Company valuation using the example of KUKA

It has been seven years since KUKA was taken over by Midea. German politicians were alarmed and asked various domestic groups to act as white knights. That is, Siemens & Co. were to submit a counteroffer. But Siemens CEO at the time, Joe Kaeser, declined, saying he could not justify a purchase price of 4 billion euros(link). The Midea offer corresponded to a P/E ratio of 37(link) and was significantly higher than the prices before. At the same time, KUKA saw an opportunity to establish itself in a market 10 times larger. Midea paid almost 4 billion euros - at that time for 95%.

Has the purchase paid off for Midea?

As can be seen, KUKA sales have not skyrocketed since then - albeit in a rather more difficult environment. The negative effects of Corona, the supply chain and also inflation were not foreseeable. In addition, there were generally overly optimistic forecasts for robotics. The sales development is probably representative for many a startup. Many robotics companies cannot achieve their own ambitious planning. The most recent quarterly figures of Universal Robots are worth mentioning.

From the point of view of whether the capital invested by Midea has paid off well, the answer so far has been a clear no. This is particularly true from the point of view of opportunity costs. After all, Midea could have invested the money in its home country, which is developing better after all. But we don't know whether the purchase might not also have come about as a result of pressure from the Chinese government. In addition, there may have been reasons for the purchase that I do not know, which can lead to misinterpretations.

Chinese buyers do not always want a good direct interest rate

The other day I spoke with the investment manager of a large Bavarian investment company. We talked about the Viessmann takeover. Neither of us can begin to understand the purchase price. She referred to her experience with a deal in which her company had bid a lot but was outbid by a Chinese company. Specifically, the deal involved a manufacturing company that could never earn the purchase price paid by the Chinese. But today it is known that the Chinese buyer copied the German production equipment ten times over in China. All quite legally, because the German company owns the rights to the design drawings and now simply belongs to the Chinese company. The Chinese buyer was obviously not interested in the German market, but in his home market. He thought in terms of indirect returns and achieved them.

Back to Midea: In any case, Midea had a strong reason: its own automation. Midea wants to steadily deploy more robots, and this is where KUKA can provide valuable services. According to the Pingwest website, "Our goal is to reach 530 robots per 10,000 employees in 2023." "In the first half of 2021, we had 320 robots per 10,000 people," the executive said. He believes KUKA is able to assist Midea and many other Chinese manufacturers in automating their production, thereby raising the penetration rate of robotics and narrowing the gap with developed countries.

In 2021 alone, Midea would have received 1,000 robots from KUKA.

No matter what the reason for the high purchase price, it is ultimately up to the buyer, who does not owe me or anyone else any accountability. In this respect, these remarks served as an anticipation of the exemplary presentation of how a company like KUKA would be valued today. The "today " is important, as interest rates and the market environment have changed since 2016. There are databases for their assessment, which are referred to below. For reasons of effort, these are only rough values that are presented. (I frequently prepare company valuations, also for auditors. The current one of KUKA interested me also against the background of the Viessmann deal).

Today's business valuation

The basis of a company valuation is the existence of a plan. The decisive factor is the future free cash flow, which is discounted. In the case of KUKA, in the absence of a plan, it is assumed here that the free cash flow corresponds to EBIT (depreciation and amortization = capital expenditure, no change in working capital, as there is no significant growth, etc.). In general, it is noticeable that the large robot manufacturers are opening up many new business areas (retail, construction, electric mobility). This of course speaks for their innovativeness. On the other hand, this shows that the development of sales in the previous areas is not exuberant.

Important for newcomers to business valuations is the awareness that the substance is not considered extra. This may come as a surprise to SMEs that have owner-occupied real estate and want to be compensated extra. They do not pay rent today. If they were to pay one, their future free cash flows would be correspondingly lower. An exception is capital that is not required for operations (e.g. a vacant plot of land that does not have to be built on to fulfill the plan).

The freely available future earnings must be discounted. For this purpose, the base interest rate (currently according to IdW S 1 = Standard der Wirtschaftsprüfer: 2.25%), the market risk premium and the individual risk of the company or a group of comparable companies (can be queried or determined in databases) are taken into account.

KUKA is worth less today than in 2016

From a purely mathematical perspective, KUKA's enterprise value today is likely to be roughly 1.5 billion euros, well below the 4 billion from 2016. The P/E ratio (price/earnings ratio) of 37 mentioned at the time was also significantly higher than, for example, that of FANUC today (roughly 22) or that of the conglomerate ABB (roughly 23). In addition to the generosity of the offer at the time, various reasons affecting the entire market are probably responsible for the high mathematical loss in value: The rise in interest rates has generally reduced stock market values and, at the same time, robotics has so not reached growth forecasts - also as a result of the external factors mentioned above (Corona/ supply chains/ inflation). ABB was apparently valued at a P/E of 35 in 2019. However, today's stock market value of 60 billion euros is higher than in 2016.

(The net financial liabilities on which interest is to be paid must still be deducted from the enterprise value. The total amount then corresponds to the equity value that is ultimately paid).

Startup valuation

As a rule, statups cannot represent planned profits for the time being. After a few years, however, these are to be expected - typically very high. Startups are therefore valued differently - also with a significantly higher risk factor beta. Often, future earnings are multiplied by the industry-standard multiple. This amount is then heavily discounted to account for the high risk. Several rounds of capital are carried out to limit the discounting. If the startup performs well, its value increases from year to year, as the period of time to be discounted becomes shorter and shorter.

Are we networking? LinkedIn
-> Go to the Cobot group on LinkedIn (link). The author is also a consultant (robotics, tech & finance/ valuations). Hardly anyone is likely to have a comparable market and solution overview. Thanks to government funding, SMEs have the option of a company tour with concrete recommendations etc. for a flat rate of €1,750 ("special areas" €800) incl. travel.