CORPORATE FINANCE

FERRARI: THE 2015 INITIAL PUBLIC OFFERING

MSc in Finance – Section C

Group C4
Carbonin, Tommaso
El Safadi, Nour
Gerber, Niclas
Kangas, Georgios
Visser, Ole

Barcelona, October 2022

Question 1
1) Artificial scarcity: Intentionally keeping production below demand instilled a perception
of exclusivity that allowed Ferrari to charge a price premium. Due to low supplies, long
waiting lists were created, which loyal customers were able to bypass by becoming regular
buyers and staying on the ‘preferred customer list’.
2) Brand image: Ferrari was named the ‘most powerful brand in the world of Finance’ which
enables them to charge an average car selling price of $267,000 making Ferrari one of the
most profitable companies in the global auto-manufacturing industry. This brand image
was carefully created and preserved by lending its name to sponsorships and licensing,
as well as providing its iconic logo to luxury brands.
3) High quality: The combination of Ferrari’s Formula 1 racing technology and its
commitment to producing models with cutting-edge solutions has resulted in excellently
engineered products. The company is one of the few global producers of super sports cars
and offers a highly diversified product portfolio within that niche, expanding from 2
outdated models to 9.
Question 2
FCA IPO advantages:
1) FCA’s ability to raise a lot of funds without being exposed to any financial risk.
2) The capital raised can be used to fund new projects for ‘its multitude of brands’.
3) FCA’s capital structure will be improved, by transferring a significant amount of its debt to
Ferrari, which is expected to have a debt of $2.3 billion after the deal.
4) FCA will have access to more favourable credit conditions.
5) Stakeholders after years of hard work will be getting compensated with dividend stock.
6) Generated publicity for FCA for potential buyers and investors.
FCA IPO disadvantages:
1) Losing Ferrari one of its most profitable business units.
2) Reduced profitability might worsen FCA’s credit conditions.
3) FCA’s reputation could take a hit as they are no longer associated with Ferrari’s brand.
4) Spin-off is a lengthy process and FCA will incur all the costs (legal, audit, managerial, and
accounting fees).
Ferrari IPO advantages:
1) Increased flexibility in how they govern their company.
2) They have more diversified financing options as they can issue corporate bonds.
3) Generated publicity for FCA for potential buyers and investors.
4) Attracted talented and competent managerial personnel.
5) Listed in the NYSE, the largest stock exchange enabled them to attract investors from the
most powerful and richest economy in the world.
Ferrari IPO disadvantages:
1) Deterioration of their capital structure as FCA strapped them off most of their cash while
transferring a significant amount of debt to them, causing a reduction in NWA.
2) As a new public entity, it must comply with the regulatory and transparency requirements.
3) Ferrari’s bargaining price will decrease, due to not buying in bulk, increasing the COGS.
4) A more diversified shareholder structure could cause a conflict of interest.
Overall ‘winner’: FCA. FCA got additional capital, was able to satisfy shareholders with stock
dividends, and improved its liquidity and capital structure due to increased cash and
decreased debt. No costs occurred other than the spin-off costs and the funds raised far
outweigh the costs.

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 Considering the post-IPO corporate governance issues, we found that Ferrari could
suffer from liquidity issues. The reason for this is that, on the one hand, cash that is used for
operations is reduced, while the increase in debt will consequently lead to a rise in interest
payments. Therefore, Ferrari has less cash on hand and higher interest payments to fulfill.
Eventually, this could lead to liquidity issues for Ferrari and might negatively influence the way
they conduct their business operations. In this case, the new investors would have to bear the
consequences of FCA's self-interest pre-IPO measures.
Regarding the Pre-IPO governance, we can spot a conflict of interest between the
FCA management's interest in their own company and the long-term health of Ferrari. By
removing the cash from Ferrari and transferring its debt to it, the FCA management did not act
in the best interest of Ferrari. Instead, they wanted to improve their situation as much as
possible before spinning Ferrari off, without caring how these measures would influence
Ferrari in the future.
Question 3
To assess the IPO environment, one must compare the total money raised and the number of
IPOs in the respective periods. When looking at the PWC IPO watch Europe Q4 report of
2015, we find that the total capital raised was €23.2 billion, while the number of listings was
105 (PWC, 2015). Considering October 2021, the PWC IPO Watch Europe report 2021 states
that the IPO proceeds of Q4 in 2021 accumulated to €17.3 billion, having 125 listings (PWC,
2021). Therefore, more listings raised less capital in 2021 than in 2015, leading to a lower
average offering value. This suggests that the overall market environment was more
favourable in 2015. That holds true even though the overall IPO volume of 2021 (€75 billion)
was higher than in 2015 (€61.5 billion). However, in 2021 especially, H1 was highly favourable
for IPOs (€46.1 billion raised) due to extreme optimism caused by the rollout of the vaccine
and lush monetary policy. While H2 also yielded a strong performance, the IPO market started
to slow down. Overall, the Ferrari IPO would have raised a more predictable and higher final
share price in 2015.
Question 4
One of the most critical steps in building a DCF model and arriving at an estimated terminal
value of a company is by making assumptions about the company’s growth rates and
margins. One of the key drivers in the valuation is the revenue growth rate. Ferrari’s business
strategy is focused on low-volume production to maintain its exclusivity. However, after
Montezemolo left, Marchionne decided to push for higher volumes, especially in China and
the Middle East. Therefore, considering the expected production rise to 9,000 units by 2019,
and the growing demands in emerging markets, those markups should be attainable for
Ferrari. In addition, the sustainable assumptions of revenue growth for cars seem reasonable
since the business operates in the luxury segment and customers are not sensitive to prices
in this market. In addition, the 2015 7% growth in car revenue can be explained by their lofty
expectations that the launch of the new 488 GTB design replacing the 458 Italia will generate
high sales.
Moreover, Ferrari’s engine sales are still low, but slightly above the inflation rate.
However, between the years 2012 to the first half of 2015, the sales of engines were seeing
strong growth rates. Therefore, the sustainable 3% annual growth rate is achievable. In
addition, Ferrari is also focusing on generating revenue through the production of branded
merchandise and undertaking several operations such as theme parks and apparel, which will
potentially enhance the brand experience. However, we believe that Ferrari is being too
optimistic in this area of their revenues since the exclusivity feature of their brand does not
apply to their mass-production merchandise.
Since Ferrari is now an independent entity, it might be difficult for them to maintain its

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operating margins. This is due to the possibility of COGS increasing since Ferrari no longer
holds FCA’s bargaining advantage. If operating margins increase, this must imply the
assumption that revenue per car will increase to a larger proportion than the COGS. Given the
fact that Ferrari plans to increase its output of cars, it will be difficult to assume that revenue
per unit will increase more than COGS per unit unless Ferrari decided to increase their prices.
In addition, in the first half of 2015, Ferrari had a significant decrease in its cash. However,
due to the increase in outputs in both cars and merchandise, the company can expect to
generate cash in the upcoming years, given its highly profitable business model.
Since Ferrari is faced with increased demands from emerging markets such as China
and the Middle East, Ferrari will have to increase the volume of outputs, therefore, Ferrari
must invest more in their PPE to be more flexible in its manufacturing setup. Consequently,
depreciation & amortization should expect to increase if net fixed assets increase.

Question 5:
Advantages of a multiples-based approach over a DCF approach:
1) Easily explainable to investors and simple and fast to calculate.
2) Investors use actual prices as opposed to forecasting future cash flows.
3) The data used is actual firm data that already exist and is easily accessible.
Disadvantages of a multiples-based approach over a DCF approach:
1) No identical companies exist.
2) The growth prospects and the management of the company aren’t considered
3) When an entire industry is overvalued or undervalued, multiples aren’t reliable
4) The number of companies you use and which companies you pick for your multiples
approach give different multiples which result in different valuations.
The case of Ferrari is unique as there are no identical firms and no ‘pure plays’ in the market.
Therefore, comparable firms will not give the most accurate representation. It was also evident
that the multiples approach was much easier and faster to calculate as opposed to the
discounted cash flow (DCF). FCA stripped equity which gave an untrue EV of Ferrari resulting
in a multiplier that does not do justice to the actual state of the company.
Question 6
Multiple-based approach assumptions used:
1) Two identical assets should have the same price.
2) The estimated value of Ferrari is based on the value of comparable automotive
companies (BMW, Daimler, and Aston Martin) and all the luxury companies.
3) The comparable firms used are those expected to generate a similar output of the
same nature and risk.
Methodology:
1) We calculated the enterprise value (EV) for all comparable firms.
2) We divided each EV of the comparable firms with their respective EBITDA.
3) We added all the EV/EBITDA ratios and divided them by the number of comparable firms
to obtain 2 average EV/EBITDA multiples, 1 for luxury industries and 1 for automobile
industries.
4) We assigned a weight of 0.7 for the luxury industries and a 0.3 weight for the automobile
industries because Ferrari’s powerful brand name should be considered more of a luxury
product. With the weighting, we obtained a weighted average EV/EBITDA multiple of 11.5.
5) We multiplied the 11.5 average EV/EBITDA multiple with Ferrari’s EBITDA ratio for 2014
to obtain Ferrari’s implied enterprise value of $7,790.03 million.

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6) The total number of post-money shares to be distributed was 189 million.
7) We divided Ferrari’s implied enterprise value of $7,790.03 million by 189 million to obtain
a Ferrari’s share price of $41.22.

Question 7
In the DCF model, our assumptions were based on best, base, and worst-case scenarios. The
base case was based on the assumptions given in the case.

1) For the best and worst-case scenarios, we assumed that revenues, operating margins,
and net working capital turnover would increase or decrease by 2% varying from the base
case.
2) Based on the 2-3% global growth range, we assumed 1,9%, 1,8%, and 1,7% terminal
growth rates for the best case, base case, and worst case, respectively (WorldBank,
2022).
3) In addition, to accommodate the IPO costs, 80% of the cash was deducted from the EV to
arrive at the equity value.
4) For the capital structure, we assumed that it would be reasonable to assign a weighted
average capital structure by considering the average capital structure of the luxury and
automotive industries. Given that Ferrari operates in the automotive industry but has
mostly the characteristics of a luxury brand, we assigned more weight to the luxury industry
in our capital structure calculations. This has resulted in the total of Ferrari’s capital
structure of 33% debt and 67% equity.
5) We used the market risk-free rate of the 1-year Italian government bonds of 0,23% and an
annual average European market return (Stoxx 600) of 4,25% (Curvo, 2022).
6) To calculate the β, we also assigned a weighted average of 70:30 for the automotive
industry beta of 1,13 and a beta of 1,44 for the luxury industry. (Damodaran, 2014).
7) With of cost of debt of 1.35%, if Ferrari has an AA credit rating, we got a result of 5% for
the WACC.

Methodology:
We started by growing our car, engine, and other revenues with the assumed growth rate for
each scenario. A similar methodology was applied to achieve the operating profit (EBIT). After
following the DCF model methodology, we have finally arrived at the Free Cash Flow of the
Firm. Using the WACC, we discounted all the cash flows from the years 2015 to 2019 to the
present value. We then calculated the present value of the terminal value using the terminal
growth rate. To arrive at the equity value, we deducted net debt from the EV and divided the
result by the number of shares outstanding of 189 million, to finally arrive at a price per share.
By following this methodology and these assumptions, we’ve arrived at an enterprise value of
€ 6270 million, and an equity value of € 6837 million, with a reasonable range of stock price
of $53,60/share (best case), $47,05/share (base case), and $42,61 (weak case).

Question 8
The value we set for the stocks was ranging between $42-53 based on a best, base, and
worst-case scenario. The initial price range had $52/share which was the highest price set as
the demand for the stocks was incredibly high with 10x oversubscription. However, we didn’t
increase it further to not overvalue the stock but also to not disappoint the investors when
there would be stock corrections. The DCF value we got in the base case is $47 which is
within the initial price range of $45-$52.
The lead investment bank has an incentive to issue the IPO at the highest price range,
as it earns a fixed percentage fee of the total IPO value. On the other hand, if the investment
bankers issue an overvalued IPO, it would be detrimental to their reputation.
Regarding FCA, a low final share price will worry stakeholders of ‘leaving money on
the table’, whereas a high price that will quickly decrease might disappoint them as they will

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have lost money themselves.
Considering Ferrari's dilemma, a too-high final share price will limit its potential to
satisfy investors in the future, who in turn could force a change in the business strategy.
However, a too-low share price might damage Ferrari’s brand image, which is crucial to its
success and will have negative consequences on its profitability in the long run.
New investors will benefit from an undervalued IPO, as they will buy stocks at a lower
price compared to what it is worth. As their stocks appreciate, momentum around the stock is
generated, which will attract additional investors. On the other hand, the financial loss new
investors will have to bear from an overvalued IPO might discourage them from investing in
Ferrari in the future.
Question 9
The IPO of Ferraris common shares happened on 21.10.2015 at $52. A month later, on
20.11.2015, the stock experienced a 7.5% correction to $48.08. This means that the market
considered the share overvalued at the IPO. Meanwhile, the MSCI World has returned 1.8%
over the same period. That shows that the decline in the value of Ferraris stock was caused
by endogenous factors and not general market trends.
On 20.10.2016, a year after the IPO, the value of the stock slightly increased to
$52.60, corresponding to a 1.15% increase since the IPO. Such performance was below
expectations. However, this performance is not much worse than the market, as the MSCI
World only returned 1.73% during the same period. Therefore, equities generally did not
perform well, and Ferrari's performance is no outlier.
Five years after the IPO, on 21.10.2015, the value of the stock skyrocketed to
$189.93, corresponding to a 270% increase. During this time, the Ferrari stock has
significantly outperformed the market, as the MSCI World returned 45%. Even though the
world economy and equity markets have shown excellent performance, it was nowhere close
to Ferrari. The company could sustainably deliver good growth numbers, which more than
satisfied its investors.
Question 10
We used ln returns as they are symmetric, time-additive, and because they calculate relative
change as opposed to absolute change. With symmetric returns, opposite signs with equal
values will cancel each other out. This is especially helpful to determine a stock's β, as we
want to measure how much its returns deviate from the market, both positive and negative.
Ferrari’s standard deviation is 2.00%. Using the coefficient of variation (CV), we measured
how spread out the stock prices are relative to the average returns. We got a CV value of
19.63 which is significantly greater than 1, implying a high standard deviation. We have used
the S&P 500 as the market portfolio (β of 1.0), as most Ferraris sales are made in America.
Here, we consider the S&P 500 as the best representation of the market due to its depth and
diversity. The β of Ferrari is very slightly above 1.0, meaning the stock's volatility is marginally
higher than the volatility of the market. However, we would have expected the β of Ferrari to
be below 1.0 because the company's business strategy claims that its sales are independent
of the general market environment. That means that even during a recession, they will be able
to sell all their products at full price. Hence, sales and overall company performance should
be highly predictable. This in turn implies below-market volatility.
Steps to calculate the β of Ferrari:
1) We collected the daily adjusted close data for Ferrari stock price and S&P500 for the 5
years from 21.10.2015 to 21.10.2020.
2) We calculated daily stock ln and market ln returns.
3) Then we used the slope function in excel and got a β of Ferrari of 1.011.

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index/stoxx-europe-600

Damodaran, A. (2014). Retrieved 10 October 2022, from

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm

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https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

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assurance/assets/pdf/ipo-watch-europe-2015.pdf (PWC, 2015)

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