Ferrari: The 2015 Initial Public Offering

Prospective Analysis: Valuation and Implementation

In partial fulfillment of requirements for

Strategic Business Analysis

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

Submitted by:
DAGAN, Marc Kristian SJ.
LINZO, Angela Kristine R.
PARDO, Christian John C.
PAYAWAL, Nicole Kate P.
SY, Harvey M.

Group 6
4MA5
 I. Case Context or Background

Enzo Ferrari established his own manufacturing firm focused on race cars for the elite, known as Ferrari. The firm also ventured into road
cars for European society. Fiat, another car manufacturer, purchased 50% of Ferrari's shares and was able to increase production and sales for the
company. By 1988, the year of Enzo Ferrari's death, 90% of Ferrari was held by Fiat. In 1992, the company grew and they started committing to
engineering excellence when Luca Montezemolo became the chairman. The strategy implemented by Montezemolo was to hold production volumes
below the demand to instill exclusivity in its brand, while also focusing on manufacturing high-quality products. When Montezemolo's position was
taken over by Sergio Marchionne, Ferrari departed from FCA, its parent company. Based on the plan, 17.175 million shares will be sold in an IPO.
The FCA holdings Ferrari would then be distributed to existing shareholders as a result of a spin-off. Finally, 90% of Ferrari shares will be available
to the public for trading while the remaining 10% will still be held by the Ferrari family.

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

As the start of public trading comes close, Sergio Marchionne, Ferrari’s chairman, must set an offering price for the IPO shares. There are
two instances with their benefits and disadvantages. First, within range price will attract more investors but may not be enough for the FCA. On the
other hand, a higher price might drive investors away and result in a poor start of trading. It will also bear the risk of losing subsequent stock price
increases. Therefore, Marchionne must find the corporation value in which it will succeed as a publicly traded company.
Moreover, there are additional things to consider in the situation. First, after the roadshow, it was confirmed that Ferrari’s IPO shares have
high public interest and demand. Secondly, Ferrari has a unique business model and strategy. Thus, it is difficult to compare the value of the company
to a specific industry. Lastly, Ferrari’s success was attributed to its high prices and product exclusivity. There is a question of preserving the brand
exclusivity when listed publicly.

III. Analysis and Alternative Courses of Actions (ACA)

ACA 1: Higher Profit margin by serving innovative products: If Ferrari wants to keep its production level low to preserve its exclusivity, they
should focus on research and development and aim to be the first in innovations in the automotive industry because if they are able to deliver innovative
products, they will be able to demand higher profit margins in their products.
ACA 2: Expanding production levels while maintaining exclusivity. Ferrari will expand its production levels but a level wherein its exclusivity will
not be much affected. Ferrari is a luxury car manufacturer and luxury brands have a business model where exclusivity drives their products' demand
higher.
ACA 3: Pursue the IPO of Ferrari: By pursuing IPO, the investors for Ferrari with special preference, can directly invest in Ferrari without having
the need of their cash being diversified by the FCA. Also, this could help restructure favorable financial leverage from the separation in order to satisfy
its own shareholders.
ACA 4: Use Discounted Cash Flow Valuation Method: In order to arrive at the value of the offering price for the IPO shares, Ferrari can use this
model. This could help the company to estimate the value of their investment based on its future cash flows.
ACA 5: Continue developing markets in Asia and Middle East: As Ferrari’s strategy includes plans to expand into markets as they believed that
they have the potential, the company might need to research more with regards to the markets in the area as they have no operating experiences in these
markets. There is a need to study more about the government regulations and taxes in dealing with the selling of luxury cars.

IV. Decision and Recommendation

To address the problem of Ferrari, Inc. in determining its share price, we decided to use two valuation approaches – market multiples and
DCF. In coming up with the answer for the multiple approach, we used the EBITDA multiples of luxury brands and got its median, which is further
explained in Appendix 1. Though multiples is commonly used in practice, we decided not to use the computed share price amounting to $38.17 as there
are inherent disadvantages to the said approach. Such drawbacks include but are not limited to: other comparable companies that might consist of biases
in their valuation, and its simplicity disregards other factors that can affect the intrinsic value – growth and decline (Corporate Finance Institute, 2021).

In lieu of that, we then opted to use the DCF approach; though this may have its disadvantages (e.g., assumptions of perpetuity and its
dependency on various key assumptions), it still is a better choice when compared to market multiples. In our computation of the DCF, we assumed a
2% growth rate after 2019, and the reasons for this are explained in Appendix 2. The group also assumes the 2% growth in suggesting that Ferrari
should increase its volume but not so much that it will take a toll on the concept of “exclusivity” that the company wants to keep after its IPO. By using
both the forecast in Exhibit 8 and our assumptions, we came up with a share price of €50.70 or $57.75.

Setting up an IPO is a gruesome procedure, and after its execution, it will enable competitors to know more about the company, as public
entities are required to prepare and disclose their financial statements. But, the potential benefits that it will bring to expand the company further
physically, financially, and brand image-wise will offset the disadvantages of setting up an IPO if it is planned and appropriately utilized. Thus, we
suggest Ferrari to set up an IPO and offer it at a price not lower than $57.75 to expand the business whilst maintaining its long-standing
tradition of exclusivity.
 V. Appendices

Appendix 1 | Market-multiples

[1] Ferrari’s business can be seen as an auto manufacturer, but the strategy and goals of the business revolves
around the concept of exclusivity. Implying that Ferrari leans more toward the luxury brand market.
[2] The group used Median to come up with a proper EBITDA multiple. Median was used instead of Mean as
there are outliers in the multiples of comparable companies for luxury brands.
Appendix 2 | DCF Approach
2.1 Step 1 [Computation of the Free Cash Flow (FCF)]

[1] The group computed the 2020 FCF to get the terminal value and its corresponding PV.
[2] A 2% growth rate is used. A major strategy of Ferrari is to maintain its exclusivity, but it needs to increase its reach
according to the new management. Thus, to increase its reach while maintaining its exclusivity, the group assumed a
2% growth rate which is close to the EU 10-Year Treasury Bonds (According to the website Bloomberg the EU 10-
year Treasury Bonds are around .1% to 1.18%).
 [3] Though depreciation and amortization is part of the FCF computation, we decided to exclude an assumption of it
in the start of the continuous growth to combat at least some part of the inherent biases when computing the DCF,
which is overvaluation (Damadoran, as cited by Siegel, 2017).

2.2 Step 2 | [Terminal Value (TV) computation and PV computation for the FCF and TV]

2.3 Step 3 | Share Price Computation

[1] The share price must be in USD as the IPO will happen at the NYSE.

VI. References

• Bloomberg. (n.d.). Rates & Bonds . Bloomberg.com. Retrieved November 4, 2021, from
https://www.bloomberg.com/markets/rates-bonds.
• CFI. (2021, September 15). Multiples analysis. Corporate Finance Institute. Retrieved November 4, 2021, from
https://corporatefinanceinstitute.com/resources/knowledge/valuation/multiples-analysis/.
• Siegel, C. (2017, February 23). Avoiding bias in DCF analysis. Miller Value Partners. Retrieved November 4,
2021, from https://millervalue.com/avoiding-bias-in-dcf-analysis/.