UNIVERSITY OF SANTO TOMAS

UST - ALFREDO M. VELAYO - COLLEGE OF ACCOUNTANCY

CA51028 - STRATEGIC BUSINESS ANALYSIS

CASE ANALYSIS 3

Ferrari: The 2015 Initial Public Offering

Submitted by:

BARBIRAN, Bea Francheska S.

CRUZ, Christiana Monique Q.

DE GUZMAN, Jevie

DIZON, Arabelle B.

SANTOS, Paulo Emmanuel S.

4A7

Submitted to:
Inst. Angelo Miguel P. Oasan, MBA

25th of November, 2022

 I. Background of the Case
After World War II, Ferrari, founded by Enzo Ferrari, gained popularity after winning a high-profile race on the day of the debut
of its first race car. European society became fascinated with the brand, and it paved the way for Ferrari to release a non-racing
road car. It became the prize for auto aficionados in Europe and North America for the ensuing decade. Kings, princes, and
members of the wealthiest family in America were among the patrons of these handmade cars. After Enzo’s death, Luca Cordero
de Montezemolo implemented a limited production policy to create the impression of exclusivity. To make sure that this would
not affect customer satisfaction, Ferrari manufactured a limited edition “halo” car to be given to a selected group of devoted
customers. The company was able to maintain its brand value while participating in sponsorship and licensing activities, as this
also provided expansion opportunities and allowed the management to significantly increase the brand’s presence by investing in
lifestyle categories and selling merchandise such as–watches, sportswear, perfume, video games, etc., with the automaker’s logo.
In addition to its aid in the company’s growth, this also provides loyal Ferrari clients a great experience.

II. Problem Definition and Point-of-View (POV)

Similar with the significant demand for the exclusive and luxurious cars manufactured by Ferrari, strong investor interest in its
IPO of 1.175 million shares was also perceived wherein the the deal was expected to be as much as 10 times oversubscribed,
surpassing the amount offered in the US luxury sports carmakers’ IPOs. With this, Fiat Chrysler Automobiles (FCA) set the
initial price range from USD48 to USD52 per share, resulting in various discussion and contrading views among analysts and
investors. Considering the unfavorable results if the offer price was set too low (e.g., unable to maximize the potential of offering
shares to the public) or too high (e.g., poor first-day trading returns), Ferrari’s management and its underwriter shall be able to
derive appropriately-valued final offering price.

III. Analysis and Alternative Courses of Action (ACA)

With the central topic covering Ferrari's IPO valuation, the proponents constructed the following alternatives to help the
management and its underwriters to arrive at a more acceptable stock price.

■ ACA 1: Discounted Cash Flows Method (DCF) - This method determines if an investment is worthwhile in the long run
based on future cash flows (Girardin, 2022). This method helps management plan a more acceptable stock price valuation
because of the reliability of free cash flows, an accurate measure of the money left for investors. However, this method is
sensitive to assumptions related to growth and discount rates (Stephen, 2020). For Ferrari, this method assumes that the
company will continue to grow and earn profits in the future. However, the risk is always there for any company, making
the previous assumption hard to guarantee. This method only works when there is high confidence about the project's future
cash flows.
■ ACA 2: Enterprise Value/EBITDA Multiple Method - This method seeks to compare the operations of similar companies
using the same financial metrics (Kenton, 2022). The ability to differentiate Ferrari from other companies despite the
varying industries helps the management arrive at an acceptable stock price valuation. However, one problem with this
method is that it does not consider cash flows and only considers the multiples of other firms. The issue is that no firm is
perfectly compatible with Ferrari based on its industry and IPO status.
■ ACA 3: Average of Discounted Cash Flows Method (DCF) and EBITDA Multiple Method - Considering both valuation
methods may be a better option for measuring IPO. This is because the combination of both methods may provide a more
accurate price for an IPO since the company will be able to utilize the advantages for both methods. The issue with this
method is similar to the EBITDA Multiple Method wherein the measure may be less accurate since there are no firms
which are relatively similar to Ferrari.
■ ACA 4: Spinoff - Following the plan of FCA to sell shares in an IPO, a spinoff of Ferrari’s stock may be a valuable option.
In a spinoff, Ferrari’s shares will be distributed to the shareholders of FCA on a pro-rata basis. Stock prices may be volatile
in the early years where the company may underperform in the weak markets and outperform on the strong markets.
Spinoffs generally have more potential since the management can focus more on its own operations, thus, increasing the
value of the company (Depersio, 2022).

IV. Decision and Recommendation

An initial public offering is crucial to a company's capital growth and investor relations. Thus, having thoroughly analyzed and
considered all possible alternative courses of action, the group determined that the Discounted Cash Flow Method (DCF) may be
employed by the underwriters and the management in estimating the ideal price of Ferrari’s IPO shares. Despite the advantages
of other alternative courses of action, the Discounted Cash Flow Method (DCF) could provide a more accurate estimate since it
is primarily based on internal company metrics, particularly on their expected cash flows. It is important to consider, however,
that Stephen (2020) stated that this type of approach may be sensitive to assumptions about growth and discount rates, and may
only be appropriate when there is high confidence about the project's future cash flows. With this decision, Ferrari stock should
be listed with an IPO price of $48.80, which falls within FCA's implied price range of USD48 to USD52 per share. Pricing the
shares at their intrinsic value ensures that they are fairly valued, providing potential benefits to investors, FCA, and Ferrari.
 Appendices

APPENDIX A
Ferrari Forecast from Years 2014 to 2019
 APPENDIX B
Discounted Cash Flows Method (DCF)

A value of an investment may be best estimated based on the investment’s anticipated future cash flows. If the calculated DCF
value is greater than the current cost of the investment, the opportunity should be greatly considered as the investment
guarantees high returns; however, if it is less than the cost, it may be inferred that the investment may not be a good opportunity
for investors in maximizing their invested assets where further investigation and analysis may be needed before pursuing such.
DCF is the standard for valuing privately-held companies, yet it may be used as an acid test for publicly-traded stocks.
Valuation:

Tax Rate 38% Profits of Ferrari would be taxed in Italy, where the company’s
headquarters and operations are situated. (Page 8)

Discount Rate 5% Based on the analyzed market data for comparable companies
(Cost of Capital) and is consistent with the relatively low risk associated with
Ferrari’s expected cash flows. (Page 8)

Growth Rate 2% Derived from the assumption that Ferrari’s profits will grow as
a result of increasing its volume due to the growing demand in
emerging markets and spending capacity of target clients.

*millions of euro 2014 2015 2016 2017 2018 2019 2020

Operating Profit 398 447 508 567 624 669 682.4

Less: Tax 151.24 169.86 193.04 215.46 237.12 254.22 259

Operating Costs 81 66 18 23 47 22

Net Working 88 55 49 130 128 38

Capital

Free Cash Flow 108.14 193.96 284.54 233.88 239.78 363.85

Terminal Value - - - - - 12,730.09

where:
FCF - free cash flow estimated for
the last forecast period
D - discount rate
G - perpetual growth rate

PV of Explicit FCFF 1,177

PV of Terminal Value 9,231

Implied Ent. Value 10,408

Debt (2,300) Debt of Ferrari after selling 17.175 million shares in an IPO (Page 4)

Implied Equity Value 8,108

Number of Shares 189

Implied Share Price in EUR 42.90

Exchange Rate 1.1375 Exchange Rate of USD/EUR on October 19, 2015 (Page 20)

Implied Share Price 48.80

 APPENDIX C
Data for Comparable Companies and Capital Markets Data
 APPENDIX C
Data for Comparable Companies and Capital Markets Data
 APPENDIX D
Enterprise Value/ EBITDA Multiple Method
 APPENDIX E
Spinoff
A spinoff is an operational strategy wherein the company establishes a new business subsidiary from its parent company. When a
parent company splits off a portion of its business operations into a second publicly listed firm and distributes shares of the new
entity to its existing shareholders, the separation is known as a spin-off (Depersio, 2022).

Source: Spinoff (wallstreetmojo.com)

This method can be used to restructure an organization's administrative structure to increase profitability. A spin-off may be a
way for the parent company to cut back on administrative expenses, create tax shelters, or enter a new market while maintaining
strong ties to the spun-off business. Another common reason for spinoffs is to improve stock value. For instance, a huge
corporation with numerous divisions can have a stock price that management believes undervalues the worth of those divisions.
It is anticipated that one or more of them will be spun off, and the new businesses will succeed. Their individual stock prices
would eventually surpass what they were worth when they were a part of the parent firm. Due to their smaller size, this strategy
offers good business growth potential and inspires the management to be successful. Spinoffs may, however, underperform in
poor markets while prospering in strong ones due to stock price volatility (Depersio, 2022).
 APPENDIX F
Valuation Summary for Ferrari

Valuation Method Computed Share Price

Discounted Cash Flows $ 48.80

EV/EBITDA Multiple $ 40.34

Average of DCF and

$ 44.57*
EV/EBITDA Multiple

Spinoff -

*Average of DCF and EV/EBITDA Multiple - The share price through this method was computed by deriving the average of
the share prices, resulting from the DCF and EV/EBITDA Multiple methods. To accurately depict an appropriate share price, it
is crucial to use both methods to utilize their points of strength. The DCF method showcases the reliability of free cash flows in
determining stock price valuation. On the other hand, the EV/EBITDA Multiple method compares Ferrari with similar
companies using the same financial metrics. The only disadvantage of this method is the need for a perfectly compatible
company to compare with Ferrari.
 References

Depersio, G. (27 April, 2022). How do spinoffs impact investors in parent and subsidiary companies. Investopedia.
https://www.investopedia.com/ask/answers/032415/how-do-spinoffs-impact-investors-both-parent-and-subsidiary-comp
anies.asp
Girardin, M. (08 September, 2022). Discounted Cash Flow (DCF) Valuation: The Basics. Forage.
https://www.theforage.com/blog/skills/dcf-valuation
Kenton, W. (29 March, 2022). EBITDA/EV Multiple: Definition, Example, and Role in Earnings. Investopedia.
https://www.investopedia.com/terms/e/ebitda-ev-multiple.asp
Stephen, E. (n.d.). Discounted Cash Flow Business Valuation: Advantages and Pitfalls. Firmex Resources.
https://www.firmex.com/resources/blog/discounted-cash-flow-valuation-advantages-pitfalls/
White, R. (21 March, 2022). DCF valuation: The stock market sanity check. Investopedia.
https://www.investopedia.com/articles/stocks/08/discounted-cash-flow-valuation.asp