The Ferrari Ipo: A Toll Premium For The Prancing Horse?

I alive inward a prosperous suburb, sustained largely yesteryear fiscal service businesses, but every bit far I know, at that topographic point is entirely 1 Ferrari inward my town. Much of the week, the machine sits inward a garage which has its ain safety system, to a greater extent than secure than the 1 protecting its owner's house, as well as on a squeamish weekend, you lot run across the possessor drive it about town. It is a remarkably inefficient transportation mode, also fast for suburban roads, also expensive to hold upward parked at a grocery flush or pharmacy, as well as also cramped for machine pool. All of this comes to mind, for 2 reasons. The starting fourth dimension is the imminent initial world offering of the company, alongside all the pomp as well as circumstance that surrounds a high-profile offering. The instant is that this offering has laid inward motion the common utter of construct names as well as the cost premiums that nosotros should pay to partake for investing inward them.

Ferrari: H5N1 Short History as well as Background

The Ferrari flush started alongside Enzo Ferrari, a racing machine enthusiast, starting Scuderia Ferrari inward 1929, to aid as well as sponsor race machine drivers driving Alfa Romeos. While Enzo manufactured his starting fourth dimension racing machine (Tipo 815) inward 1940,  Ferrari every bit a machine making society was founded inward 1947, alongside its manufacturing facilities inward Maranello inward Italy. For much of its early on existence, it was privately owned yesteryear the Ferrari family, though it is said that Enzo viewed it primarily every bit a racing machine society that happened to sell cars to the public. In the mid-1960s, inward fiscal trouble, Enzo Ferrari sold a 50% stake inward the society to Fiat.  That asset was afterward increased to 90% inward 1988 (with the Ferrari identify unit of measurement retaining the remaining 10%). Since then, the society has been a small, albeit a real profitable, patch of Fiat (and FCA).

The society acquired its legendary status on the race tracks, as well as holds the tape for most wins  (221) inward Formula 1 races inward history. Reflecting this history, Ferrari even so generates revenues from Formula 1 racing, alongside its part amounting to $67 1 1000 m inward 2014. Much every bit this may hurting machine enthusiasts everywhere, some of Ferrari's standing comes from its connexion to celebrities. From Thor Batista to Justin Bieber to Kylie Jenner, the Ferrari has been an musical instrument of misbehavior for wealthy celebrities all over the world.

The Auto Business

In before posts, where I valued Tesla, GM as well as Volkswagen, I argued that the auto line of piece of job organisation bore the characteristics of a bad business, where companies collectively earn less than their cost of majuscule as well as most companies destroy value. In fact, I used the words of Sergio Marchionne, CEO of Fiat Chrysler (and the parent society to Ferrari) to construct the representative that the top managers at auto companies were delusional inward their belief that the line of piece of job organisation would magically plough around. Looking at the line of piece of job organisation broadly, hither are iii characteristics that let out themselves:

1. It is a depression growth business: The auto line of piece of job organisation is a cyclical one, alongside ups as well as downs that reverberate economical cycles, but fifty-fifty allowing for this cyclicality, the line of piece of job organisation is a mature one. That is reflected inward the growth charge per unit of measurement inward revenues at auto companies.

Year	Revenues ($)	% Growth Rate
2005	1,274,716.6
2006	1,421,804.2	11.54%
2007	1,854,576.4	30.44%
2008	1,818,533.0	-1.94%
2009	1,572,890.1	-13.51%
2010	1,816,269.4	15.47%
2011	1,962,630.4	8.06%
2012	2,110,572.2	7.54%
2013	2,158,603.0	2.28%
2014	2,086,124.8	-3.36%

During this period, the emerging marketplace position economies inward Asia as well as Latin America provided a pregnant boost to sales, but fifty-fifty alongside that boost, the compounded annual growth charge per unit of measurement inward aggregate revenues at auto companies betwixt 2005 as well as 2014 was entirely 5.63%.

2. With piteous turn a profit margins: H5N1 fundamental dot that Mr. Marchionne made virtually the auto line of piece of job organisation is that operating margins of companies inward this line of piece of job organisation were much also slim, given their cost structures. To illustrate this dot (and to fix my valuation of Ferrari), I computed the pre-tax operating margins of all auto companies globally, alongside marketplace position capitalizations exceeding $1 billion, as well as the graph below summarizes my findings.

Source: S&P Capital IQ

3. And high reinvestment needs: The auto line of piece of job organisation has e'er required pregnant investments inward flora as well as equipment, but inward recent years, the advent of technology has also pushed upward R&D spending at auto companies. One mensurate of the drag this puts on cash flows is to aspect at internet majuscule expenditures (capital expenditures inward excess of depreciation) as well as R&D, every bit a percentage of sales, for the entire sector:

It is this combination of anemic revenue growth, slim margins as well as increasing reinvestment that is squeezing the value out of the auto business. (You tin download the information for all auto companies, alongside profitability measures as well as pricing ratios by clicking here.)

The Super Luxury Automobile Business

If, every bit has been said before, the entirely departure betwixt the rich as well as the ease of us is that the rich receive got to a greater extent than money, the departure betwixt the rich as well as the super rich is that super rich receive got so much coin that they receive got stopped counting. The super luxury machine manufacturers (Ferrari, Aston Martin, Lamborghini, Bugatti etc.), alongside prices inward the olfactory organ bleed segment, cater to the super rich, as well as receive got seen sales grow faster than the ease of the auto industry. Much of the additional growth coming from newly minted rich people inward emerging markets, inward general, as well as China, inward particular. Like the ease of the companies inward the super luxury segment, Ferrari is less auto society as well as to a greater extent than status symbol, as well as draws its allure from 4 fundamental characteristics:

1. Styling: I am non a machine lover, but fifty-fifty I tin recognize that a Ferrari is a function of art. That is non accidental, since the society spends substantial amounts on styling as well as the piffling details that pop off into every Ferrari.
2. Speed: There is no absolutely no run a hazard that you lot volition examination the upper limits of the car's engine capacity, but you lot could larn from LA to San Francisco inward virtually 3 hours, if you lot could maintain the machine at its top speed (I am non recommending this). So, if you lot grew upward alongside dreams of beingness a Formula 1 driver, as well as at nowadays receive got the coin to fulfill them, a Ferrari is belike every bit unopen every bit you lot are going to larn to these dreams.
3. Story: The machine comes alongside a flush that draws every bit much from its celebrity connections every bit it does from  its speed exploits. 
4. Scarcity: Notwithstanding the starting fourth dimension iii points, it would hold upward simply some other luxury machine if everyone had one. So, it has to hold upward kept scarce to command the prices that it does, both every bit a novel machine as well as inward its used versions.

To illustrate how exclusive the Ferrari monastic tell is, inward all of 2014, the society sold entirely 7255 cars, a number that has barely budged over the terminal 5 years. (The Lamborghini monastic tell is fifty-fifty to a greater extent than exclusive, alongside entirely 2000 cars sold annually.)  The society has its roots inward Italy but is subject on a super- rich clientele globally for its sales:

Note that a pregnant patch of the revenue pie comes the Middle East as well as that Ferrari, similar many other global companies, is becoming increasingly subject on PRC for growth.

Valuing Ferrari

As many of you lot reading this weblog are aware, I am a believer that all valuations start alongside stories as well as that different stories tin yield different valuations. With Ferrari, at that topographic point are 2 plausible stories that you lot tin offering for the futurity of the company, alongside valuations to dorsum them up:

1.The Status Quo (Super Exclusive, Low Production, High Margin)
The story: Ferrari remains a extra-exclusive automobile company, keeping production depression as well as prices high. The benefits of this strategy are high operating margins (Ferrari has amid the highest inward the auto business) partly because of the high prices, as well as partly because the society does non receive got to pass much on expensive advertizing campaigns or selling. It also volition hold reinvestment needs to a minimum, since capacity expansion volition non hold upward necessary, though the society volition hold spending on R&D to save its border (on speed as well as styling). In addition, yesteryear focusing on a real small-scale grouping of super rich people about the world, Ferrari may hold upward less affected yesteryear macroeconomic forces than other luxury auto companies.
The inputs: The inputs into my valuation reverberate the story, alongside depression revenue growth, high margins as well as depression reinvestment driving value:

The valuation: With these assumptions, the value for equity of 6,310 1 1000 m Euros (approximately $7 billion). You tin download the spreadsheet here.

2. Rev it Up (Increase production, Introduce a lower-priced model)
The story: Ferrari tries to broaden its client base, mayhap yesteryear introducing a lower-priced version; this would mirror what Maserati did alongside its Ghibli model. That volition permit for higher revenue growth but similar Maserati, Ferrari volition receive got to yield some of its operating margin, since this strategy volition require lower prices as well as higher selling costs. Seeking a larger marketplace position volition also expose it to to a greater extent than marketplace position risk, pushing its cost of majuscule inward high growth to 8.5% as well as its cost of majuscule beyond to 7.5%.
The inputs: This strategy volition generate higher sales (doubling number of units sold inward side yesteryear side 10 years) but at the expense of lower margins (from lower prices as well as higher selling costs) as well as higher hazard (as the clientele volition hold upward to a greater extent than sensitive to economical conditions).

The valuation: With this strategy, the value for equity of 6,042 1 1000 m Euros (approximately $6.75 billion). You tin download the spreadsheet here.

At to the lowest degree based on my estimates, it is to a greater extent than sensible for Ferrari to stick alongside its low-growth, high cost strategy as well as hold itself to a higher identify the fray of the auto business, a bad line of piece of job organisation where most companies appear to receive got a tough fourth dimension earning their cost of capital.

The Brand Name Premium

There is a lot of casual utter virtually how Ferrari volition command a premium because of its squall as well as some receive got suggested that you lot should add together that premium on to estimated value. In an intrinsic valuation, it is double counting to add together a premium as well as the ground is simple. The values that I receive got estimated already contain the premium. If you lot are wondering how, receive got a aspect at the operating margin of 18.20% that I receive got used for Ferrari, a number vastly inward excess of the margins earned yesteryear other auto companies. That high margin, inward conjunction alongside express growth inward cars sold, also allows Ferrari to earn a render on majuscule of 14.56%, good to a higher identify its cost of capital. These inputs yield a value premium, alongside the magnitude varying across multiples:

	Ferrari (my estimated value)	Auto Sector	Reason for difference
EV/Sales	2.10	0.94	Ferrari's operating margin is 18.2% versus Industry average of 6.58%.
EV/Invested Capital	1.97	1.02	Ferrari earns a much higher render on majuscule (14.56%) than the sector (6.68%)
EV/EBITDA	12.57	9.05	Ferrari EBITDA/Invested majuscule is 15.68% versus Industry average of 14.45%.
PE	22.87	10.00	Ferrari has a debt ratio of 9.43% versus Industry average of 39.06%.
PBV	2.56	1.29	Ferrari has a slightly higher ROE as well as lower equity hazard (because of less debt)

Thus, the intrinsic value estimates already are edifice inward a hefty premium for the effects that Ferrari's construct squall has on its operating margins as well as render on capital.

Is it possible that the construct squall tin hold upward utilized better? That is e'er possible but at that topographic point is null to betoken that the construct is beingness mismanaged or that it tin hold upward easily exploited to generate additional value. In fact, the consolidation of voting might inward the hands of the existing owners suggests that at that topographic point the line of piece of job solid volition stay largely unchanged after the IPO.

IPO Related Issues
An initial world offering does exercise a host of issues that tin impact valuation, sometimes tangentially as well as sometimes directly. In the representative of Ferrari, the iii issues that merit the most attending are whether the proceeds from the offering volition impact value, what the value per part volition be, as well as how the augmentation of voting rights for the existing stockholders volition play out.

1. Use of proceeds: The proceeds from an IPO tin receive got a feedback outcome on value, but entirely if the IPO proceeds are kept inward the line of piece of job solid to embrace electrical flow or futurity investment needs. In this IPO, the billion dollars expected to hold upward raised from the offering volition pop off to Fiat for cashing out some of its ownership stake, as well as thus non exercise goodness Ferrari stockholders. There is thence no require to add together these proceeds dorsum to the cash residue (as I would have, if the IPO proceeds had been retained yesteryear the firm).
2. Number of shares/IPO cost per share: Note that inward both my valuations, I receive got focused on the value of equity, rather than a per part value, for 2 reasons. The starting fourth dimension is that the number of shares is even so inward flux (notice all the empty spaces inward the prospectus). The instant is that the per part value volition hold upward a business office of the number of shares created inward the company. Thus, if the value of equity is 6.3 billion Euros, Ferrari tin exercise 100 1 1000 m shares at 63 Euros per part or 2 billion shares at 3.15 Euros per share, alongside the same destination result. The number of units as well as offering cost volition hold upward laid jointly, because setting 1 volition also decide the other. The utter of the town is that the society volition hold upward valued at 50 Euros per part as well as the value of equity volition hold upward 10 billion Euros. At to the lowest degree based on those rumors, it seems similar the Ferrari volition exercise 200 1 1000 m shares, as well as if that is the right number, the value per part that I construct it at is virtually 31.5 Euros per part (based on my 6.3 billion Euro status quo value).
3. Control: After the IPO, Ferrari volition larn an independent line of piece of job solid but command volition even so stay concentrated inward the hands of its electrical flow owners, Fiat as well as the Ferrari family. In fact, the existing owners volition larn twice the voting rights on their shares, relative to the those who purchase shares inward the IPO, for their loyalty. The 2 large owners, Exor (the investment fund for the Agnelli family) as well as the Ferrari identify unit of measurement volition command 49% (Update: I erroneously stated the they would command 51% of the voting rights, but alongside the ease of the holdings dispersed, that is effectively majority control) of the voting rights alongside virtually 33% of the shares. The shares that you lot as well as I volition receive got a run a hazard to purchase at the IPO volition hold upward the low-voting right shares, I guess because nosotros are disloyal investors. I don't run across much of a discount on these shares since fifty-fifty without the additional voting rights, it is unlikely that anyone tin forcefulness the society to alter its operations, if that alter is against the wishes of the Agnelli/Ferrari clan.

Conclusion
It volition hold upward interesting to run across this game play out, every bit the offering gets closer. There is a push to attach a valuation of eleven billion Euros for the Ferrari shares, both because it volition larn to a greater extent than cash for Fiat from the offering, as well as to a greater extent than importantly, because the increased value of its remaining holdings inward Ferrari volition so feed into Fiat's marketplace position capitalization. The force may succeed because investors appear eager to purchase these shares, at to the lowest degree according to this story, as well as the cost premium volition hold upward justified alongside the declaration that Ferrari is a premium construct that caters to the rich. Off to the races!

YouTube Video


Data Attachments

1. Ferrari Prospectus

Spreadsheets 

1. Auto Industry: Company Data
2. Ferrari Valuation (Status Quo)
3. Ferrari Valuation (Rev it up)
4. Google Shared Spreadsheet: Ferrari Valuations

Dream Big Or Remain Focused? Lyft's Counter To Uber!

This is the 2nd inwards a serial of 3 posts on the ride sharing business. In my first, published inwards both TechCrunch in addition to my blog, I valued Uber, trying to contain the tidings that has come upward out nearly the companionship in addition to its contest inwards the finally year. In this one, I starting fourth dimension plow to valuing Lyft, which is telling a narrower, to a greater extent than focused floor to investors than Uber in addition to also expression at how the pricing ladder inwards ride sharing companies has pushed upward prices across the board. In the finally post, due out on Wednesday, I volition expression at the ride sharing marketplace equally a business.

In my finally post, I valued Uber in addition to admitted that the companionship has made its means to my listing of obsessions. My focus on Uber, though, has meant that I bring non paid whatsoever attending to the other ride sharing companionship inwards the US,  Lyft, in addition to I don’t retrieve I bring been lone inwards this process. An unscientific analysis of tidings stories on ride-sharing companies inwards the finally twosome of years suggests that Uber has dominated the coverage of this business. Rather than persuasion this equally a slight on Lyft, I would fighting that this is at to the lowest degree partially past times design, in addition to that it is purpose of both companies' strategies. Uber is viewed equally the hands-down winner of this battle correct now, but this is exactly 1 battle inwards a long state of war in addition to investors define winners differently from corporate strategists.

Valuing Lyft

To value Lyft, I volition employ the same template that I used for Uber, though the choices I volition brand inwards terms of total market, marketplace share, operating margins in addition to endangerment volition all live different, reflecting both Lyft’s smaller scale in addition to to a greater extent than express ambitions (for the moment).

The Leaked Numbers

The house to start this assessment is past times comparing the ride sharing attain of Lyft amongst Uber in addition to that comparing is inwards the tabular array below:

	Uber	Lyft
Number of cities inwards US	150	65
Number of cities	>300	65
Number of countries	60	1
Number of rides - 2014	140	NA
Number of rides (in millions) - 2015E	NA	90
Number of rides (in millions) - 2016E	NA	205
Gross Billings (in millions $) - 2014	$2,000	$500
Gross Billings (in millions $) - 2015E	$10,840	$1,200
Gross Billings (in millions $) - 2016	$26,000	$2,700
Estimated Growth for 2015	442%	140%
Estimated Growth for 2016	140%	125%
Operating loss inwards 2014 (in millions $)	-$470	-$50

The fundamental differences tin live summarized equally follows. First, Uber is clearly going later the global market, uninterested inwards forming alliances or partnerships amongst local ride sharing companies. Lyft has made explicit its intention to operate inwards the US, at to the lowest degree for the moment, in addition to that seems to bring been precursor to forming alliances (as evidenced past times this tidings story from 2 weeks ago) amongst large ride sharing companies inwards other markets. Within the US, Uber operates inwards to a greater extent than than twice equally many cities equally Lyft does. Second, both companies are growing, though Uber is growing at a faster charge per unit of measurement than Lyft, in addition to that is captured inwards both the issue of rides in addition to gross billings at the companies. Third, both companies are losing coin in addition to pregnant amounts at that, equally they driblet dead for higher revenues. Note that, for both companies, the mass of the information comes from leaked documents, in addition to should so considered amongst skepticism. In addition, in that location are about numbers that come upward from press reports (Lyft's loss inwards 2014) that are to a greater extent than guesses than estimates.

The line concern models of the 2 companies, at to the lowest degree when it comes to ride sharing, are really similar. Neither owns the cars that are driven nether their names and both claim that the drivers are independent contractors. Both companies utilization the 80:20 separate for ride receipts, amongst 80% staying amongst the driver in addition to 20% going to the company, but that surface understanding hides the cutting pharynx contest nether the surface for both drivers in addition to riders. Both companies offering incentives (think of them equally sign-up bonuses) for drivers  to start driving for them or, ameliorate still, to switch from the other company. They also offering riders discounts, gratuitous rides or other incentives to seek them or, ameliorate still, to switch from the other ride sharing company. At times, both companies bring been defendant of stepping over the line inwards trying to teach ahead inwards this game, in addition to Uber’s higher profile in addition to reputation for ruthlessness has made it the to a greater extent than ordinarily named culprit. 

The other large operating departure is that dissimilar Uber, which is attempting to expand its sharing model into the delivery in addition to moving markets, Lyft, at to the lowest degree for the moment, has stayed much to a greater extent than focused on the ride sharing business, in addition to inside that business, it has also been less ambitious inwards expanding its offerings to novel cities in addition to novel types of automobile services than Uber.

The Narrative Contrast in addition to Valuation

In my valuation of Lyft, I volition seek to contain the differences that I encounter (from Uber) into my narrative:

	Lyft	Uber
Potential Market	US-centric, ride-sharing company.	Global, logistics company
Growth Effect	Double ride-sharing marketplace inwards U.S. inwards side past times side 10 years	Double logistics marketplace globally inwards side past times side 10 years
Market Share	Weak national networking benefits	Weak global networking benefits
Competitive Advantage	Semi-strong competitive advantages	Semi-strong competitive advantages
Expense Profile	Drivers equally partial employee	Drivers equally partial employees
Capital Intensity	Low uppercase intensity	Low uppercase intensity, amongst potential for shift to to a greater extent than uppercase intense model
Management Culture	Aggressive inside ride sharing business, Milder amongst regulators in addition to media.	Aggressive amongst all players (competitors, regulators, media)

In short, the Lyft narrative is narrower in addition to to a greater extent than focused (on ride sharing in addition to inwards the US) than the Uber narrative. That puts them at a disadvantage, at to the lowest degree at this phase inwards the ride sharing market, inwards terms of both value in addition to pricing, but it could run inwards their favor equally the game unfolds. 

The adjustments to the Lyft valuation, relative to my Uber valuation, are primarily inwards the total marketplace numbers, but I exercise brand tiddler adjustments to the other inputs equally well. 

1. Smaller total market: Rather than utilization the total global market, equally I did for Uber, I focus on exactly the U.S. portion of these markets. That reduces the total marketplace size substantially. In addition, I assume that, given Lyft’s focus on ride sharing, that its marketplace is constrained to live the U.S. automobile service market. Notwithstanding these changes inwards my assumption, the potential marketplace nevertheless remains a large one, amongst my guess nearly $150 billion inwards 2025. 
2. National networking benefits: Within the U.S. market, I assume that the increased cost of entry into the line concern that I referenced inwards my finally post service on Uber volition restrain novel competitors in addition to that Lyft volition relish networking benefits across the country, enabling it to claim a 25% marketplace part of the U.S. market. 
3. Drivers driblet dead partial employees: My assumptions on drivers becoming partial employees in addition to contest driving downwards the ride sharing companionship piece of revenues volition parallel the ones that I made for Uber, resulting inwards lower operating margins (25% inwards steady state) in addition to a smaller piece of revenues (15%). 
4. Lyft is riskier than Uber: Finally, I volition assume that Lyft is riskier than Uber, given its smaller size in addition to lower cash reserves, in addition to laid upward its cost of uppercase at 12%, inwards the 90th percentile of U.S. companies, in addition to allow for 10% adventure that the companionship volition non brand it.

The value that I derive for Lyft amongst these assumptions is captured inwards the flick below:

Spreadsheet amongst Lyft Valuation (September 2015)

The value that I teach for Lyft is $3.1 billion, less than 1 7th of the value that I estimated for Uber ($23.4 billion) inwards my finally post.

The biggest danger that I encounter for investors inwards Lyft is that the companionship has to move the close future, where the pressure level from Uber in addition to the nature of the ride sharing line concern volition create hundreds of millions of dollars to a greater extent than inwards losses. If the uppercase market, which has been accommodating in addition to so far, dries up, Lyft faces the existent danger of non making it to ride sharing nirvana. It is a concern amplified past times Mark Shurtleff at Green Wheels Mobility Solutions, a long-time proficient in addition to consultant inwards the ride sharing in addition to mobility business, who points to Lyft's concentration inwards a few cities in addition to cash give the axe equally potential danger signs.

Pricing The Ride Sharing Companies

While none of the ride sharing companies are publicly traded in addition to in that location are so no prices (yet) for me to compare these valuations to, in that location bring been investments inwards these companies that tin live extrapolated at about endangerment to guess what these investors are pricing these companies at. In keeping amongst my subject that toll in addition to value come upward from different  processes, recognize that these are prices, non values.

The VC Pricing

I took at expression the most recent VC investments inwards ride sharing companies in addition to what prices they interpret into.

Company	Last VC circular investment amount (in US$ millions)	Date	Lead Investors	Imputed Pricing for the companionship (in U.S. $ millions)
Lyft	$530.00	15-May	Rakuten, Didi Kuaidi, Carl Icahn	$2,500.00
Uber	$1,000.00	15-Jul	Microsoft	$51,000.00
Didi Kuaidi	$2,000.00	15-Jul	China Investment Fund	$15,000.00
Ola	$310.00	15-Mar	DST Global	$2,300.00
GrabTaxi	$200.00	15-Jul	Coatue Management & others	$1,500.00

* Sources: Public News Reports, Mark Shurtleff
The danger inwards extrapolating VC investments to overall value, which is what the press stories that study the overall prices do, is that the solely fourth dimension that a VC investment tin live scaled upward direct to overall value is if it comes amongst no strings attached. Adding protections (ratchets) or sweeteners tin really speedily alter the relationship, equally I noted TechCrunch in addition to in this post service on unicorns. 

The Drivers of Price

Notwithstanding that concern, is in that location a logic to this pricing? In other words, what makes Uber to a greater extent than than 3 times to a greater extent than valuable than Didi Kuaidi in addition to Didi Kuaidi half dozen times to a greater extent than valuable than Lyft? To answer these questions, I pulled upward the statistics that I could notice for each of these companies:

Company	Estimated Value (Price)	Gross Billing inwards $ millions (2015)	Revenues (2015)*	Operating Profit or Loss (2015)	Cities served (2015)	# rides	Potential Market (in $ millions)	# Drivers
Lyft	$2,500	$1,200	$300	-$100	65	156	$55,000	100000
Uber	$51,000	$10,840	$2,000	-$470	300	1460	$205,000	800000
Didi Kuaidi	$15,000	$12,000	$450	-$1,400	137	2190	$50,000	2600000
Ola	$2,500	$1,200	$150	NA	85	100	$13,000	250000
GrabTaxi	$1,500	$1,000	$50	NA	26	300	$6,000	75000
BlaBlaCar	$1,600	$600	$72	NA	100	NA	$20,000	NA

* The revenues are estimated using the revenue piece that these companies report, but amongst client give aways in addition to other marketing costs, the actual revenues were in all probability lower.

Note that almost all of these numbers come upward from leaks, guesses or judgment calls, in addition to that in that location are many items where the information is exactly non available. For instance, spell nosotros know that Ola, GrabTaxi in addition to BlaBlaCar are all losing money, nosotros exercise non know how much. At the endangerment of pushing my information to breaking point, I computed every possible pricing multiple that I could for these companies:

Company	Value/Gross Billing	Value/Revenues	Value/City	Value/Ride	Value/Potential Market
Lyft	2.08	8.33	$38.46	$16.03	0.0455
Uber	4.70	25.50	$170.00	$34.93	0.2488
Didi Kuaidi	1.25	33.33	$109.49	$6.85	0.3000
Ola	2.08	16.67	$29.41	$25.00	0.1923
GrabTaxi	1.50	30.00	$57.69	$5.00	0.2500
BlaBlaCar	2.67	22.22	$16.00	NA	0.0800
Average	2.38	20.54	70.18	$17.56	0.1861
Median	2.08	22.22	48.08	$16.03	0.2205
Aggregate	2.76	22.98	103.93	$17.24	0.2123

On a pure pricing basis, Lyft looks inexpensive on every pricing multiple, in addition to Uber looks expensive on each one, mayhap providing about perspective on why Carl Icahn found Lyft to live a bargain, relative to Uber. Didi Kuaidi looks expensive on whatsoever stair out other than gross billing in addition to GrabTaxi looks inexpensive on about measures in addition to expensive on others.  It is worth noting that these companies bring different revenue models, amongst Lyft in addition to Uber hewing to the 20% piece model, established inwards the U.S. in addition to Ola (which has to a greater extent than of a taxi aggregating model), at to the lowest degree according to the reports I read, follows the same policy. BlaBla is by in addition to large long-distance rides in addition to gets nearly 10-12% of the gross billing equally revenue, GrabTaxi gets solely 5-10% of gross billings, Didi Kuaidi, which had its origins inwards a taxi hailing app, gets no part of a large chunk of its revenues in addition to BlaBlaCar derives its revenues to a greater extent than from long distance city-to-city traffic than from inside urban amount automobile service. Given how modest the sample is in addition to how few transactions bring truly occurred, I volition non endeavour to over analyze these numbers, other than wondering, based on my post service on corporate names, how much to a greater extent than an umlaut would bring added to Über's hefty price.

With all of these companies, the prices paid bring risen dramatically inwards the finally twelvemonth in addition to a one-half in addition to I believe that this pricing ladder is driven past times Uber's success at raising capital. In fact, equally Uber's estimated toll has risen from $10 billion early on inwards 2014 to $17 billion finally June to $40 billion at the start of 2015 to $51 billion this summer, it has ratcheted upward the values for all of the other companies inwards this space. That should non live surprising, since the pricing game almost e'er is played out this way, amongst investors watching each other rather than the numbers. As amongst all pricing games, the danger is that a driblet inwards Uber's pricing volition ratchet downwards the ladder, causing a grade downwards inwards everyone's prices.

Big versus Small Narratives

If narrative drives numbers in addition to value, which is the declaration that I bring made inwards valuing Uber in addition to Lyft inwards these finally 2 posts, the contrast betwixt the 2 is also inwards their narratives. Uber is a large narrative company, presenting itself equally a sharing companionship that tin succeed inwards different markets in addition to across countries. Giving credit where it is due, Travis Kalanick, Uber’s CEO, has been disciplined inwards staying truthful to this narrative, in addition to acting consistently. Lyft, on the other hand, seems to bring consciously chosen a smaller, to a greater extent than focused narrative, staying amongst the floor that it is a automobile service companionship in addition to farther narrowing its react, past times restricting itself the US. 

The payoff of a large narrative is that, if yous tin convince investors that it is viable in addition to reachable, it volition deliver a higher value for the company, equally is evidenced past times the $23.4 billion value that I estimated for Uber. It is fifty-fifty to a greater extent than of import inwards the pricing game, peculiarly when investors bring really few concrete metrics to attach to the price. Thus, it is the 2 biggest marketplace companies, Uber in addition to Didi Kuaidi, which ascendancy the highest prices. Big narratives exercise come upward amongst costs, in addition to it those costs that may dissuade companies from going for them. 

1. It tin distract: Big narratives volition require companies to deliver on multiple measures in addition to that may distract management from to a greater extent than immediate needs. 
2. It tin live costly: Having to grow faster in addition to inwards multiple markets (different businesses in addition to different geographies) at the same fourth dimension volition live to a greater extent than costly than focusing on a smaller marketplace in addition to having to a greater extent than measured ambitions.
3. It tin create disappointments: The flip side of convincing investors that yous tin attain for the heights is that if yous don’t brand it, yous volition disappoint them, no thing how goodness your numbers may be. 

With Uber, yous encounter the pluses in addition to minuses of a large narrative. It is possible that Uber Eats (Uber’s nutrient delivery service), UberCargo (moving) in addition to UberRush (delivery) are all investments that Uber had to brand now, to driblet dead on its narrative going, but it is also possible that these are distractions at a minute when the ride sharing market, which remains Uber’s pump in addition to soul, is heating up. It is undoubtedly truthful that Uber, spell growing at exponential rates, is also spending coin at those same rates to driblet dead on its large growth going in addition to it is non solely likely, but a certainty, that Uber volition disappoint their investors at about time, only because expectations bring been laid upward in addition to so high. 

It is mayhap to avoid these risks that Lyft has consciously pushed a smaller narrative to investors, focused on 1 line concern (ride sharing) in addition to 1 marketplace (the US). It is avoiding the distractions, the costs in addition to the disappointments of the large narrative companies, but at a cost. Not solely volition it cede the limelight in addition to excitement to Uber, but that may atomic number 82 it to live both valued in addition to priced less than Uber. Uber has used its large value in addition to access to uppercase equally a bludgeon to driblet dead later Lyft, inwards its strongest markets.

As an investor, in that location is nil inherently goodness or bad nearly either large or modest narratives, in addition to a companionship cannot driblet dead a goodness investment exactly because of its narrative choice. Thus, Uber, equally a large narrative company, commands a higher valuation ($23.4 billion) but it is priced fifty-fifty to a greater extent than highly ($51 billion). Lyft, equally a modest narrative company, has a much lower value ($3.1 billion) but is priced at a lower issue ($2.5 billion). At these prices, equally I encounter it, Lyft is a ameliorate investment than Uber. 

Block in addition to Draft

It is clear that Uber in addition to Lyft bring really different corporate personas in addition to visions for the futurity in addition to that about of the departure is for exterior consumption. It serves Uber well, inwards its disruptive role, to live viewed equally a flake of a great who volition non walk away from a fight, exactly equally it is Lyft’s best interests to portray itself equally the gentler, to a greater extent than humane human face upward of ride sharing. Some of the difference, though, is management culture, amongst Uber drawing from a really different puddle of decision-makers than Lyft does. If this were a bicycle race, Uber reminds me of the aggressive atomic number 82 rider, intent on blocking the balance of the pack in addition to getting to the complete line first, in addition to Lyft is the lower profile racer who rides exactly behind the leader, using the draft to relieve liberate energy for the finally push. This is going to live a long race, in addition to I bring a feeling that its contours volition alter equally the complete line approaches, but whatever happens, it is going to live fun to watch!

YouTube Version

Ride Sharing Series (September 2015)

1. 1. TechCrunch in addition to On the Uber Rollercoaster: Narrative Tweaks, Twists in addition to Turns
   2. Dream Big or Stay Focused? The Lyft Answer!
   3. TechCrunch in addition to The Future of Ride Sharing: Playing Pundit

Spreadsheets

1. Lyft: Valuation
2. Ride Sharing Companies: Metrics in addition to Pricing

The Ride Sharing Business: Playing Pundit

This is the 3rd together with concluding ship service inwards a serial of iii on the ride sharing business. In the first, I valued Uber together with looked at the development of its line of piece of occupation organization over the in conclusion eighteen months. In the second, I valued Lyft together with looked at pricing across ride sharing companies. In this one, I facial expression at the futurity of the ride sharing line of piece of occupation organization from the perspective of an outsider amongst no expertise inwards this business.

In my in conclusion ii posts, I first valued Uber, amongst its expansive narrative, together with so looked at putting numbers on Lyft's less ambitious storyline. In my Uber post, I argued that the ride sharing marketplace seat was proving to endure bigger, broader together with growing faster than I had estimated it would endure inwards June 2014. In the Lyft post, I examined how VCs were pricing ride sharing companies. In this post, I wish to consummate the even yesteryear looking at the electrical flow the world of the ride sharing marketplace seat together with for scenarios for the marketplace seat over time, amongst consequences for investors, automobile riders together with drivers. 

The Ride Sharing Market: The State of the Game

In my posts on ride sharing, I noted that the ride sharing marketplace seat has grown exponentially inwards the in conclusion ii years, drawing inwards novel users together with redefining the automobile service business. That growth tin endure seen  in multiple dimensions:

1. Anecdotal & Qualitative evidence: I am unremarkably wary virtually using anecdotal information but I conduct hold been keeping tabs on Uber usage inwards my travels together with I conduct hold been amazed at the company's global reach. This summer, I did seminars inwards São Paulo, Moscow together with Mumbai, together with inwards each venue, a meaning proportion of the attendants had taken Uber to the event. In fact, my children speak virtually Ubering to destinations unknown, rather than taking a cab, merely as xeroxing together with googling became synonyms for copying together with online searching. 
2. Operating metrics at ride sharing companies: The operating metrics at the ride sharing companies individually, together with inwards the aggregate, dorsum upwards the suggestion that this is a high growth business.

Company	Revenues inwards 2014	Revenues (2015)	Growth Rate (2015)
Lyft	$125	$300	140.00%
Uber	$400	$2,000	400.00%
Didi Kuaidi	$30	$450	1400.00%
Ola	$50	$150	200.00%
GrabTaxi	$15	$50	233.33%
BlaBlaCar	$30	$72	140.00%

3. Investor expectations: The increases inwards the values attached to ride sharing companies betoken that investors are also scaling upwards expectations of futurity growth inwards this business. Using Uber's estimated value of $51 billion inwards its most recent VC funding to illustrate the process, I estimated imputed revenues of $51.4 billion inwards 2026, which, if yous agree its revenue piece part at 15% (my assumption) yields an imputed gross billing of $342.8 billion inwards 2026. If I repeat this practise amongst the other ride sharing companies, the collective revenues beingness forecast yesteryear investors may overstep attainable revenues, an illustration of what I termed the large marketplace seat delusion.

Company	Estimated Value (Price)	Revenue Share	Operating Margin	Failure Probability	Imputed Revenue(2026)	Imputed Gross Billing (2026)
Lyft	$2,500	15%	25%	10%	$2,800	$18,665
Uber	$51,000	15%	25%	0%	$51,418	$342,787
Didi Kuaidi	$15,000	15%	20%	0%	$20,044	$133,629
Ola	$2,500	15%	20%	15%	$3,927	$26,183
GrabTaxi	$1,500	10%	20%	15%	$2,392	$23,923
BlaBlaCar	$1,600	12%	20%	10%	$2,392	$19,935
Total	$74,100	NA	NA	NA	$82,974	$565,123

The growth inwards ride sharing has been accompanied amongst to a greater extent than intense contest together with rising costs, as tin endure seen inwards the large together with growing operating losses reported yesteryear the companies inwards this business. The reasons for these losses are manifold, as I noted inwards my Uber post. Some of the costs come upwards from intense contest for drivers together with customers, amongst companies following the Field of Dreams model, that Amazon has used to such effect inwards the in conclusion decade. Some costs come upwards from outside, higher insurance costs together with employee expenses, as ride sharing companies drib dead from beingness fringe players to larger businesses. Some costs menstruum from legal fights amongst regulators, licensing agencies together with other rule-writers, whose wish to command the line of piece of occupation organization clashes amongst the market-driven imperatives of ride sharing. The optimistic sentiment is that these costs volition drib dead smaller as companies scale up, but volition they? As revenues scale up, the release of drivers volition increment proportionately, together with unless the contest disappears, the costs of fighting for drivers together with customers volition continue. In brief, the existing ride sharing model looks similar a long term coin loser, unless something key changes.

 Future Shock

At the jeopardy of playing marketplace seat prognosticator inwards a marketplace seat where I am a novice, I encounter 4 possible scenarios that tin unfold inwards this market, all possible, but mayhap non as probable.

1. Winner-takes-all: The large prize inwards many technology businesses is that at that spot is a tipping point, where the winner ends upwards capturing much of the market. That is the template that Microsoft used ii decades agone amongst MS Office to capture the line of piece of occupation organization software line of piece of occupation organization together with that Google used to scale the heights of online advertising. The payoff to such a strategy is that yous non solely command the dominant marketplace seat part but that yous learn pricing mightiness (and higher profits). It does seem to endure the strategy that Uber is next inwards the ride sharing business, but at that spot rest iii route blocks that may brand it the way. First, yous conduct hold to take away your competitors from the playing plain together with spell Uber had the cash buffer together with uppercase raising upper mitt in conclusion year, that payoff has narrowed as a resultant of partnerships together with novel uppercase flowing into other ride sharing companies. In a perverse way, Uber's best conduct chances of succeeding at this strategy is if at that spot is a hitch or halt inwards the menstruum of uppercase to tech companies, though that may function against its objective of going world inwards the close future. Second, yous conduct hold to navigate your means through the anti trust together with monopoly questions that volition inevitably follow, non an piece of cake or an cheap task, as Google together with Microsoft conduct hold discovered over the in conclusion decade. Third, spell technology remains a focal dot for ride sharing companies, the automobile service or logistics line of piece of occupation organization needs physical infrastructure, making it to a greater extent than hard to save global networking benefits.
2. The Losers' Game: While the winner-take-all is alluring, its logical conclusion, if yous conduct hold multiple players pursuing it, together with none winning, is that yous tin brand the line of piece of occupation organization a loser's game, ane inwards which the marketplace seat grows as promised together with companies generate high revenues, but brand really picayune inwards profits. H5N1 large line of piece of occupation organization tin sometimes endure a bad one, as I noted inwards this ship service on bad businesses together with why companies inwards these businesses drib dead along to invest together with grow inwards them.
3. The Divide together with Rule Game: As the sometime colonial empires discovered a few centuries ago, together with the Sicilian criminal offence families realized inwards the tardily 1920s inwards the United States, the most profitable halt game, when contest is cut-throat (literally), is to negotiate a truce, where the spoils are divided upwards together with each rival is given command of a segment. In the ride sharing market, if the line of piece of occupation organization boils downwards to ii or iii large players, they may endure able carve upwards the global marketplace seat together with each usage musician volition learn a complimentary run inwards their carved upwards portion . This volition be, of course, terrible intelligence for drivers together with customers together with may attract regulatory or legal scrutiny, but for investors collectively, it volition endure most value-adding scenario. There are ii potential weak links. The outset is that this truce, yesteryear its really nature, volition non endure a friendly ane together with modest violations tin Pb to it unraveling. The instant is that it rests on the premise that at that spot is no exterior political party that is powerful plenty to measuring inwards together with conduct hold payoff of the soft spots inwards the market.
4. The Game Changer: I believe that the existing ride sharing model is an unstable one. As I argued inwards my ship service on Uber, the really strengths of the models (bare bones infrastructure, drivers as independent contracts together with no automobile ownership) makes it unsustainable inwards the long term, since ride sharing companies conduct hold to compete for drivers on a continuous basis, offering them incentives to switch from competitors, together with customers, amongst special deals. It is thus in all likelihood that a novel model volition emerge, though it remains an opened upwards enquiry of whether it volition come upwards from ane of the players inwards the game, or from an outsider. Thus, Uber's hiring of robotics engineers may endure a precursor of a dissimilar ride sharing game, amongst driverless cars together with infrastructure investments, or it may endure Google or Tesla who learn inwards the moving painting amongst a dissimilar means of operating this business. 

If these scenarios remind yous a picayune little of the prisoner's dilemma, where ii rational individuals are given a pick betwixt cooperating together with competing, at that spot are parallels. Consider ane possible version, where the ride sharing companies globally boil downwards to ii competitors: Uber, as a global ride sharing behemoth, together with the Not-Uber, an alliance of  national ride ride sharing companies (Ola+Didi Kuaidi + GrabTaxi + Lyft..). The box below captures the possible outcomes of this game, which volition learn infinitely to a greater extent than complicated if at that spot is an outsider usage musician lurking on the fringes.

Based on my really express noesis of the companies inwards this space, I would give the highest odds to the ride sharing line of piece of occupation organization becoming a loser's game, attach virtually equal probabilities to it becoming a winner-take-all or a game changer emerging, together with encounter the to the lowest degree conduct chances that the ride sharing companies volition collude to maximize profits together with value. There are others, who know to a greater extent than virtually this line of piece of occupation organization than I do, who encounter this game evolving differently over time. Mark Shurtleff at Green Wheels Mobility Solutions, the ride sharing skillful that I referenced inwards my in conclusion ship service thinks that I am beingness also pessimistic on unopen to counts together with mayhap also optimistic on others together with feels that at that spot are modest start ups that are finding a improve line of piece of occupation organization model than the large players. There are unopen to who believe that I am underestimating the trace of the familiar together with that ride sharing companies, in ane trial established, volition endure hard to displace. 

The Dance of the Disrupted

In a ship service from a few months ago, I looked at the the nighttime side of disruption, i.e., the businesses beingness disrupted, both amongst the intent of identifying the businesses most at jeopardy together with to facial expression at the stages, at to the lowest degree as I encounter them, of how the disrupted line of piece of occupation organization bargain amongst the chaos of seeing established line of piece of occupation organization models beingness upended. Using that 5 stage process, it seems to me that the taxi cab line of piece of occupation organization is forthwith at an advanced stage:

Stage of disruption	The Taxi Cab Business
1. Denial together with Delusion	This is long inwards the past, but inwards the outset twelvemonth or ii of Uber’s existence, at that spot were many inwards the conventional automobile service together with taxi cab businesses, who were convinced that non solely was this a passing phase, but that no client inwards his correct heed would wish to missy the comfort, convenience together with security of a yellowish cab experience. (Irony alert!)
2. Failure together with False Hope	With each misstep yesteryear a ride sharing companionship (and Uber inwards particular), whether it endure an employee amongst a unloose natural language or a laid on yesteryear an Uber driver, the hope that this misstep volition seat an halt to the ride sharing line of piece of occupation organization rises amidst taxi operators together with regulators. However, solely the most delusional amidst these agree on this hope.
3. Imitation together with Institutional Inertia	In the false belief that all that separates the ride sharing companies from conventional automobile service is an app, taxi operators conduct hold turned to putting apps inwards the hands of drivers together with customers. At the same time, whatever attempts to innovate flexibility into the existing automobile service line of piece of occupation organization are fought yesteryear politicians, regulators together with unopen to of the operators who do goodness from the electrical flow structure.
4. Regulation, Rule Rigging together with Legal Challenges	This seems to endure the house where automobile service companies are making their stand, aided together with abetted yesteryear regulators, courts together with politics. By restricting or fifty-fifty banning ride sharing, they are slowing it’s growth but as I encounter it, the struggle is on its means to beingness lost, since it is the customers who ultimately volition decide the winner inwards this game, together with they are voting amongst their dollars.
5. Acceptance together with Adjustment	It may endure irksome inwards coming, but a portion of the conventional automobile service line of piece of occupation organization is adjusting to the novel reality, sometimes because they realize that it is a struggle that is unwinnable together with sometimes because the fiscal colina is getting steeper to climb. This is peculiarly truthful for cab operators who conduct hold borrowed much or most of the coin that they used to purchase medallions together with are discovering that they cannot pay their debt.

So what does the futurity hold? Will at that spot endure no taxi cabs left on the streets of New York, London together with Tokyo inwards a few years? I mean value that the taxi cab line of piece of occupation organization volition shrink, but non disappear, together with that it volition retain a portion of its line of piece of occupation organization inwards those world spaces where regulators conduct hold the most say, airports, develop stations together with world arenas. If this is the future, it is also clear that at that spot is to a greater extent than hurting to come upwards together with it volition conduct hold the shape of continuing reject inwards taxi cab revenues together with marketplace seat capitalization at these companies. As for the private automobile service business, it volition either accommodate together with part revenues amongst the ride sharing companies  (which notwithstanding needs cars together with drivers) or focus on corporate relationships (offering discounted together with on-demand services to companies that do non wish their employees using multiple ride sharing services). 

Coming shortly to a line of piece of occupation organization close you?

As I scout the traditional taxi cab line of piece of occupation organization flailing together with ride sharing companies grow at their expense, together with am tempted to laissez passer on judgment on the inability of those inwards the line of piece of occupation organization to accommodate to the set down that they alive in, at that spot are ii full general lessons that come upwards to mind. From the disruptor's standpoint, I mean value that the success of Uber together with its peer grouping inwards changing the automobile service line of piece of occupation organization is a reminder that existing line of piece of occupation organization models tin endure disrupted inwards curt guild yesteryear novel technologies, but the collective losses reported yesteryear these companies are also a reminder that making coin on disruption is much to a greater extent than difficult.

Looking at the same procedure from the perspective of the disrupted, it is a reminder that the hurting inflicted on the automobile service line of piece of occupation organization could really easily endure coming to the line of piece of occupation organization that yous are in. If yous are inwards the fiscal services business,  the amusement line of piece of occupation organization or the wellness aid business, all of which are deserving of disruption, I wonder whether yous would react whatever to a greater extent than rationally than the London cabdrivers who went on strike to halt Uber, together with ended upwards getting many of their customers to assay Uber for the really outset time. I operate inwards the teaching business, a large together with extraordinarily inefficient business, together with at that spot is no grouping to a greater extent than resistant to alter together with to a greater extent than unprepared to accommodate than tenured professors at enquiry university. I cannot hold off to encounter this group, convinced of its intellectual superiority together with attached to unreal perks (minuscule teaching loads, enquiry assistants together with sabbaticals),  go through the throes of disruption.

YouTube Version

Ride Sharing Series (September 2015)

1. On the Uber Rollercoaster: Narrative Tweaks, Twists together with Turns
2. Dream Big or Stay Focused? The Lyft Answer!
3. The Future of Ride Sharing: Playing Pundit

Winning At A Loser's Game? Control, Synergy As Well As The Abinbev/Sabmiller Merger!

I receive got been a long fourth dimension investor inwards ABInBev, though I became 1 indirectly in addition to accidentally, through a stake I took a long fourth dimension agone inwards Brahma, a Brazilian imbibe fellowship . That fellowship became Ambev inwards 1999, which inwards plough was merged alongside Interbrew, the Belgian brewer, inwards 2004, in addition to expanded to include Anheuser Busch, the U.S. of A. of America beer maker, inwards 2008 to larn out the largest beer manufacturer inwards the world.  I made the mass of my coin early on inwards my belongings life, but Amber has remained inwards my portfolio, a house holder that provides me exposure to both the imbibe draw of piece of occupation concern in addition to Latin America, piece delivering generally positive returns. It was therefore alongside trepidation that I read the argued that creating growth through acquisitions is hard to do, in addition to doubly so when the acquisition is of a large populace company. Since ABInBev's command rests alongside 3G Capital, a grouping that I honor for its investment acumen, it would hold out unfair to prejudge this contend without looking at the numbers. So, hither nosotros go!

The Fog of Deal Making: Breaking downwards an acquisition

The commencement casualty inwards contend making is expert sense, equally the fog of the deal, created past times bankers, managers, consultants in addition to journalists, clouds the numbers. Not only practise you lot encounter "control" in addition to "synergy", 2 words that I include inwards my weapons of mass distraction, thrown roughly casually to justify billions of dollars inwards premiums, but you lot also encounter them used interchangeably. When you lot larn a company, at that topographic point are iii (and only iii possible) motives that are consistent alongside intrinsic value. 

1. Undervaluation: You purchase a target fellowship because you lot believe that the marketplace position is mispricing the fellowship in addition to that you lot tin laissez passer the sack purchase it for less than its "fair" value. In effect, you lot are behaving similar whatsoever value investor would inwards the marketplace position in addition to at that topographic point is no ask for you lot to either alter the way the target fellowship is run or facial expression for synergy benefits. 
2. Control: You purchase a fellowship that you lot believe is badly managed, alongside the intent of changing the way it is run. If you lot are correct on the commencement count in addition to tin laissez passer the sack brand the necessary changes, the value of the theater should growth nether your management. If you lot tin laissez passer the sack pay less than the "changed" value, you lot tin laissez passer the sack claim the divergence for yourself (and your stockholders). 
3. Synergy: You purchase a fellowship that you lot believe, when combined alongside a draw of piece of occupation concern (or resource) that you lot already own, volition hold out able to practise things that you lot could non receive got done equally separate entities. Broadly speaking, you lot tin laissez passer the sack intermission synergy downwards into "offensive synergies" (where you lot are able to grow faster inwards existing or novel markets than you lot would receive got equally standalone businesses and/or accuse higher prices for your products), "defensive synergies" (where you lot are able to trim costs or ho-hum down/prevent turn down inwards your businesees) in addition to "tax synergies" (where you lot straight receive got wages of taxation clauses or indirectly past times beingness able to borrow to a greater extent than money). 

The fundamental distinction betwixt synergy in addition to command is that control does non require some other entity or fifty-fifty a alter inwards managers. It tin laissez passer the sack hold out accomplished past times the target company's management, if they set their minds to it in addition to mayhap hire some help. Synergy requires 2 entities coming together in addition to stems from the combined entity's capacity to practise something that the private entities would non receive got been able to deliver. Note that these motives tin laissez passer the sack co-exist inwards the same acquisition in addition to are non mutually exclusive.  To assess whether these motives apply (or brand sense), at that topographic point are 4 numbers that you lot ask to track: 

1. Acquisition Price: This is the cost at which you lot tin laissez passer the sack larn the target company. If it is a private business, it volition hold out negotiated in addition to in all likelihood based on what others are paying for similar businesses. If it is a populace company, it volition hold out at a premium over the marketplace position price, alongside the premium a business office of the set down of the M&A marketplace position in addition to whether you lot receive got other potential bidders. 
2. Status Quo Value: This is the value of the target company, run past times existing administration in addition to based on existing investing, financing in addition to dividend policies. 
3. Restructured Value: This is the value of the target company, alongside changes to investing, financing in addition to dividend policies. 
4. Synergy value: This tin laissez passer the sack hold out estimated past times valuing the combined fellowship (with the synergy benefits built in) in addition to subtracting out the value of the acquiring company, equally a stand upward lone entity, in addition to the restructured value of the target company. 

Connecting these numbers to the motives, hither are the weather condition you lot would ask for each motive to brand feel (by itself).

Motive	Test
Undervaluation	Acquisition Price < Status Quo Value
Control	Acquisition Price < Restructured Value (Status Quo Value + Value of Control
Synergy	Acquisition Price < Restructured Value + (Value of Combined fellowship alongside synergy - Value of Combined fellowship without synergy)

Which of these motives, if any, is driving ABInBev's acquisition of SABMiller, in addition to whatever the motive or motives, is the premium beingness paid justified? To brand that assessment, I volition compute each of the 4 numbers for this deal.

Setting upward the ABInBev Deal

The commencement word stories on ABInBev’s intent to purchase SABMiller came out on September 15, 2015, though at that topographic point may receive got been inklings amid some who are to a greater extent than connected than I am. While no cost was specified, the market’s initial reaction was positive, alongside both ABInBev in addition to SABMiller’s stock prices increasing on the story. The film below captures the fundamental details of the deal, including both possible rationale in addition to consequences:

There were 2 fundamental reasons provided to rationalize the potential deal. The commencement is geographic complementarity, since these 2 companies overlap inwards surprisingly few parts of the world, given their size. ABInBev is the largest thespian inwards Latin America, alongside Brazil at its center, in addition to SABMiller is the biggest brewer inwards Africa. SABMiller’s Latin American operations are exterior of Brazil, for the most component division in addition to piece ABInBev has pregnant North American operations, SABMiller's North American exposure is only through its Coors Joint Venture. While no specifics are provided, the set down for synergy seems to hold out that subsequently this deal, ABInBev volition hold out able to expand sales inwards the fastest growing marketplace position inwards the the world (Africa) in addition to that SABMiller volition hold out able to growth its revenues inwards the most profitable marketplace position inwards the the world (Latin America). The instant is consolidation, a vastly over used term that frequently agency nothing, but  if it tied to specifics, relates to potential costs savings in addition to economies of scale. While the absence of geographic overlap may trim the potential for cost cutting, ABInBev tin laissez passer the sack role the template that it has used so successfully on prior deals (especially the Grupo Modelo acquisition) to cutting costs inwards this acquisition equally well.

There are also negative consequences that follow from this deal. The commencement is that when anti trust regulators inwards different parts of the the world volition hold out paying unopen attending to this deal, in addition to it seems probable that SABMiller volition hold out forced to sell its 58% stake inwards MillerCoors in addition to that Molson Coors, the other JV partner, volition hold out the beneficiary. The second, in addition to this adds to the pressure, ABInBev has agreed to pay $3 billion to SABMiller if the contend falls through.  In summary, though, the challenge is a elementary one. ABInBev is paying a $29 billion premium to larn SABMiller. Is at that topographic point plenty value added to ABInBev's stockholders that they volition hold out able to walk away equally winners?

The Players inwards the Deal
To brand a value judgment of this deal, nosotros receive got to start out past times looking at ABInBev in addition to SABMiller, equally stand upward lone companies, prior to this deal. In the film below, I start alongside a snapshot of ABInBev:

Capital Mix		Operating Metrics		Geographical Mix
Interest-bearing Debt	$51,504	Revenues	$45,762	Latin America	$18,849.00	42.03%
Lease Debt	$1,511	Operating Income (EBIT)	$14,772	Africa	$-	0.00%
Market Capitalization	$173,760	Operating Margin	32.28%	Asia Pacific	$5,040.00	11.24%
Debt to Equity ratio	30.51%	Effective taxation rate	18.00%	Europe	$4,865.00	10.85%
Debt to Capital ratio	23.38%	After-tax render on capital	12.10%	North America	$16,093.00	35.88%
Bond Rating	A2	Reinvestment Rate =	50.99%	Total	$44,847.00	100.00%

Looking past times the numbers, it is worth noting that non only does ABInBev has a history of growing successfully through acquisitions but that its Pb stockholder, 3G Capital, is considered a astute allocator in addition to steward of capital.

On the other other side of the contend stands SABMiller, in addition to the film below provides a feel of the company's standing at the fourth dimension of the deal:

Capital Mix		Operating Metrics		Geographical Mix
Interest-bearing Debt	$12,550	Revenues	$22,130	Latin America	$7,812	35.30%
Lease Debt	$368	Operating Income (EBIT)	$4,420	Africa	$6,853	30.97%
Market Capitalization	$75,116	Operating Margin	19.97%	Asia Pacific	$3,136	14.17%
Debt to Equity ratio	17.20%	Effective taxation rate	26.40%	Europe	$4,186	18.92%
Debt to Capital ratio	14.67%	After-tax render on capital	10.32%	North America	$143	0.65%
Bond Rating	A3	Reinvestment Rate =	16.02%	Total	$22,130	100.00%

This table, though, misses SAB's holdings inwards the MillerCoors JV in addition to its other minority holdings inwards associates roughly the world, in addition to the numbers for SAB's shares of these are summarized below:

SAB Share of Other Associates
Operating Metrics		Geographical Mix
Revenues	$6,099.00	Latin America	$-	0.00%
Operating Income (EBIT)	$654.00	Africa (mostly South Africa)	$2,221	36.42%
Operating Margin	10.72%	Asia Pacific	$2,203	36.12%
Effective taxation rate	25.00%	Europe	$1,675	27.46%
After-tax render on capital	11.00%	North America	$-	0.00%
Invested Capital	$4,459	Total	$6,099	100.00%
SAB Share of MillerCoors JV
Operating Metrics		Geographical Mix
Revenues	$5,201.00	Latin America	$-	0.00%
Operating Income (EBIT)	$800.00	Africa (mostly South Africa)	$-	0.00%
Operating Margin	15.38%	Asia Pacific	$-	0.00%
Effective taxation rate	25.00%	Europe	$-	0.00%
After-tax render on capital	11.05%	North America	$5,201	100.00%
Invested Capital	$5,428	Total	$5,201	100.00%

The numbers reinforce my before betoken near geographic complementarity at to the lowest degree at the rear fellowship level, alongside ABInBev getting a large pct of its Latin American sales inwards Brazil in addition to SABMiller getting most of its Latin American sales from countries other than Brazil.

Is SABMiller a bargain?

The commencement stride inwards this analysis to a valuation of SABMiller, equally a stand upward lone fellowship in addition to alongside its existing administration inwards place. Based on the numbers, this is a conservatively run fellowship (both inwards terms of role of debt in addition to reinvestment for growth) in addition to the valuation reflects that:

	SAB Miller	+ 58% of Coors JV	+ Share of Associates	SAB Miller Consolidated
Revenues	$22,130.00	$5,201.00	$6,099.00
Operating Margin	19.97%	15.38%	10.72%
Operating Income (EBIT)	$4,420.00	$800.00	$654.00
Invested Capital	$31,526.00	$5,428.00	$4,459.00
Beta	0.7977	0.6872	0.6872
ERP	8.90%	6.00%	7.90%
Cost of Equity =	9.10%	6.12%	7.43%
After-tax cost of debt =	2.24%	2.08%	2.24%
Debt to Capital Ratio	14.67%	0.00%	0.00%
Cost of uppercase =	8.09%	6.12%	7.43%
After-tax render on uppercase =	10.33%	11.05%	11.00%
Reinvestment Rate =	16.02%	40.00%	40.00%
Expected growth rate=	1.65%	4.42%	4.40%
Number of years of growth	5	5	5
Value of firm
PV of FCFF inwards high growth =	$11,411.72	$1,715.25	$1,351.68
Terminal value =	$47,711.04	$15,094.36	$9,354.28
Value of operating assets today =	$43,747.24	$12,929.46	$7,889.56	$64,566.26
+ Cash				$1,027.00
- Debt				$12,918.00
- Minority Interests				$1,183.00
Value of equity				$51,492.26

 I am adding inwards my estimated values for SAB's part of the Coor's JV in addition to other associates to larn out far at the total value of the operating assets. In valuing each piece, I receive got estimated equity adventure premiums that reverberate where each 1 operates, using a 6% mature marketplace position premium for the Coors JV, since it generates most of its revenues inwards North America, in addition to much higher premiums for the other 2 parts. At to the lowest degree based on my estimates, the value of equity is $51.5 billion, good below the marketplace position capitalization of $75 billion on September 15. (This may hold out cynical of me, but if used (wrongly inwards my view) a 6% equity adventure premium for SABMiller, based on its Great Britain incorporation, I larn a value of $76 billion for its equity.)

Bottom line: To me, SABMiller does non facial expression similar it is priced to hold out a bargain, fifty-fifty at the pre-deal price, in addition to definitely non at the contend price.

The Value of Control

Is SABMiller ripe for a restructuring? It is tough to say from the exterior but 1 way to mensurate room for improvement is to compare the fellowship on fundamental corporate finance measures against both the acquirer (InBev) in addition to the remainder of the alcholic imbibe sector:

	SABMiller	ABInBev	Global Alcoholic Beverage Sector
Pre-tax Operating Margin	19.97%	32.28%	19.23%
Effective Tax Rate	26.36%	18.00%	22.00%
Pre-tax ROIC	14.02%	14.76%	17.16%
ROIC	10.33%	12.10%	13.38%
Reinvestment Rate	16.02%	50.99%	33.29%
Debt to Capital	14.67%	23.38%	18.82%

This comparing may hold out simplistic, but it looks similar SABMiller lags the sector is inwards its reinvestment charge per unit of measurement in addition to render on capital, in addition to that it earns a net turn a profit margin that tally upward to the sector. It also has a debt ratio that is non far off from the sector average. ABInBev has a much higher net turn a profit margin than the remainder of the sector in addition to pays a lower taxation rate. I revalued SABMiller alongside the render on capital, debt ratio in addition to reinvestment charge per unit of measurement laid equal to the manufacture average. (I considered using ABInBev's operating margin but much of that comes from Brazil in addition to it is unlikely that SABMiller tin laissez passer the sack tally it inwards South Africa or the remainder of Latin America.

	Status Quo Value	Restructured	Changes made
Cost of Equity =	9.10%	9.37%	Increases alongside debt ratio
After-tax cost of debt =	2.24%	2.24%	Left unchanged
Debt to Capital Ratio	14.67%	18.82%	Set to manufacture average
Cost of uppercase =	8.09%	8.03%	Due to debt ratio change
Pre-tax render on capital	14.02%	17.16%	Set to manufacture average
After-tax render on uppercase =	10.33%	12.64%	Result of pre-tax ROIC change
Reinvestment Rate =	16.02%	33.29%	Set to manufacture average
Expected growth rate=	1.65%	4.21%	Result of reinvestment/ROIC
Value of firm
PV of FCFF inwards high growth =	$11,411.72	$9,757.08
Terminal value =	$47,711.04	$56,935.06
Value of operating assets today =	$43,747.24	$48,449.42
+ Cash	$1,027.00	$1,027.00
+ Minority Holdings	$20,819.02	$20,819.02
- Debt	$12,918.00	$12,918.00
- Minority Interests	$1,183.00	$1,183.00	Value of Control
Value of equity	$51,492.26	$56,194.44	$4,702.17

Bottom line: Changing the way SABMiller is run adds near $4.7 billion to the value, but fifty-fifty alongside that addition, the equity value of $56.2 billion is nevertheless far below what ABInBev paid on Oct 15. That suggests that command was non the primary rationale either.

The Value of Synergy

This leaves us alongside only 1 option, synergy, in addition to to value synergy, I valued ABInBev equally a standalone fellowship in addition to set it together alongside the restructured value of SABMiller to larn a combined fellowship value, alongside no synergy. I so assumed that the synergy (from geographic complementarity in addition to consolidation) would manifest itself inwards a higher operating margin, higher reinvestment in addition to a higher growth charge per unit of measurement for the combined company:

	Inbev	SABMiller	Combined theater (no synergy)	Combined theater (synergy)	Actions
Cost of Equity =	8.93%	9.37%	9.12%	9.12%
After-tax cost of debt =	2.10%	2.24%	2.10%	2.10%
Cost of uppercase =	7.33%	8.03%	7.51%	7.51%	No changes expected
Operating Margin	32.28%	19.97%	28.27%	30.00%	Cost cutting & Economies of scale
After-tax render on uppercase =	12.10%	12.64%	11.68%	12.00%	Cost cutting also improves render on capital
Reinvestment Rate =	50.99%	33.29%	43.58%	50.00%	More aggressive reinvestment inwards shared markets
Expected growth rate=	6.17%	4.21%	5.09%	6.00%	Higher growth because of reinvestment
Value of firm
PV of FCFF inwards high growth =	$28,732.57	$9,806.49	$38,539.06	$39,150.61
Terminal value =	$260,981.86	$58,735.57	$319,717.43	$340,174.63	Value of Synergy
Value of operating assets =	$211,952.80	$50,065.35	$262,018.16	$276,609.92	$14,591.76

It is possible that I receive got been also pessimistic near the potential cost savings or growth possibilities, but given the history of synergy inwards large deals, I remember that I am beingness optimistic. Based on my estimates at least, the value of synergy inwards this contend is $14.6 billion (and that is assuming it is delivered instantaneously).
Bottom line: If synergy is the motive for this deal, a slap-up contend has to larn out correct for ABInBev to intermission fifty-fifty on this deal, permit lone create value.

The Disconnect
The history of 3G Capital equally successful value creators predisposed me to laissez passer them the practise goodness of the doubt, when I started assessing the deal. After looking at the numbers, though, I don't encounter the value inwards this contend that would justify the premium paid. It is possible, mayhap fifty-fifty likely, that at that topographic point is some aspect of the deal, mayhap taxes or other benefits, that I am non grasping. If so, I would encourage you lot to role my template, alter the numbers that you lot remember ask to hold out changed, brand your ain assessment in addition to move inwards them inwards this shared Google spreadsheet. It is also possible that fifty-fifty the smartest investors inwards the the world tin laissez passer the sack sometimes permit over confidence drive them to over react. Time volition tell!

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Data Attachments

1. ABInBev Annual Report (2014)
2. SABMiller Annual Report (2015)

Spreadsheets

1. SABMiller: Status Quo in addition to Control Value
2. Value of Synergy 
3. Google Shared Spreadsheet for Deal Analysis