Question

Imagine that you are the CEO of Moet Hennessy Louis Vuitton SE (LVMH). You have just received share price valuation estimates for a potential buyout target, Rimowa, from two of your top financial analysts. You have confidence in their estimates because they have taken FIN 305 from the Shidler College of Business. Both analysts used the discounted cash flow (DCF) model to estimate the share price resulting in a valuation of $50, by the first analyst and $60, by the second analyst. Part I: Identify two possible causes for the significant difference in valuation and briefly explain how each possible cause affected the DCF model’s share price estimate. Part II: You made a buyout offer of $55 a share and Rimowa’s CEO rejected it. The German luxury luggage brand Rimowa is crucial to LVHM’s strategic expansion into brands that have heritage and a unique position. As the CEO of LVHM what would you do to meet LVHM’s strategic objective while minimizing the cost to acquire Rimowa? Briefly defend your recommendation.

Answer 1

DCF valuation taken in lot of assumptions before delivering the final result. Thus there is a high probability of getting multiple answers.  

Two possible causes of difference in Valuation

1. Terminal rate growth: This small change in this causes a big change in valuation. The final outcome highly depends on terminal growth rate. Both analysts must have used different terminal growth rates to value the company resulting in different valuations.

2. Projections: Differences in projections like sales growth, costs, and other expenses will affect the valuation as it will directly affect the cash flows. The two analysts must have a difference in their assumptions in projections.

Recommendation:

As a CEO I would do a few things,

1. Firstly, I would calculate the value (synergies) I would get after the acquisition. And compare it with the price that I will be paying for acquisition.

2. Secondly, I would determine the lowest possible price I can afford to pay for acquisition and then I will make my decision.