082.7thousand units.Market volume forecastIn 2015, the European motorcycles market isforecast to have a volume of 2,078.1 thousandunits, a decrease of 0.2% since 2010.
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDParticulars 2011 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021FTotal Revenue 5311.71 5630.42 5968.24 6326.34 6705.92 7108.27 7534.77 7986.85 8466.06 8974.03 9512.47Y-o-Y Growth in Revenue % 9.31% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Operating Income 829.97 718.29 773.04 819.42 868.59 920.70 975.94 1034.50 1096.57 1162.37 1232.11Operating Margin 15.63% 12.76% 12.95% 12.95% 12.95% 12.95% 12.95% 12.95% 12.95% 12.95% 12.95%Income Tax- Total 244.59 241.57 259.96 275.60 292.16 309.68 328.24 347.90 368.71 390.75 414.10Income Tax Rate on EBIT 29.47% 33.63% 33.63% 33.63% 33.64% 33.64% 33.63% 33.63% 33.62% 33.62% 33.61%Net Operating Profit After Taxes 490.46 527.81 559.55 593.16 628.75 666.43 706.34 748.59 793.35 840.74Depreciation 188.21 187.85 199.12 211.07 223.73 237.15 251.38 266.46 282.45 299.40% Sales 3.34% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15% 3.15%Capital Expenditure 156.32 165.70 175.64 186.18 197.35 209.19 221.75 235.05 249.15 264.10% Sales 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%Working Capital 1736.44 1953.35 2183.28 2427.00 2685.34 2959.19 3249.46 3557.15 3883.31 4229.03% Sales 30.84% 32.73% 34.51% 36.19% 37.78% 39.27% 40.69% 42.02% 43.27% 44.46%FV of Cash flow 427.41 440.21 466.62 494.62 524.29 555.75 589.10 624.44 661.91 701.62Timing 1 2 3 4 5 6 7 8 9 10Value Multiple 0.94 0.88 0.83 0.78 0.73 0.69 0.64 0.60 0.57 0.53PV of Cash flow 401.38 388.22 386.46 384.70 382.94 381.20 379.46 377.74 376.02 374.30Perpetual Growth Rate 3%Terminal Multiple 29.55598PV of Cash Flows (mn $) 3832.42PV of Terminal Cash Flow (mn $) 11062.92Total Firm Value (mn $) 14895.34Net Debt (mn $) 5,722.59Surplus Cash (mn $) 1680.33Equity Value (mn $) 10853.08Shares in Issue(million) 230.5DCF Share Price value 47.08493Share price as on Jun 15,2012 (in $) 49.01Pros and Cons Represents the true intrinsic valueof the share Accounting policy used is lesssignificant and inputs are lessexposed to manipulation since it isintrinsic to the company Encompasses an adjusted level ofrisk using WACC Market Risk Premium calculatedusing market returns may bevolatile during a particular period. Based on assumptions relating togrowth rates, projected cash flowsand other expenses which aresubjective Highly sensitive to discount ratesand terminal multipleValuation : Discounted Cash Flow
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDTransaction based onthe Auto, Luxurygoods and FinancialSector are selected inapprox proportion tothe Harley Business.Mean of FV/EBITcalculated as 18.8.Comparabletransactions in therange of 5 areselected.Mean ofFV/EBITDAcalculated as 11.1.Comparabletransactions in therange of 5.5 areselected.RecentTransactionsbased on last 5years data areselectedCriteria1Criteria 2 Criteria 3 Criteria 4Calculation arebased on averageas the transactionschosen are of 3different sectors.Criteria 5Date Target Acquirer EV/EBITDA EV/EBITNature of Business ofTargetNature ofBusiness ofAcquirerMar-07 Aston Martin David Richards & Investment Dar 11.3 20.2 Automobiles Investment Co.Sep-08 Manitou Gehl 13.4 15.5 Auto Components Auto ComponentsAug-09 Porsche Volkswagen 9.4 18.3 Automobiles AutomobilesJul-09 Tory Burch Tresalia Capital 10 N/A Luxury Fashion Investment Co.Dec-10 Suzuki Volkswagen 6.7 22.1 Automobiles AutomobilesHarley Davidsons Value of Equity asper:EV/EBIT Multiple 10265.4EV/EBIDTAMultiple 15790.1Valuation – Transactions Comparables Relativity of transactions helps incomparison rather thanunderstanding Diverse segment transactionscan be incorporated based onthe type of company Subjectivity involved in shortlisting of transactions. Difficult to account for currentmarket conditions as multiplesare based on historictransactionsPros and Cons
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDCalculation are basedon average as thetrading multipleschosen are of 2different sectorsMean of P/Ecalculated as 13.3.Comparablemultiples in therange of 10 areselected.Mean ofFV/EBITDAcalculated as 6.4.Comparablemultiples in therange of 5 areselected.Industry tradingcomparables aretaken forAuto, Luxury goodsand Financial Sector+are selectedCriteria 1 Criteria 2 Criteria 3 Criteria 4Mean ofFV/REVENUEcalculated as 1.14Comparablemultiples in therange of 3.2 areselected.Criteria 5Target FIRM VALUE MARKET CAP FV/REVENUE FV/EBITDA P/E SECTORPrada 16,825 16,854 4.25 13.8 23.5 Luxury.Polaris 4,852 5,079 1.59 9.8 17.7 AutomobilesHonda 51,799 58,280 0.4 3.6 8.7 AutomobilesSwatch 16,630 19,317 2.1 7.6 13.6 LuxuryYamaha Motor 6,195 3,363 0.37 5.9 11.8 AutomobilesHarley Davidsons Value of Equityas per:EV/REVENUE Multiple 9808.18EV/EBIDTA Multiple 7378.90P/E Multiple 7386.27Valuation – Trading Comparables Common sense approach – similarcompanies should sell for similarprices. Incorporates the factors relative tocompanies in the sector. High degree of subjectivity as notwo companies are truly comparable Incorporates the factors relative tocompanies In the sector Uniform accounting standards iscrucial Does not consider the targetcompanies specificsPros and Cons
Multiple Enterprise ValueSegment Statistic Low High Low HighFinCo 2011 Operating Income $268,791.0 15.3x 15.3x 4,112,502.3 4,112,502.3OpCo 2011 Revenue $4,662,264.0 0.50x 2.50x 2,331,132.0 11,655,660.0Total Firm Value $6,443,634.3 $15,768,162.3Less: Net Debt (5,722,000.0) (5,722,000.0)Plus: Non Operating Assets / (Liabilities) 1,680,330.0 1,680,330.0Total Equity Value $2,401,964.3 $11,726,492.3Fully Diluted Shares Outstanding 230,540 230,540SOTP Equity Value $10.42 $50.87Current Share Price $49.01 $49.01Premium/(Discount) to Market (78.7%) 3.8%Assumptions:1) For Op Co, we have taken EV/Revenue Multiple as sales driving factor for a manufacturing company2) For Fin Co, we have considered EV/EBIT Multiple as cost of funds dictate success of a financing companySource for multiples: Damodran’s Site and Wikiwealth.comAll figures in 1000s and in DollarsIndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesSOTP ValuationThe Debt assumed tobe same in both lowand high whichdecreases the valuationper share to a greatextent and bringsinconsistency to thevaluationTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND
Currency in Millions USDFair Value of Equity Weights Weighted ValueValue of Equity as per DCF Method 10853.1 40% 4341.2Value of Equity as per Comparable CompanyMultiples:Value as per Forward Price/Earnings Ratio 7386.3 6.67% 492.7Value as per Forward Price/Sales Ratio 9808.2 6.67% 654.2Value as per Forward EV/EBITDA 7378.9 6.67% 492.2Value of Equity as per Comparable TransactionMultiples:Value as per EV/Sales Multiple 10265.4 20% 2053.1Value as per EV/EBIDTA Multiple 15790.1 20% 3158.0Total 1.0001 11191.4Fair Value of Equity in million USD 11191.4Outstanding Number of Shares as 230.5Fair Value per Share in USD 48.55IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesImpactanalysisAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDDeal StructureSWAP RatioMarket Price of BMW as on 31/12/2011 € 49.96Currency Exchange rate 1.26345Swap Ratio 0.77Deal Structure (in $mn)No. of Equity Shares of Harley Davidson(mn) 230.5No. of Equity Shares of BMW (mn) 601.995Market Value of Harley Davidson Debt $4,644.29Total Firm Value $16,065.57Market Capitalization $11190.78Less : Cash $1,680.33Net Price of Consideration $9,510.45Deal structure for Equity consideration (in mn)Total Debt before merger € 69,443.00Total equity before merger € 27,515.00Debt - 70% $6657.31Equity - 30%Share Swap $2,853.13No. of shares swapped 45.20Existing no. of equity shares 601.995Total no. of equity shares 647.20Total debt after merger € 74,712.15Price on HOG as on 31/12/2011 $38.61Premium paid per share( max premium40%) 26%% stake of Harley davidson shareholders incombined entity 6.98%Debt4644Debt6819Equity29229510.44DealFinancingTotal Firm ValueFunding
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesSynergiesREVENUEGROWTHBrand Synergy :combined portfolioCompetitive SynergiesAs a result BMW will beable to access newemerging countries likeIndia, Brazil, China andmany African and LatinAmerican countriesReducing risk of EurocrisisINCREASEINASSETEFFICIENCYGREATERACCESSTOFUNDSDiversity of source offundsAccess to the capitaldebt market of USAStable debt/Equity ratioIncrease distributionchannel with higherpurchasing power andhigher bargainingpower.MINIMISINGOPERATINGEXPENSESynergies in marketingand sales anddistribution.Economies of scale inproductionWorkforcerationalizationIncrease in operationalefficiency1: Organizational CompatibilitySharedValueStrategicduediligenceSystemSkill2: OrganizationalSynergyStrengthOpportunity3: FinancialConsiderationCurrent FundingInvestment PlanTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDEconomies of scale ininvestment portfolioImprove cashmanagementtechniquesEnhancement ofResearch anddevelopment aspectBetter plantmanagementSharedValueStrategicduediligenceSystem SkillHigh Average Good diversifiedStrength Opportunity CurrentFundingInvestmentPlanHigh Very high Good yes
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesImpactanalysisAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND0.0020000.0040000.0060000.0080000.00100000.00120000.002008 2009 2010 2011 2012E 2013E 2014E 2015ERevenuePOST ACQUISITIONSynergiesCombinedFirm Value€ 59895BMW FirmValue€ 47998Harley DavidsonFirm Value€ 8589€ 3,306 Values in Mn €0.0020.0040.0060.0080.00100.00120.00140.00Merged Entity BMW Harley DavidsonAssetsRevenue0.0020.0040.0060.0080.00100.00120.00Merged EntityBMWHarley DavidsonHondaEBITDAEBITNetIncome
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesImpactanalysisAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND0.002.004.006.008.0010.0012.0014.0016.0018.00Exisiting BMW EPSWithout SynergiesWith SynergiesEPS PreacquisitionPost acquisition EPS GrowthW/oSynergiesSynergiesRealisedW/oSynergiesWithSynergies2012E 4.35 4.30 4.77 -1% 10%2013E 5.45 5.29 6.65 -3% 22%2014E 6.48 6.20 7.58 -4% 17%2015E 7.51 7.13 8.54 -5% 14%2016E 8.57 8.09 9.57 -6% 12%2017E 9.67 9.08 10.69 -6% 11%2018E 10.83 10.11 11.91 -7% 10%2019E 12.04 11.20 13.25 -7% 10%2020E 13.32 12.36 14.71 -7% 10%2021E 14.69 13.59 16.31 -8% 11%Forecasted EPSEPS of BMW Group isexpected to grow at aCAGR of 14.48% from$4.35 in 2012 to $14.69 in2021In case of a acquisition, theEPS growth rate of BMWgroup is expected to be13.59% in case synergies arenot realizedWith synergies gettingrealized, the EPS of BMWgroup is forecasted to increaseand show a CAGR of 14.63%in the said periodHigher EPS of combined entity means that acquisition is Accretive and an increased EPSCAGR makes the deal more attractiveAccretion Dilution Analysis
IndustryAnalysisAcquisitionRationaleKeyIssuesCreditAnalysisValuationDriversValuationDealstructureSynergiesAccretionDilutionAlternativesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDSuzukiKawasaki YamahaKawasaki manufacturesmotorcycles, ATVs, utilityvehicles, personalwatercraft, general purposegasoline engines andindustrial robots.•187Countries, productionfacility in 23 countries• 3rd largest producer ofmotorcycle in the worldWorlds second largestproducer of motorcyclesIt also producesATVs, boats, snowmobiles, outboard motors, andpersonal watercraft.Kawasaki had JPY 13.4 billionextraordinary loss onimpairment for the fiscal yearending March 2012.•The Company had 139subsidiaries and 37associated companies (Ason 31st March 2012).•Revenues (2011) : USD27 Billion•6.7% share in globalmotorcycle marketRevenues (2011) : USD 14BillionZRX1200 DAEG ,Ninja ZX-6R,Vulcan 1700 series,Teryx 750 seriesThe MULE utility-orientedvehicle seriesLets4 and Lets5scooters, Gemma, GSR400/ABS, Gladius,Bandit650, GSXR1000, SuzukiBoulevard M90 cruiserand the KINGQUAD750AXi 4x4 ATV.•Range of motorcyclesfrom 50 to 1,900 cc•RoyalStar, StratoLiner, RoadLiner, Raider, Stryker,V-Star, V-Max, Road Star• Shipbuilding• Rolling stock & constructionmachinery•Aerospace• Gas turbines & machinery• Plant & infrastructureengineering• Consumer products & machinery•Hydraulic machinery• Automobile• Motorcycle• Marine & PowerProducts•Financial Services•Two Wheelers• Marine• Special Machinery• Industrial Machinery &Robot• Others segment(automobile engines)MotorcycleBusinessLinesofBusinessBrandPortfolioOthers0.005.0010.0015.0020.0025.0030.00MarketCapFirmValueRevenueAssetBaseNetDebtKawasakiSuzukiYamahaCriteria:Geographical Presence Access to newer customersegments Strong Brand Name Future growthopportunities0%2%4%6%8%10%OperatingProfitMarginROEKawasakiSuzukiYamahaAlternatives
ReferencesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUND• http://www.bloomberg.com/• http://www.reuters.com/• http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1671&context=key_workplace• http://www.druid.dk/uploads/tx_picturedb/dw2002-440.pdf• http://www.britannica.com/EBchecked/topic/45050/automotive-industry/65777/The-industry-in-the-United-States• www.bmw.com/• www.harley-davidson.com/• www.yamaha.com/• www.pwc.com/auto• www.motorcycle-usa.com/• world.honda.com/ www.kawasaki.com/• http://pages.stern.nyu.edu/~adamodar/• Yahoo Finance Google Finance• BMW Annual Report 2008-2011• BMW 10k Form 2011• Harley Davidson Annual Report 2008-2011• Harley Davidson 10k Form• Cost of Capital Applications ;Valuation by Aswath Damodaran• M&A INTERNATIONAL INC. Automotive M&A Outlook: Why Build When You Can Buy? 2012• Automotive M&A Insights 2011 (PWC)• Automotive M&A Insights 2010 (PWC)• DATA MONITOR REPORT - Motorcycles in Europe• DATA MONITOR REPORT - Global Motorcycles• KPMG - U.S. Auto Industry Executives Predict an Increase in Growth and M&A• Deloitte – Automotive M&A• Deloitte - Emerging markets, emerging opportunities Strategies for automotive partnerships in today’s global marketplace
TEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDSensitivity Analysis (Share Price wrt WACC amd Terminal Growth Rate)Terminal Growth2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%WACC5% 63.96 77.04 96.66 129.37 194.77 390.99 Infinite5.50% 51.89 60.84 73.38 92.18 123.51 186.18 374.186% 42.85 49.29 57.87 69.88 87.89 117.92 177.986.48% 36.02 40.86 47.08 55.40 67.05 84.58 113.927% 30.23 33.91 38.50 44.42 52.30 63.34 79.907.50% 25.65 28.53 32.06 36.47 42.14 49.70 60.298% 21.84 24.15 26.91 30.30 34.53 39.97 47.22AppendixWACC Calculation of HOGMarket Rate Premium 6.51%Risk Free Rate of Return 1.6%Beta 2.15Cost of Equity 15.58%After tax Cost of Debt 2.64%Proportion of Debt 0.70Proportion of Equity 0.30WACC 6.48%Assumptions:Beta is taken from ReutersRisk Free Rate of Return is rate of US treasury 10 year bond yield on Jun15,2012Cost of Debt is assumed to be yield on their latest bond issues.Appendix
TEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDAppendixHistoric Nominal GDP growth rate (US)(CAGR)05-12 2.601%06-12 2.728%07-12 2.370%08-12 2.028%09-12 3.605%Sales Growth MatrixForecasted Growth Revenue ShareUS 5.20% 67%Europe 4.00% 18%RoW 12% 15%Source: MarketlineSales Growth 6.00% (Weighted Avg)Appendix
SynergiesTEAM: MAXIMUMJ. P. Morgan Case Study Competition– CAMPUS ROUNDBMWHarleyDavidsonPre AcquisitionvalueAcquisition relatedcostAsset Efficiency OperatingExpenseReductionCost of capitalreductionRevenue growth Value ofCombined entity•Acquisitioncost•Integrationcost•CulturalImpact•Economies ofscale ininvestmentportfolio•Improve cashmanagementtechniques•Enhancement ofResearch anddevelopment•Synergies inmarketing andsales anddistribution.•Economies ofscale in production•Workforcerationalization•Increase inoperationalefficiency•Reducing riskof Euro crisis•Increasediversity•Increasedpurchasingpower•Brandsynergy•Access tonew products•Expandcustomer base•IncreaserevenueCreatingvalue forBMW andHD’s stakeholdersOriginalBMW valueOriginalHarleyDavidsonvalueCost SynergyRevenue SynergyAppendix