Term Paper (Advanced seminar), 2013
47 Pages, Grade: 1,7
Table of Contents
List of Abbreviations
List of Figures
List of Tables
1.1 Problem Definition
2 Theoretical basis of a Corporate Evaluation
2.1 Evaluation Reasons
2.2 Purpose and Function
2.3 Investment Theoretical Approach
2.5 Empirical references and other frameworks
3 Company Profile of the Daimler AG
4 Discounted Cash Flow Methods on use on the Daimler AG
4.1 Entity Approach
4.1.1 Weighted Average Cost of Capital
4.1.2 Free Cash Flow (FCF)
4.1.3 Underlying assumptions
4.1.4 Calculation of the FCF
4.1.5 Calculation of the equity capital value
4.2 Equity Approach
4.2.1 Flow to Equity (FtE)
4.2.2 Calculation of the equity capital value
5 Multiplier Method
5.1 Calculation of the multipliers
5.2 Calculation of the equity capital value
6 Evaluation and Critical Consideration
6.1 DCF Method
6.2 Multiplier Method
ITM-Checklist 1: 360-degree analysis
The methods to evaluate the value of a company are numerous and diverse. In this assignment the theoretical framework of company evaluation is described and the popular approaches depending on discounted cash flows or multipliers are explained and used on the example of the Daimler AG. The different value results are discussed in the concluding part.
illustration not visible in this excerpt
Fig. 1 Examples for purposes for a corporate evaluation
Fig. 2 Modified subdivision of corporate evaluation approaches
Fig. 3 Application frequency of company evaluation methods
Fig. 4 DCF Approaches
Fig. 5 Equity capital value of Daimler AG of all methods
Tbl. 1 Key data of Daimler AG 2009 - 2011
Tbl. 2 Forecast of the Daimler AG (2012 – perpetuity)
Tbl. 3 Calculation of FCF
Tbl. 4 Calculation of the equity capital value (FCF)
Tbl. 5 Calculation of FtE
Tbl. 6 Calculation of the equity capital value (FtE)
Tbl. 7 Key data of peer group
Tbl. 8 Peer group multipliers
Tbl. 9 Calculation of equity capital value (multiplier)
The task of a company evaluation is at least a very simple one: assigning a formal price to the informal value of a company. But already in this easy sounding explanation the problem itself is included, for the connection of informal and formal conditions includes always a lot of subjectivity, which is naturally a terrible for most graduates. But, for this assignment has no (obvious) philosophical background, the solutions for this problem are being described in the following chapters.
And the solutions are diverse. Many different approaches and methods can be found in referencing literature. Because of this variety the assignment is divided in two main parts. The first one is a description of the theoretical background of the company evaluation as a whole, explaining different reasons and purposes for an evaluation, which is relevant for choosing the purposeful method. Furthermore some significant methods and approaches will be explained in systematic and relation to the background theory explained before.
The second part will be a detailed explanation of the currently most relevant methods: the equity and the entity approach, using discounted cash flows, and the multiplier approach, using a comparison between several companies. As a core of this assignment these approaches will be used for calculating the value of the Daimler AG, the automotive company with the longest tradition and history worldwide. As a conclusion, the value results of the different approaches are compared and discussed critically, to explain problems of company evaluation and the different methods.
The core of the assignment is to evaluate the company value for the Daimler AG with the help of different approaches and to explain the differences. Therefore some restrictions have to be made: for the evaluations German standards are assumed, e.g. concerning the taxation, in accordance to the German reference literature. Furthermore personal taxes of a possible investor are not taken in account in any form for the evaluation.
The hypothesis for this assignment is that for the high influence of subjectivity in evaluating a value the different methods may lead to non-similar results. For a valid discussion of this point the use of the approaches in general and the calculations and underlying assumptions in detail have to be very transparent and clear.
The described and used approaches are based upon investigation in German literature only. The evaluation itself is calculated for the 31st of December 2011, and therefore all company data, e.g. annual reports, are for 2011, and all stock prices are of 30th of December which was the last exchange trading day in 2011. Data and insights of 2012 are not taken in account any more. Exceptions are made for the companies Nissan and Toyota because their financial year ends at the 31st march 2012. The historical exchange rate for Dollar/Euro (31.12.2011) is 0.77 and for Yen/Euro (31.03.2012) 0.01 (finanzen.net, accessed: 17.12.12).
In the following chapter the theoretical framework for the chapters seven and eight should be established. As mentioned in the introduction the methods and approaches for company evaluation are manifold, and none of these can be named to be itself more reliable than another. This fact is going to be described and verified by defining the overall conditions for all approaches. Following this there is a short overview on this approaches and methods, which are not used for evaluation as part of this assignment.
There are several reasons in a company’s business inducting an evaluation for this company or for a part of it. Those reasons can be caused by a change of ownership, e.g. in case of a company acquisition or a company sale, in case of a fusion or of inheritance or dispossession or by an admission or withdrawal of a partner of the company.
If there is no change of ownership causing the company evaluation it is often part of a decision-making process, e.g. for a determination of rescue operation- or creditworthiness of a company, if an existential flow of equity- or outside capital is needed. It seems possible, that the same reason may occur with or without change of ownership, e.g. in case of acquisition or the sale of company shares. Therefore, depending on the extent of the transaction and the resulting ownership relation, both kinds of evaluation reasons are possible (Wöhe 2010, p. 570).
An overview of the different evaluation reasons, subdivided according to the methodology used above, is shown in figure 1:
illustration not visible in this excerpt
Fig. 1 Examples for purposes for a corporate evaluation (acc. to Frère & Schyra 2011, p. 5; Wöhe 2010, p. 570; Ballwieser 2011, p. 1-2; Thommen & Achleitner 2012, p. 692)
Beneath the wide range of reasons, the rule in case of corporate evaluation is acc. to Frère and Schyra (2011, p. 5) a voluntary or forced change in the structure of a company’s ownership. Furthermore an evaluation is not only defined by the causing reason, but also by the chosen valuation date, for small periods of time maybe may cause big differences by unexpected trends or incidents (Frère & Schyra 2011, p. 4). Exact conclusions relating to this are given in chapter 2.2. Different evaluation reasons determine different purposes.
The legal regulated task of a company evaluation is, according to §9 BewG, the determination of the common value of a company.
Relevant for this are laws of property and equities. A differentiation is made by company value, value of potential revenue, liquidation value and reproduction value (Frère & Schyra 2011, p. 4).
The evaluated company has to be divided under an economic point of view from its environment, but not from a legal point of view, to be clear about the evaluation object. So it is important, that the evaluation object is defined unequivocal. But the evaluation object itself may be a whole company, within the meaning of a legal person, or a non-independent part of a company. However, such a part has to be definable using economic criteria and has to be dividable from other parts of the same company. If the evaluation object is defined economically, in theory the same approaches and methods for evaluation are usable, regardless of its nature as a part of a company or a multinational group (Frère & Schyra 2011, p. 5; Ballwieser 2011, p. 6).
For a fundamental differentiation are defined two purpose oriented subdivisions (Wöhe 2010, p. 570; Thommen & Achleitner 2012, p. 694; Ballwieser 2011, p. 10): If the company should not be preserved as a total entrepreneurial working source a separate evaluation method has to be used. For this the company value is the sum of all evaluated assets less the debts. In such a case, according to the evaluation reason, it may be purposeful to determine a liquidation- or reproduction value. For the liquidation value the determination of the market values of all assets in case of realization of them minus the liabilities has to be executed. The second possibility is the method of the reproduction value, as already mentioned. Using this method an amount is determined, which is necessary to reproduce the company identically. The occurring problems, especially for the reproduction approach, are discussed in chapter 2.3.
Should however the company business be continued in form of an entrepreneurial working source the use of global evaluation methods is suitable, which is well-founded on all assets and liabilities. This approach pursues an investment-oriented orientation. Significant for this approach is not the sum of the single value of the assets of the company, but the value of the company as a source of income. The company is therefor considered as an investment object that provides yields for the investor on rather the owner. These approaches are mostly future-oriented, what makes them very good comparable to alternative investment possibilities. This is the significant advantage that makes this method to the practically most used actually (Ballwieser 2011, p. 8-9).
The usable approaches are also described in the following chapters and will also be explained on the evaluation of the Daimler AG.
It hast to be pointed out clearly that, according to Ballwieser (2011, p. 1-2) a company itself got no value regardless of an evaluation reason and an evaluation purpose. Therefor the consideration of a purpose caused function has to be reflected with special attention, to convert a company evaluation effective. These appropriate kinds of functions can be subdivided as follows (acc. to Wöhe 2012, p. 571; Thommen & Achleitner 2012, S. 693-694; Ballwieser 2011, p. 1-2):
For an advisory function has to be assumed, that a company value should be determined for a buyer or seller. For a transaction can only be assumed to take place, if the for a seller significant corporation value (which is equal to the bottom of the price range for negotiations) is not undercut and the for a buyer significant corporation value (which is equal to the top of the price range for negotiations) is not exceeded, a purchase price has to be negotiated which is between those to price borders. According to the commissioned negotiation party the evaluation is used as a decision making tool for the buyer or the seller to define his personal purchase price top or bottom border. This advisory function can also be used for non-transaction decisions, e.g. the determination of creditworthiness.
Attending a mediation function the company appraiser is in charge for both negotiating parties. The target of the evaluation is therefor the determination of a for both parties reasonable and acceptable price. Founded on a as transparent as possible determinate upper and lower price border a mediation- or arbitrating value should be proposed. To reach this, an impartial as possible determination is necessary to reconcile the differing interests. For this also existing evaluations can be used and considered.
The argumentation function is similar to the advisory function as it is biased oriented. Price negotiations, as the intention of the evaluation commissions, should be raised or lowered as far as possible. So this function should provide an argument for a negotiation.
Finally the tax calculation function is for the determination of company shares for the assessment for inheritance tax and is therefor providing a tax base.
Depending on the function, which is the purpose of the company evaluation, reliability and validity are playing a more or less important rule. So a low traceability and an intended disregard of relevant facts may be useful for an argumentation functional evaluation. But for support by advisory, the same parameters will in the same shaping will not lead to a useful result (Ballwieser 2011, p. 2).
If the company evaluation is caused by a buying interest the company is treated as an investment. The main question relevant in this case is: How high is the benefit of the invested capital, or, how much is the yield? This means the evaluation founded on the future benefit flows for the buyer or investor. This, itself, includes the calculation of the expected inflow of funds and the expected costs. Whereas the costs for an investment in bonds or capital equipment are known, they have to be determinate for every company in individual case (Thommen & Achleitner 2012, p. 691).
Already at this point the above-mentioned objectivity problem becomes visible. In general all of these costs are plausible to calculate, but each of the determination approaches, which will be described, contains a significant subjectivity factor, as it will be shown. An objective company value is, as already mentioned, not determinable, and the scientific evidence of a value-price-divergence is underlying this fact (Frère & Schyra 2011, p. 6). A detailed consideration of this divergence is at least causing a philosophical, tautological problematic nature and is therefor not object of this assignment. It should be noted just that much, that reasoned in the nature of economics itself the price of a market object can never be reflecting its value for everyone, because value itself is a subjective idea. Evaluations in this case are always founded on subjective determinations and decisions (Thommen & Achleitner 2012, p. 693). If a company value is for example determinate for argumentative function, it is always influenced by the position of the evaluator (Thommen & Achleitner 2012, p. 693), what itself is no problem, if it serves the function of the evaluation. But, thinking further on, this circumstances lead to the insight, that an objective evaluation is not realistic, even if it is functional for mediation and therefor impartial.
Another problem becomes visible by an organic point of view. Companies are not the sum of their assets, but their value is founded on their profitability, which is itself significantly depending on immaterial factors. These factors could be an effective and efficient organization, an appropriate working atmosphere or an effective management. These kinds of factors are termed as Goodwill factors (Thommen & Achleitner 2012, p. 697).
The deduction on these facts, which is the actual accepted point of view for company evaluations, defines the value of a company not as the value of the company’s substance, but as the derivation of future incomes, so far as the continuation on rather the maintenance of the company is expected (Thommen & Achleitner 2012, p. 697). This is one of the reasons for the selection of the approaches in chapter 4 and 5.
According to the described understanding of purpose and function the evaluation of the Daimler AG in the following chapters is comparable with a preparation of a decision in advisory function. Both transparency and validity have been given an importance, and by its neutral oriented approach there will be no determination of a price range (Ballwieser 2011, p.2). For the depiction of the different approaches it is taken as a basis that the subject inducting the evaluation is reaching for the maximization of the financial outcome of his investment. The targeting of possible non-financial aims is, on the other hand, not taken in account.
The Discounted Cash Flow Methods and the Multiplier Methods are discussed in the chapters 4 and 5. Below these methods will be shortly described, which are subject in the referencing literature but not used for the corporate evaluation of this assignment.
Beneath the two already mentioned approaches there are several others. It seems there is no literature reference covering all approaches and methods mentioned in any other reference literature, and indeed no method that is named or defined the same in all reference literature. So the following chapter is already a selection with no claim to completeness. Under consideration of the explained functions in the chapter above a methodical subdivision of the approaches of company evaluation is done as follows (acc. to Ballwieser 2011, p. 8-10):
illustration not visible in this excerpt
Fig. 2 Modified subdivision of corporate evaluation approaches (acc. to Ballwieser 2011, p. 8)
The liquidation value method calculates the disposable assets of a company minus the liabilities. This approach is normally used in case of an upcoming liquidation of a company, but it may also be chosen to determinate a minimum level of value for evaluations with expected continuing business. It should be noted further that the values of the properties of the company have to be discounted if the liquidation is more than a year in the future. Related to the circumstances of an insolvency, which usually causes liquidation, the liquidation value is caused by the raised debts normally negative (Frère & Schyra 2011, p. 14).
The reproduction value method is founded on a similar methodology. The value assets of the company are also balanced with its debts, but with the aim of a determination of a reproduction value for a totally equal company (Wöhe 2012, p. 581-582). In contrast to the liquidation value method not the disposing prizes are calculated but the procurement costs (Frère und Schyra 2011, p. 15). For Goodwill factors are not determinate and are therefore not reproducible the result is only a part-reproduction value, which is useless for value determination (Wöhe 2012, p. 582).
Apart from that, the often-approaching problem of calculating Goodwill factors in a company evaluation has for example been solved with the Stuttgarter approach. Here, earnings above a normal yield are added to the reproduction value. This is only be used for small- and medium-sized businesses, which cannot be determinate reputable with other methods, like earnings values and cash flows (Frère & Schyra 2011, p. 25-26). By using earning values and cash flows for evaluation the goodwill-calculation problem does not occur because of the founding methodology.
The earnings value method is the most used method for company evaluation in Germany (Frère und Schyra 2011, p. 16). According to Ballwieser (2011, p. 13ff) this method is the discounting of expected value flows from the company to the owners. These values have to be reduced by the equity capital investments of the appropriate owner (which are inflows of deposits to raise the capital) and the personal taxes (Ballwieser 2011, p. 47). Therefor only these earnings will be accounted, which can be taken from the company without reducing the financial substance that is necessary for the company’s business success (Thommen & Achleitner 2012, p. 697). The cash price of the future sale of the company or of company hares can be included in the calculation (Wöhe 2012, p. 579). According to the Stuttgarter approach the determination of the future earnings is deduced from the EBIT of the last three years (Frère & Schyra 2011, p. 16).
At this point the first disadvantage of this method becomes visible. The retrospective use of company’s earnings is taken unreflected, so the method is past-oriented (Wöhe 2012, p. 579). The second disadvantage is that earnings that are counted after the taxation and are significant for the yield flows to the owners are not calculated for the evaluation. To compensate this, according to the Stuttgarter approach 15% of the reference amounts are subtracted on flat-rate, which leads to obvious wrong results (Frère & Schyra 2011, p. 16). Thirdly a complete pay out of the company’s profit to the investor is assumed and a necessary accumulation of the profit is ignored (Thommen & Achleitner 2012, p. 699). Fourthly no equity capital costs are taken into account (Wöhe 2012, p. 581). Additionally there is no formally advanced calculation-scheme for a consideration of risks. Therefor subjective assumptions are taken in account, what is causing non-transparency and therefor makes comparison more difficult (Thommen & Achleitner 2012, p. 699).
Due to globalization and internationalization of company transactions the German stamped earnings value method has lost importance for the benefit of the discounted cash flow (DCF) methods, which have already overcome most of the disadvantages mentioned above. This will be shown in chapter 4.
Out of the described earnings value approach and reproduction method, combined approaches are creatable (Wöhe 2012, p. 582-583). Using these, a determination of an as objectively as possible company value using schematic rules is expected to be done. The approach described by Wöhe is at least an arithmetic mean of the values calculated with these both methods. This approach is also found in other references.
Other approaches and methods are the method of future success value (Wöhe 2012 p. 572-574), the economy value added approach (EVA) (Thommen & Achleitner 2012, p. 705ff.), the cash flow return on investment (CFROI) approach (Thommen & Achleitner 2012, p. 705ff.) and the Realoptionsansatz, which is very complex and therefor cannot be taken in account for this assignment (Frère & Schyra 2011, p. 23ff.). These methods are only mentioned to get closer to completeness, but as the approaches in this chapter do they do not play a role in the further assignment.
The position of the German Institute of Accountants (IdW) towards the actual methods and approaches for company evaluation is formulated in the “IdW standard: principles for the performance of business valuations”, first published in 2001. This document recommends in principle success related determinations. The reproduction value and the liquidation value methods are refused for being theoretically untenable. Therefor the IdW proposes the selection between the earning value method and the later described DCF approach. The IdW document is, caused by its reference value, an appropriate basis to choose from the actual methods of company evaluation and is also giving practicable instructions (Wöhe 2012, p. 583).
An actual empirical assessment of company evaluation methods is delivered by Thommen and Achleitner (2012, p. 708 – 709). They examined the practically used methods with regard to their distribution.
Therefor they questioned tax consultants, accountants, and other experts. With the possibility of multiple naming the evaluation resulted in the application frequency shown in figure 3.
illustration not visible in this excerpt
Fig. 3 Application frequency of company evaluation methods (acc. to Thommen & Achleitner 2012)
It became visible, that earning value methods with a significant distance are the most often used approaches. The multiplier approach and the DCF-approach are placed 2nd and 3rd rank. As a reason for this the disadvantages of the multiplier method are named, and also the complexity of DCF-approach, which will be discussed in the appropriate chapters later. Another reason could be the traditional standing of the earnings value method and the naturally slow and resistant spread of the newer methods, like the DCF-approach is. The little relevance of the separate evaluation methods on the other hand might be caused by their low usefulness for evaluation occasions, which are caused by upcoming investments or changes of the value structure (e.g. transactions or stock market flotation). For many company evaluations are also several methods used, to reach a negotiation- or consensus range, or to prove another evaluation on plausibility (acc. to Thommen & Achleitner 2012, p. 709).
The legal framework for company evaluations is also varied. Next to the already mentioned BewG there have to be named, depending on the occasion of the valuation, the WpÜG, the AktG and the WpHG (Frère und Schyra 2011, p. 10-11).
The use of the following chapter is an overview of the Daimler AG as the subject of this evaluation. The given facts are for the year 2011, unless otherwise stated, as the annual report of Daimler, which is the reference for this evaluation, is.
The Daimler AG is the parent company of the Daimler Group. The main business of the Company is the development, production and distribution of cars, trucks and vans. Through direct or indirect controlled companies Daimler is also participating in business with buses and financial services (Daimler 2012, p. 72-73).
With its different brands, Daimler is engaged in nearly all regions worldwide. The Group has production facilities in a total of 18 countries and approximately 8,000 sales centers.
The several divisions contributed to this total as follows: Mercedes-Benz Cars 52%, Daimler Trucks 25%, Mercedes-Benz Vans 8%, Daimler Buses 4% and Daimler Financial Services 11%.
The products supplied by the Mercedes-Benz Cars division range from the small cars of the smart brand to the premium automobiles of the Mercedes-Benz brand and to the Maybach luxury cars. The most important markets for Mercedes-Benz Cars in 2011 were Germany with 21% of unit sales, the other markets of Western Europe (24%), the United States (18%) and China (16%).
Daimler Trucks is the biggest globally active manufacturer of trucks above 6 tons gross vehicle weight. The division develops and produces vehicles in a global network under the brands Mercedes-Benz, Freightliner, Western Star and Fuso. Daimler Trucks’ most important sales markets in 2011 were Asia with 32% of unit sales, the NAFTA region (27%), and Europe (22%). The most important markets for vans are in Europe, which accounts for 76% of unit sales.
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