Valuation & Corporate Finance Advisors Forum 6

Valuation & Corporate Finance Advisors Munich, Germany 14 November 2016 Forum 6 | „Unternehmensbewertung in der Nullzins-Ära“ 14. Deutscher Corporate Discussion Materials M&A-Kongress Content

Concerning the content of this document please contact: Development Interest Yields

Daniel Kittlauss Parameters in valuation formula Managing Director, Frankfurt Valuation Advisory Services Market Cap versus Earnings expectation +49 (0)170 786 3531 Implied cost of capital and implied market risk premia [email protected] Countries with over- under valuation in stock market Andreas Stoecklin Managing Director, Munich Development of Corporate debt market Corporate Finance +49 (89) 388 884 120 So where is the next invest bubble in 2017? [email protected]

Klaus Pflum Senior Advisor Corporate Finance +49 (89) 388 884 110 [email protected]

Duff&Phelps 2November14,2016 1987, 1997, 2007: The Next “Lehman”… Coming in 2017?“

Investors snapped up shares The NASDAQ Composite, home to of South Sea Company more most of the dot-com companies, 1720 soard from under 500 to over 5000 than eight-fold over 6- South Sea Company 2017 ? months period before it in 15 months. Hundreds of these A British joint-stock company and companies achieved multi-billion Sovereign Bonds bubble collapsed, in expectation of a public-private partnership Global central bankers are busy keeping the repeat of the success of the dollar valuation as soon as they created to consolidate and went public financial system liquid with helicopter East India Company reduce the cost of debt but money, though markets should see cracks marketed to the public as a 1997-2000 and the unkown consequences this growth opportunity because of its Dot-com Bubble systemic bubble could bring monoply on trade with South 1886-92 Speculative bubble in America, which would realistically Encihamento (“Mounting") stocks related to the never take place because of Economic bubble in Brazil burgeoning internet Spain‘s control over that facilitated by new banking laws continent at that time that were intended to stimulate 2017 ? industrialization, but that 2007 Bubble burst in S&P 500 1621 encouraged unbridled Uranium Bubble If S&P index (current level Tipper and See-Saw Time speculation around IPOs and Uranium prices skyrocketed, close to 2100) finally reaches 1720 Money in German states was other practices 1969-70 possibly initially prompted by 2300, the threshold level of Mississippi Company debased with an intention to Poseidon Bubble flooding of the Cigar Lake Mine major bubbles in the past, a A Bank and trading defraud neighboring states by Stock market bubble in Australian in Saskatchewan, the largest bust in the U.S equity market is company with a monoply exchanging the debased mining shares initially prompted by a undeveloped source of uranium likely to happen over French foreign trade: currency for solid currency in speculative frenzy over shares of a in the world, but which wasn‘t exaggerated claims of the those states, all in an effort to company that had made a large yet producing anything at the wealth of French colony raise money for the Thirty Years‘ nickel discovery at a time when time War Louisiana led to wild nickel was in shortage speculation in the shares of the company

1980-90s 2017 ? 1846 2000s 1637 1920s Japanese Asset Price Bubble Real Estate Railway Mania Real Estate Bubbles Tulip Mania Florida Land Boom Abundant liquidity, financial Metropolitian real estate Speculative frenzy over 2005 – India In Holland, tulips that were rare Speculative land deregulation, monetary easing prices have reached railroad shares in Britain 2006 – UK, Irland, Spain at the time became symbols of boom and euphoria over future growth critical levels in cities like 2007 – US, China prosperity: the most expensive prospects led to speculation in Stockholm, Munich, 2008 – Romania tulips sold for fifteen or twenty the stock and property markets London .... 2009 – Australia times the annual salary of a skilled craftsman

At the peak in 1989, the value of the The US housing boom and 2006 Imperial Palace grounds in Tokyo was bust, and the ripple effects it Jatukam Craze greater than that of the real estate in the had on mortgage-backed The Tulipmania is one of the earliest Speculative frenzy over entire state of California. The burst of the securities resulted in an global recorded instances of an irrational asset Jatukam amulets (look like over- bubble in early 1990 set the stage for economic contraction that was bubble. By one account, tulip prices soared sized pieces of vaguely Japan‘s “Lost Decades" of the 1990s and the biggest since the 1930s 20-fold over 4-months period hindu/buddhist jewelry that you early 2000s Depression wear around your neck) in Thailand that were thought to bring wealth

Source: Goldman Sachs

Df & Phelps 3Duff Impact of Lehman on our Yield curve

Duff&Phelps 4November14,2016 Development from „Lehman“ to today‘s zero interest ...

Duff&Phelps 5November14,2016 How are interest impacting market cap ... ?

CDAX vs. Basiszins / risk free rate (10years)

1,200 0.06

0.05 1,000

0.04 800

0.03

600

0.02

400 0.01

200 0.00

0 -0.01 Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16 CDAX Index (Total Return) 10y German Gov. Bond

Duff&Phelps 6November14,2016 Parameters in valuation formular ...

Duff&Phelps 7November14,2016 (D) Market capitalisation versus earnings expectation...

Market value vs. earnings estimate (in bn. EUR)

1,600 120

1,400 100

1,200

80 1,000

800 60

600 40

400

20 200

- - Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16 Market Value Average earnings period 1 to 3

Duff&Phelps 8November14,2016 (D) Yield vs.Implied cost of capital | Implied market risk premia

Implied MRP against Risk Free Rate (in %)

13%

11%

-1% Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16

Total Implied CoC Risk Free Rate MRP

Duff&Phelps 9November14,2016 (D) Implied risk premia has increased ...

MRP Development

14%

12%

10%

0% Jan/ 01 Jan/ 02 Jan/ 03 Jan/ 04 Jan/ 05 Jan/ 06 Jan/ 07 Jan/ 08 Jan/ 09 Jan/ 10 Jan/ 11 Jan/ 12 Jan/ 13 Jan/ 14 Jan/ 15 Jan/ 16

High/Low MRP

Duff&Phelps 10November14,2016 USA ... similar to D, decline in ICOC more visable

Market Value vs earnings estimates (in bn. USD) 25,000 1,600 Market Value Average earnings period 1 to 3 1,400 20,000 1,200

15,000 1,000 800

10,000 600

400 5,000 200

- - Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Implied MRP against risk free rate Total Implied CoC Risk Free Rate MRP 13%

11%

-1% Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Duff&Phelps 11November14,2016 Japan - low interest environment, business as usual ...

Market Value vs earnings estimates (in bn. Yen) 600,000 40,000 Market Value Average earnings period 1 to 3 35,000 500,000 30,000 400,000 25,000

300,000 20,000

15,000 200,000 10,000 100,000 5,000

- - Jan.01 Jan.02 Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Implied MRP against risk free rate Total Implied CoC Risk Free Rate MRP 13%

11%

-1% Jan.01 Jan.02 Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Duff&Phelps 12November14,2016 Regressing ICOC + EMRP against yield...

14%

12%

y = 0.38x + 0.07 R² = 0.36 10%

8% icoc mrp Linear (icoc) 6% Linear (mrp)

4% y = -0.61x + 0.07 R² = 0.60

0% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Duff&Phelps 13November14,2016 Summarizing the implied market risk premia model ...

• Main Advantage – Forward looking, i.e. consideration of current market situation possible • Main problems: – Underlying assumption: price = (fundamental) value of the company – Estimation of input parameter (e.g. dividends, growth rate, rating (PD)) – General circularity problem (if applied to a single company)

Stock Price

Discounting Expected Expected Dividends Dividends Implied Discount Rate

• Conclusion: Despite shortfalls upcoming alternative approach to measure expected returns or single components of the CAPM such as EMRP

Duff&Phelps 14November14,2016 Status of discussion on EMRP and risk free yield in D & US

IDW recommendation for Sep 2012ff: Normalization (US):

„[...] 1. Bei der Prognose der Marktrisikoprämie sind durch die “Duff & Phelps Increases Recommended U.S. Equity Risk Finanzmarktkrise veränderte Ein- flussparameter, insbesondere Premium from 5.0% to 5.5% eine veränderte Risikotoleranz, zu berücksichtigen,so dass sich im Based upon current market conditions, Duff & Phelps recommends Vergleich zu den letzten Jahren derzeit höhere Marktrisikoprämien an increase in the U.S. ERP to 5.5% when developing discount rates rechtfertigen lassen. as of January 31, 2016 and thereafter (until further guidance is 2. Der FAUB hält es für sachgerecht, sich derzeit bei der Bemessung issued). der Marktrisikoprämien an einer Bandbreite von 5,5 % bis 7 % (vor The prior Duff & Phelps recommended U.S. ERP was 5.0%, perönlichen Steuern) [...] zu orientieren. established as of February 28, 2013. Both of these ERP estimates [...]“ were measured relative to a normalized yield of 4.0% on 20-year U.S. Treasury bonds.”

Duff&Phelps 15November14,2016 Is there a bubble, shall I invest ...?

12% Germany MRP: 7.96% 12% Japan MRP: 7.46% ICOC: 7.77% ICOC: 7.39%

10% Rf: -0.19% 10% Rf: -0.08%

8% 8% P R P R 6% M 6% M

4% 4%

2% y = -1.1x + 0.09 2% y = -2.45x + 0.08 R² = 0.66 R² = 0.49

0% 0% -1% 0% 1% 2% 3% 4% 5% 6% -1% 0% 1% 1% 2% 2% 3% Risk Free Rate Risk Free Rate 12% USA 12% UK MRP: 6.03% MRP: 4.57% ICOC: 6.83% ICOC: 6.17% 10% 10% Rf: 1.6% Rf: 0.8%

8% 8% P P 6% 6% R R M M

4% 4%

2% y = -0.64x + 0.07 2% y = -0.6x + 0.07 R² = 0.40 R² = 0.43

0% 0% 0% 1% 2% 3% 4% 5% 6% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% Risk Free Rate Risk Free Rate

Duff&Phelps 16November14,2016 Anybody still believes in ECB’s inflation target ?

German Break-even Rates

3.0%

2.5%

No data available 2.0% e c i r P

1.5% t s a L 1.0% 1.0% 1.1%

0.5%

0.0%

10 years 15 years Average

Duff&Phelps 17November14,2016 Anybody still believes in ECB’s inflation target ?

Euro Area Inflation-linked Swap

3.0%

2.5%

2.0% e c i r

P 1.5% 1.5% t s a L

1.0% 1.2%

0.5%

0.0%

10 years 20 years

Duff&Phelps 18November14,2016 Development of Corporate debt market

Absolute Yield of 10Y Industry bonds by different rating classes 16% Mid Price AA Mid Price A Mid Price BBB Mid Price BBB- 14%

12%

10%

0% Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Spread against EUR Swaps of 10Y Industry bonds by different rating classes 12% Industrial AA 10Y Industrial A 10Y Industrial BBB 10Y Industrial BBB- 10Y 10%

-2% Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Jan.12 Jan.13 Jan.14 Jan.15 Jan.16

Duff&Phelps 19November14,2016 So where is the next invest bubble in 2017?

Source: Goldman Sachs & Duff&Phelps

0uf& Phelps 20Duff Duff & Phelps is the premier global valuation and corporate finance advisor with expertise in complex valuation, dispute consulting, M&A, restructuring, and compliance and regulatory consulting.

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Duff & Phelps is the premier global valuation and corporate finance advisor with expertise in complex valuation, dispute consulting, M&A and restructuring. The firm’s more than 2,400 employees serve a diverse range of clients from offices in North America, Europe and Asia.

M&A advisory and capital raising services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising services in the United Kingdom and Germany are provided by Duff & Phelps Securities Ltd., which is authorized and regulated by the Financial Conduct Authority.