The origin of this thesis stems from the rumour that has been covered in the media over the past few years, namely, that the privately owned car manufacturer Volvo Cars AB were likely to become a listed company.
For a market introduction, a value of the company is necessary. As noted by scholars, though the valuation process is similar to that of a public company, valuing private companies introduces a range of additional issues that finance literature rarely covers. Moreover, interestingly was that business media devoted little to no attention on the possibility of another exit option for the company’s owners. Listing a company is by no means an exclusive exit strategy for private company owners, and therefore, it was concluded that it would be interesting to explore alternative options. Thus, this thesis sought to answer a research question that covered both aspects; firstly, value Volvo Cars AB on a stand-alone basis (as in the case of an IPO) and, secondly, to explore whether the company was an attractive investment case to a third party, and if so, a valuation from the perspective of the prospective buyer would be performed.
As the research question entails flexibility and requires subjective judgements, a pragmatic case study strategy was applied. In the quest for finding an answer to this question, numerous well-established theoretical models and primary methodologies related to the subject were applied. Additionally, in line with the research strategy, attention was paid to what practitioners actually do when facing the challenges of valuing private companies.
Imperative in any valuation is gaining a sound understanding of the company and the industry in which it operates. Since the acquisition from Ford in 2010, the company embarked on a strategic journey that would transform the company considerably. The transition from the value segment to the premium segment required significant investment, yet success of this decision is not only reflected in rising sales, but also profitability. Moreover, a strategic analysis illustrated the challenges of navigating the automobile industry.
Intense rivalry, government regulations, structural changes, increased threat of new entry, and technological disruption were among other factors identified as the micro-and macroeconomic factors that profoundly influence the industry and its future profitability. Critical to succeed in the industry was, therefore, identified as having differentiated products, a strong brand, and an efficient utilisation of invested capital.
A financial analysis of the company and its peers, revealed Volvo’s relative strength of converting invested capital into sales, including premium peers, was the primary driver of its ability to generate superior return.
Further, the progress in key value drivers was attributed to one of Volvo’s strongest competitive advantages - its brand. With a rich heritage of focus and innovations related to safety and the environment, the company
106 has not only gained momentum due to current consumer trends but also managed to successfully establish itself on the market, despite its relatively small size. A key enabler for this development was identified as strong brand management competencies.
With the identified strategic and financial value drivers in mind, a forecast of the company’s future performance was made. In this part, the company’s cost of capital was also estimated to 7,44%. In the explicit forecasting period, Volvo’s momentum was expected to continue and excess returns realised, whereas in the long-term excess returns eventually deteriorates as competition increases and the company’s competitive advantage fades. This is primarily driven by the fact that is it extremely difficult to predict who will emerge the winner in the technological race that currently is on-going. From these predictions, the equity value was derived to of €16.245 million using a DCF and EVA analysis. To benchmark the intrinsic valuation, a relative valuation was applied. This revealed that current market conditions and sentiments assigned a greater value to value the company, yielding a value range of €20.001 – €20.364. Jointly, these two valuation methodologies form the company’s fair IPO value range between €16.245 – €20.364 million.
Inherent in a DCF analysis is uncertainty. As a way of analysing this uncertainty, a risk analysis that considered both discrete and continuous risk was performed. The risk analysis showed that the estimates in the determinant DCF analysis were rather robust to changes in key value drivers. Additionally, the analysis also illustrated that despite the discrepancy between the absolute and relative valuation, the different values were within a close range.
Using the fundamental analysis of Volvo, the successive sections focused on the second objective of this thesis, namely to identify a potential buyer and the value this buyer assign to the business. From the perspective of a financial buyer, using LBO investment rationale, Volvo was not recognized an attractive investment due to, amongst others, further requirements in capital expenditures and weak prospects for efficiency enhancement, yielding unpredictable cash flows and low prospects for operational value creation.
On the other hand, the investment case from a strategic buyer’s perspective appeared more attractive, primarily due to readily available synergistic benefits. Following, a screening of potential acquirers identified Renault as a potential party. This lead into the subject of synergies, which were both validated and estimated.
Using a DCF analysis, with incorporated synergistic benefits, Volvo’s investment value to Renault was estimated to €23.536 million. Using similar rationale to that of a relative valuation, a precedent transaction analysis was performed. From this it was concluded that the estimated investment value was well in line what similar buyers have paid over preceding three years. In sum, figure X illustrates the difference between the estimated values.
107 Figure 1. Value illustration
Fair Market Value versus Investment Value
Investment Value €23.536
Acquisition Premium €7.921
Fair Market Value €16.245
Source: Adopted from Evans and Bishop (2002)
While it is easy to draw to the conclusion that, since one value is greater than the other this is the optimal way to proceed, this conclusion omits the relevant factor of whether the overall market for selling companies is favourable. The effect of market conditions (or the perception of it) on the willingness of the owners to initiate a potential exit option clearly manifested itself when the rumours of a potential market introduction of Volvo started spreading. At that time, according to Volvo’s owner, the market had a different perception of the company and was not accurately recognising its value. Thus, an exit was discarded. However, this concern was raised before the company’s strong performance in 2016 was revealed. Based on recent development and future projections, there is arguably a “window of opportunity” in which a higher price for the business may be realised. Additionally, taking into account how the market is currently pricing similar companies, going public has arguably become a more attractive exit scenario.
Nonetheless, a strategic buyer like Renault is likely willing to pay more for the company due to the possibility of realising synergistic benefits – both readily available synergies, such as economies of scale, as well as speculative synergies. Yet, the derivation of the investment value or whether an acquisition makes strategic sense from the respective buyers’ perspective is inevitably a subjective assessment. This aspect, however, has direct ties the purpose of this thesis, namely to explore how value is perceived depending on perspective.
Thus, it is concluded that, given the demand and the investment case, a strategic buyer will assign a greater value to Volvo and, therefore, this is concluded as the value maximising exit strategy
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