Valuation of companies is done for many reasons. The evaluation of alternative strategies for decisions to sell or buy a company is the widest known purpose among literature. The alternatives can be categorized into three parts: mergers and acquisitions, succession and continuation. The former reflects the selling or buying decision of companies, and the acquisition of shares and mergers. Succession means management buyouts, whereas continuation refers to reorganization, monitoring of financial standing and liquidity flotation, investments but also divestments and spin offs (cf. Hansa & Dvorak 2007).
Adidas has gone through several valuations already. In 1994 Adidas was sold for 1,350 million German Mark whereas in mid-1995 the company was already valued at 3,300 million German Mark when it was initially offered to public (cf. Die Welt 1995). As of December 31st 2010 the price for an Adidas share was 48.89 Euro (€), reflecting a 29.4% growth compared to 2009 (cf. Adidas 2011 a, p. 2).
The following paper on hand values the German company Adidas as of December 2010 with help of the valuation methods Discounted Cash Flow in terms of equity and entity approach as well as the market oriented multiples. Both valuation methods are theoretical defined and later applied to Adidas.
Table of Contents
1 Introduction
2 Theoretical foundation of valuation models
2.1 Discounted cash flow
2.1.1 Discounting
2.1.2 Free Cash flows
2.1.2 Discounting rates – The costs of capital
2.2 Valuation using Multiples
3 Assessment of Adidas
3.1 Adidas in figures
3.2 Strategy and planning
3.3 Market analysis and competition
4 Applying valuation methods
4.1 Valuation of Adidas with the DCF approach
4.1.1 Forecasts of the free cash flows
4.1.2 Determination of the CAPM and WACC
4.1.3 Calculation of the shareholder value
4.2 Multiples factors
4.2.1 Definition of qualified multiples and peer group
4.2.2 Formation of the multiples
5 Comparison and assessment of the results
Research Objectives and Core Themes
The primary objective of this assignment is to determine the shareholder value of the German corporation Adidas as of December 2010. By utilizing both intrinsic and market-based valuation models, the paper aims to provide a comprehensive analysis of the company's financial position, strategic outlook, and competitive standing within the global sporting goods industry.
- Application of the Discounted Cash Flow (DCF) model using both entity and equity approaches.
- Utilization of market-oriented valuation methods through peer group multiples.
- Strategic analysis of the "route 2015" business plan and future financial projections.
- Comparative assessment of valuation results against the actual market capitalization.
- Evaluation of the impact of financial structure and debt management on shareholder value.
Excerpt from the Book
2.2 Valuation using Multiples
The valuation of a company through the usage of multiples is a market oriented approach. It means that a company is valued by comparing key indicators of other companies on the same market. Moxter has stated that valuation means comparison with the market otherwise the assessment will be an absolute figure without a meaning (cf. Moxter 1983, p. 123). The multiplier valuation follows this point of view.
The method is simple: the market value of a company is derived by reference figures of the overall market figures; the law of one price is applied (cf. Esty 2000). Reference figures can be profit, cash flows, and turnover. The enterprise value of company A (EVA) divided by a reference figure of company A (for example CF) reflects the multiplying factor (m). The factor is now applied to the same reference figure of company B, therefore yielding in the value of company B (cf. Seppelfricke 2003, p. 193; cf. Schultze 2003, p. 157). The rule of proportion shows the linear relationship:
EVA / CFA = EVB / CFB = m
The multiplier is usually derived from an entire set of companies in the market, a peer group. This setup ensures an appropriate reflection of the overall market value as no company is directly comparable with another. Products and market positioning are not identical because companies offer unique selling propositions to which the market responds differently. Furthermore some companies on the market are over performing and others are underperforming. Criteria for the selection of a peer group are most often industry classification, company size, market position, cost structuring, phase in life cycle and geographic representation (cf. Cheridito et al. 2001, p. 322).
Summary of Chapters
1 Introduction: This chapter outlines the motivation behind company valuation and provides a brief historical context of Adidas, setting the stage for the analysis.
2 Theoretical foundation of valuation models: This section details the mathematical and conceptual frameworks of the Discounted Cash Flow (DCF) method and market-oriented multiples.
3 Assessment of Adidas: This chapter provides an overview of Adidas' current financial standing, long-term strategic targets, and its position within the competitive global sports market.
4 Applying valuation methods: This section puts the theory into practice by forecasting cash flows, determining capital costs, and calculating the shareholder value using both DCF and multiple-based approaches.
5 Comparison and assessment of the results: This concluding analysis compares the valuation results derived from the different methods and discusses their reliability relative to the company's market capitalization.
Keywords
Adidas, Company Valuation, Discounted Cash Flow, DCF, Multiples, Shareholder Value, CAPM, WACC, Enterprise Value, Peer Group, Financial Analysis, Market Capitalization, Sporting Goods Industry, Equity Approach, Entity Approach
Frequently Asked Questions
What is the core purpose of this academic assignment?
The paper evaluates the German sporting goods company Adidas to determine its shareholder value as of December 2010 using established financial models.
Which valuation models are utilized in this research?
The author employs two primary methodologies: the Discounted Cash Flow (DCF) approach (covering both entity and equity methods) and the market-oriented approach using multiples.
What is the central research question?
The research seeks to quantify the intrinsic value of Adidas based on 2010 data and assess whether the company was undervalued or overvalued by the stock market at that time.
How is the peer group for the multiple valuation determined?
The peer group is selected based on industry classification, market position, and comparable business segments, specifically focusing on companies like Nike and Puma.
What is the significance of the "route 2015" strategy?
The "route 2015" strategy serves as the foundational outlook for the author's financial forecasts regarding sales growth and EBIT margins, which are critical for the DCF calculation.
Which primary financial indicators are used for the multiple valuation?
The study utilizes net income, book value of equity, capital employed, EBIT, and net sales as key denominators for the multiple valuation.
Why are there two different results for the DCF and the multiples method?
The DCF method is highly sensitive to long-term assumptions and management targets, whereas the multiple method reflects current market comparisons, leading to different value ranges.
What role does the CAPM model play in the analysis?
The Capital Asset Pricing Model (CAPM) is used to determine the cost of equity, which is an essential component for discounting future cash flows in the equity approach.
How does the acquisition of Reebok influence the valuation?
The acquisition of Reebok is analyzed as a strategic move that significantly impacted Adidas' financial structure, leverage, and sales volume during the period leading up to the 2010 valuation.
What is the author’s conclusion regarding the market valuation of Adidas?
The author concludes that Adidas was undervalued by the market in 2010, noting that analyst expectations and the stock price rose significantly following the publication of the 2010 financial results.
- Quote paper
- Anne-Kristin Rademacher (Author), 2012, Valuating a German business - Case adidas, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/201566
