23
Munich, Germany 14 November 2016 Valuation & Corporate Finance Advisors Forum 6 | „Unternehmensbewertung in der Nullzins-Ära“ Discussion Materials 14. Deutscher Corporate M&A-Kongress
Munich, Germany
14 November 2016Valuation & Corporate Finance Advisors
Forum 6 | „Unternehmensbewertung in der Nullzins-Ära“
Discussion Materials
14. DeutscherCorporateM&A-Kongress
Content
Development Interest Yields
Parameters in valuation formula
Market Cap versus Earnings expectation
Implied cost of capital and implied market risk premia
Countries with over- under valuation in stock market
Development of Corporate debt market
So where is the next invest bubble in 2017?
Duff & Phelps 2November 14, 2016
Concerning the content of this document please
contact:
Daniel Kittlauss
Managing Director, Frankfurt
Valuation Advisory Services
+49 (0)170 786 3531
Andreas Stoecklin
Managing Director, Munich
Corporate Finance
+49 (89) 388 884 120
Klaus Pflum
Senior Advisor
Corporate Finance
+49 (89) 388 884 110
3Duff & Phelps
Source: Goldman Sachs
1621Tipper and See-Saw Time
Money in German states wasdebased with an intention to
defraud neighboring states byexchanging the debased
currency for solid currency inthose states, all in an effort to
raise money for the Thirty Years‘War
1720South Sea Company
A British joint-stock company andpublic-private partnershipcreated to consolidate andreduce the cost of debt butmarketed to the public as a
growth opportunity because of itsmonoply on trade with South
America, which would realisticallynever take place because of
Spain‘s control over thatcontinent at that time
1720Mississippi Company
A Bank and tradingcompany with a monoplyover French foreign trade:exaggerated claims of thewealth of French colony
Louisiana led to wildspeculation in the shares of
the company
1637Tulip Mania
In Holland, tulips that were rareat the time became symbols ofprosperity: the most expensivetulips sold for fifteen or twentytimes the annual salary of a
skilled craftsman
The Tulipmania is one of the earliestrecorded instances of an irrational assetbubble. By one account, tulip prices soared20-fold over 4-months period
Investors snapped up sharesof South Sea Company morethan eight-fold over 6-months period before itcollapsed, in expectation of arepeat of the success of theEast India Company
1886-92Encihamento (“Mounting")
Economic bubble in Brazilfacilitated by new banking lawsthat were intended to stimulate
industrialization, but thatencouraged unbridled
speculation around IPOs andother practices 1969-70
Poseidon BubbleStock market bubble in Australian
mining shares initially prompted by aspeculative frenzy over shares of a
company that had made a largenickel discovery at a time when
nickel was in shortage
1846Railway Mania
Speculative frenzy overrailroad shares in Britain
1920sFlorida Land Boom
Speculative landboom
1997-2000Dot-com Bubble
Speculative bubble instocks related to theburgeoning internet
2007Uranium Bubble
Uranium prices skyrocketed,possibly initially prompted by
flooding of the Cigar Lake Minein Saskatchewan, the largest
undeveloped source of uraniumin the world, but which wasn‘tyet producing anything at the
time
1980-90sJapanese Asset Price Bubble
Abundant liquidity, financialderegulation, monetary easing
and euphoria over future growthprospects led to speculation inthe stock and property markets
2000sReal Estate Bubbles
2005 – India2006 – UK, Irland, Spain2007 – US, China2008 – Romania2009 – Australia
2006Jatukam Craze
Speculative frenzy overJatukam amulets (look like over-
sized pieces of vaguelyhindu/buddhist jewelry that you
wear around your neck) inThailand that were thought to
bring wealth
At the peak in 1989, the value of theImperial Palace grounds in Tokyo wasgreater than that of the real estate in theentire state of California. The burst of thebubble in early 1990 set the stage forJapan‘s “Lost Decades" of the 1990s andearly 2000s
The NASDAQ Composite, home tomost of the dot-com companies,soard from under 500 to over 5000in 15 months. Hundreds of thesecompanies achieved multi-billiondollar valuation as soon as theywent public
The US housing boom andbust, and the ripple effects ithad on mortgage-backedsecurities resulted in an globaleconomic contraction that wasthe biggest since the 1930sDepression
2017 ?Real Estate
Metropolitian real estateprices have reached
critical levels in cities likeStockholm, Munich,
London ....
2017 ?Bubble burst in S&P 500If S&P index (current level
close to 2100) finally reaches2300, the threshold level ofmajor bubbles in the past, a
bust in the U.S equity market islikely to happen
2017 ?Sovereign Bonds bubble
Global central bankers are busy keeping thefinancial system liquid with helicopter
money, though markets should see cracksand the unkown consequences this
systemic bubble could bring
1987, 1997, 2007: The Next “Lehman”… Coming in 2017?“
Impact of Lehman on our Yield curve
Duff & Phelps 4November 14, 2016
Development from „Lehman“ to today‘s zero interest ...
Duff & Phelps 5November 14, 2016
-0.01
0.00
0.01
0.02
0.03
0.04
0.05
0.06
0
200
400
600
800
1,000
1,200
Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16
CDAX vs. Basiszins / risk free rate (10years)
CDAX Index (Total Return) 10y German Gov. Bond
How are interest impacting market cap ... ?
Duff & Phelps 6November 14, 2016
Parameters in valuation formular ...
Duff & Phelps 7November 14, 2016
-
20
40
60
80
100
120
-
200
400
600
800
1,000
1,200
1,400
1,600
Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16
Market value vs. earnings estimate (in bn. EUR)
Market Value Average earnings period 1 to 3
Duff & Phelps 8November 14, 2016
(D) Market capitalisation versus earnings expectation...
(D) Yield vs.Implied cost of capital | Implied market risk premia
Duff & Phelps 9November 14, 2016
-1%
1%
3%
5%
7%
9%
11%
13%
Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16
Implied MRP against Risk Free Rate (in %)
Total Implied CoC Risk Free Rate MRP
(D) Implied risk premia has increased ...
Duff & Phelps 10November 14, 2016
0%
2%
4%
6%
8%
10%
12%
14%
Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16
MRP Development
High/Low MRP
USA ... similar to D, decline in ICOC more visable
Duff & Phelps 11November 14, 2016
-1%
1%
3%
5%
7%
9%
11%
13%
Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Total Implied CoC Risk Free Rate MRPImplied MRP against risk free rate
Market Value vs earnings estimates (in bn. USD)
-
200
400
600
800
1,000
1,200
1,400
1,600
-
5,000
10,000
15,000
20,000
25,000
Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Market Value Average earnings period 1 to 3
Japan - low interest environment, business as usual ...
Duff & Phelps 12November 14, 2016
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
-
100,000
200,000
300,000
400,000
500,000
600,000
Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Market Value Average earnings period 1 to 3
-1%
1%
3%
5%
7%
9%
11%
13%
Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Total Implied CoC Risk Free Rate MRPImplied MRP against risk free rate
Market Value vs earnings estimates (in bn. Yen)
Regressing ICOC + EMRP against yield...
Duff & Phelps 13November 14, 2016
y = 0.38x + 0.07R² = 0.36
y = -0.61x + 0.07R² = 0.60
0%
2%
4%
6%
8%
10%
12%
14%
-1% 0% 1% 2% 3% 4% 5% 6% 7% 8%
icoc
mrp
Linear (icoc)
Linear (mrp)
• Conclusion: Despite shortfalls upcoming alternative approach to measure expected returns or singlecomponents of the CAPM such as EMRP
Duff & Phelps 14November 14, 2016
DiscountingExpectedDividends
Stock Price
Implied DiscountRate
ExpectedDividends
Summarizing the implied market risk premia model ...
• Main Advantage
– Forward looking, i.e. consideration of current market situation possible
• Main problems:
– Underlying assumption: price = (fundamental) value of the company
– Estimation of input parameter (e.g. dividends, growth rate, rating (PD))
– General circularity problem (if applied to a single company)
Status of discussion on EMRP and risk free yield in D & US
Duff & Phelps 15November 14, 2016
IDW recommendation for Sep 2012ff: Normalization (US):
„[...]
1. Bei der Prognose der Marktrisikoprämie sind durch dieFinanzmarktkrise veränderte Ein- flussparameter, insbesondereeine veränderte Risikotoleranz, zu berücksichtigen,so dass sich imVergleich zu den letzten Jahren derzeit höhere Marktrisikoprämienrechtfertigen lassen.
2. Der FAUB hält es für sachgerecht, sich derzeit bei der Bemessungder Marktrisikoprämien an einer Bandbreite von 5,5 % bis 7 % (vorperönlichen Steuern) [...] zu orientieren.
[...]“
“Duff & Phelps Increases Recommended U.S. Equity RiskPremium from 5.0% to 5.5%Based upon current market conditions, Duff & Phelps recommendsan increase in the U.S. ERP to 5.5% when developing discount ratesas of January 31, 2016 and thereafter (until further guidance isissued).The prior Duff & Phelps recommended U.S. ERP was 5.0%,established as of February 28, 2013. Both of these ERP estimateswere measured relative to a normalized yield of 4.0% on 20-yearU.S. Treasury bonds.”
Is there a bubble, shall I invest ...?
Duff & Phelps 16November 14, 2016
ICOC: 7.77%
MRP: 7.96%
Rf: -0.19%
ICOC: 6.17%
MRP: 4.57%
Rf: 1.6%
ICOC: 7.39%
MRP: 7.46%
Rf: -0.08%
ICOC: 6.83%
MRP: 6.03%
Rf: 0.8%
y = -0.64x + 0.07R² = 0.40
0%
2%
4%
6%
8%
10%
12%
0% 1% 2% 3% 4% 5% 6%
USA
Risk Free Rate
MR
P
y = -1.1x + 0.09R² = 0.66
0%
2%
4%
6%
8%
10%
12%
-1% 0% 1% 2% 3% 4% 5% 6%
Germany
Risk Free Rate
MR
P
y = -0.6x + 0.07R² = 0.43
0%
2%
4%
6%
8%
10%
12%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
UK
Risk Free Rate
MR
P
y = -2.45x + 0.08R² = 0.49
0%
2%
4%
6%
8%
10%
12%
-1% 0% 1% 1% 2% 2% 3%
Japan
Risk Free Rate
MR
P
Anybody still believes in ECB’s inflation target ?
Duff & Phelps 17November 14, 2016
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
La
st
Pri
ce
German Break-even Rates
10 years 15 years Average
No data available
1.0%
1.1%
Anybody still believes in ECB’s inflation target ?
Duff & Phelps 18November 14, 2016
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
La
st
Pri
ce
Euro Area Inflation-linked Swap
10 years 20 years
1.5%
1.2%
Development of Corporate debt market
Duff & Phelps 19November 14, 2016
-2%
0%
2%
4%
6%
8%
10%
12%
Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Spread against EUR Swaps of 10Y Industry bonds by different rating classes
Industrial AA 10Y Industrial A 10Y Industrial BBB 10Y Industrial BBB- 10Y
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16
Absolute Yield of 10Y Industry bonds by different rating classes
Mid Price AA Mid Price A Mid Price BBB Mid Price BBB-
20Duff & Phelps
Source: Goldman Sachs & Duff&Phelps
1621Tipper and See-Saw Time
Money in German states wasdebased with an intention to
defraud neighboring states byexchanging the debased
currency for solid currency inthose states, all in an effort to
raise money for the Thirty Years‘War
1720South Sea Company
A British joint-stock company andpublic-private partnershipcreated to consolidate andreduce the cost of debt butmarketed to the public as a
growth opportunity because of itsmonoply on trade with South
America, which would realisticallynever take place because of
Spain‘s control over thatcontinent at that time
1720Mississippi Company
A Bank and tradingcompany with a monoplyover French foreign trade:exaggerated claims of thewealth of French colony
Louisiana led to wildspeculation in the shares of
the company
1637Tulip Mania
In Holland, tulips that were rareat the time became symbols ofprosperity: the most expensivetulips sold for fifteen or twentytimes the annual salary of a
skilled craftsman
The Tulipmania is one of the earliestrecorded instances of an irrational assetbubble. By one account, tulip prices soared20-fold over 4-months period
Investors snapped up sharesof South Sea Company morethan eight-fold over 6-months period before itcollapsed, in expectation of arepeat of the success of theEast India Company
1886-92Encihamento (“Mounting")
Economic bubble in Brazilfacilitated by new banking lawsthat were intended to stimulate
industrialization, but thatencouraged unbridled
speculation around IPOs andother practices 1969-70
Poseidon BubbleStock market bubble in Australian
mining shares initially prompted by aspeculative frenzy over shares of a
company that had made a largenickel discovery at a time when
nickel was in shortage
1846Railway Mania
Speculative frenzy overrailroad shares in Britain
1920sFlorida Land Boom
Speculative landboom
1997-2000Dot-com Bubble
Speculative bubble instocks related to theburgeoning internet
2007Uranium Bubble
Uranium prices skyrocketed,possibly initially prompted by
flooding of the Cigar Lake Minein Saskatchewan, the largest
undeveloped source of uraniumin the world, but which wasn‘tyet producing anything at the
time
1980-90sJapanese Asset Price Bubble
Abundant liquidity, financialderegulation, monetary easing
and euphoria over future growthprospects led to speculation inthe stock and property markets
2000sReal Estate Bubbles
2005 – India2006 – UK, Irland, Spain2007 – US, China2008 – Romania2009 – Australia
2006Jatukam Craze
Speculative frenzy overJatukam amulets (look like over-
sized pieces of vaguelyhindu/buddhist jewelry that you
wear around your neck) inThailand that were thought to
bring wealth
At the peak in 1989, the value of theImperial Palace grounds in Tokyo wasgreater than that of the real estate in theentire state of California. The burst of thebubble in early 1990 set the stage forJapan‘s “Lost Decades" of the 1990s andearly 2000s
The NASDAQ Composite, home tomost of the dot-com companies,soard from under 500 to over 5000in 15 months. Hundreds of thesecompanies achieved multi-billiondollar valuation as soon as theywent public
The US housing boom andbust, and the ripple effects ithad on mortgage-backedsecurities resulted in an globaleconomic contraction that wasthe biggest since the 1930sDepression
2017 ?Real Estate
Metropolitian real estateprices have reached
critical levels in cities likeStockholm, Munich,
London ....
2017 ?Bubble burst in S&P 500If S&P index (current level
close to 2100) finally reaches2300, the threshold level ofmajor bubbles in the past, a
bust in the U.S equity market islikely to happen
2017 ?Sovereign Bonds bubble
Global central bankers are busy keeping thefinancial system liquid with helicopter
money, though markets should see cracksand the unkown consequences this
systemic bubble could bring
So where is the next invest bubble in 2017?
Duff & Phelps is the premier globalvaluation and corporate financeadvisor with expertise in complexvaluation, dispute consulting, M&A,restructuring, and compliance andregulatory consulting.
The firm’s more than 2,400professionals serve a diverse rangeof clients from over 70 offices in theAmericas, Europe and Asia.
In Germany, Duff & Phelps operateswith offices in Munich, Frankfurt,Berlin, Hamburg, Bremen andCologne.
21
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For more information about our globallocations and services, please visit:www.duffandphelps.com
About Duff & Phelps
Duff & Phelps is the premier global valuation and corporatefinance advisor with expertise in complex valuation, disputeconsulting, M&A and restructuring. The firm’s more than 2,400employees serve a diverse range of clients from offices in NorthAmerica, Europe and Asia.
M&A advisory and capital raising services in the United Statesare provided by Duff & Phelps Securities, LLC. MemberFINRA/SIPC. Pagemill Partners is a Division of Duff & PhelpsSecurities, LLC. M&A advisory and capital raising services in theUnited Kingdom and Germany are provided by Duff & PhelpsSecurities Ltd., which is authorized and regulated by the FinancialConduct Authority.
