Auto Industry 101.5: Takeover prices. (Prepare to be disappointed.)

Geely paid $1.5 billion for all of Volvo

Geely paid $1.5 billion for all of Volvo

In this 5th installment of Auto Industry 101, we talk about the price for your toils and troubles of starting a car company. This short course is written due to the recent interest in disrupting the auto industry. The course is kept extremely simple, Auto Industry for the Twitter Generation. Those in the industry will find nothing new. Those new to the industry hopefully will find a helpful primer.

Takeover fantasies usually help prop up a stock price, and with Tesla’s shares slowly trundling in the general direction of Mother Earth, there has been no shortage of takeover fantasies. Elon Musk himself brought up BMW last year, only for BMW to vehemently deny any possible alliances, or dalliances. I am frequently asked what Apple, or a global automaker would pay for Tesla. Here is my usual answer.

Tesla’s market cap is around $25 billion right now, and from what I read, some people think that `in a takeover, it might be worth $75 billion. I don’t know what Apple would pay for Tesla, and I don’t even want to think about it. I have followed many mergers and acquisitions in the auto industry, I was even involved in a few. The prices paid are depressing. Remember, your company is only worth what someone is willing to pay.

Fiat got a deal: All of Chrysler for $10 billion, half of it in pension obligations

Fiat got a deal: All of Chrysler for $10 billion, half of it in pension obligations

Car companies can be cheapskates when it comes to buying others. If they buy another carmaker, then usually after, or close to a bankruptcy. Bankruptcies are preferred, they wipe out nasty creditors, employees, and pension funds. Sometimes, you can buy a nice car business, shouldered with a large workforce and legacy costs, for a dollar. If you want to make a lot of money, better sell a headphone maker, or a messaging app.

The Dongfeng deal valued Peugeot-Citroen at $14.6 billion, or $5,200 per unit

The Dongfeng deal valued Peugeot-Citroen at $14.6 billion, or $5,200 per unit

Abandon all hope that big OEMs want to buy another carmaker for their technology, or their brand. Multinational carmakers usually are convinced that their own tech, and their own brand are superior, and that everybody else’s is worthless. Real value usually is attached to the most powerful ingredient in the auto business, and that is scale. If you can buy volume for cheap, and if you can spread your superior tech across the enlarged volume, then this can translate into real money, and it would be worth … how much?

Valuations of recent auto industry acquisitions
Company bought of  for billion in Units p.a.  Price/unit
Geely 100% Volvo $1.50 2010 312,100 $4,806
Dongfeng 14% PSA $2.05 2014 2,833,781 $5,167
Fiat 100% Chrysler $10.40 2010 2,371,427 $4,386
Aabar 9% Daimler $2.63 2009 1,447,953 $20,201

 

Looking at a few recent big transactions, counter-parties seem to be willing to pay around $5,000 per car sold in that year. Yes, you did read right. Five thousand dollars per car. Volvo went for $1.5 billion, divided by 312,000 units, around $4,800 per unit. Dongfeng effectively paid $5,100 per unit when it acquired a 14% share of Peugeot. Fiat paid around $4,400 for each unit of Chrysler, including the pension obligation. Car companies have changed hands for less. When Skoda was bought by Volkswagen, the price was around $850 per unit and year.

You’ll probably protest now, saying that these were all down and out companies, which can’t hold a candle to Tesla. Well, as I said, the down and out companies usually are the ones that get bought and sold, but alright, let’s use one of the fanciest automakers on earth, Daimler. Abu Dhabi paid around $2.6 billion for a 9 percent share. That comes out to $20,000 for each one of the 1.44 million units Daimler sold in that year. This would value the oldest and most revered car brand in the world at $29 billion, including management, plants and fixtures.

The Saudi deal valued Daimler at $29 billion

The Saudi deal valued Daimler at $29 billion

By now, it should be amply established that the bandied about valuations of Tesla are at best symptoms of clinical delusions.  So, how much really?

Using the more than generous Daimler valuation, Tesla would be worth $700 million today. Alright, round number, $1 billion, including Elon Musk, and at least 3 glowing tweets per day, weekends free.

Have we got a deal?

But then, Tesla is no Daimler. Be it as it may, no carmaker will buy Tesla for $25 billion. If Tesla would make headphones or message apps, on the other hand …