In early July 2007, the New York based hedge fund Perry Capital proposed to raise its stake in NEC Electronics Corporation (NECE), the then publicly listed subsidiary of Japanese conglomerate, NEC Corporation, from 4.8 percent to 25 percent. The offering was ¥5,000 a share, at about 60 percent premium. Perry’s investment in NECE traced back to late 2005, the year its first exposure to Asian markets, with the initial investment cost at around ¥3,200 a share. Perry believed the intrinsic value of NECE was to release after restructuring its business strategy, albeit NECE was expected a loss in FY2005. This paper studies the investment of Perry Capital in NECE, and particularly looks at Perry’s consideration to increase its stake…show more content…
Since the exact date of evaluation is not clearly stated in the case, we will first evaluate NECE at 2007 based on the assumptions made and then apply the same methodology to other years. Team Perry used an approach that employed EBITDA multiples for each segment: MCU, CCD and Communications. We use the information from exhibit 7 and exhibit 8 to infer the fundamental value from 2004 to 2007 and future. We then make inference on value of NECE based on 03/2006 and 03/2007 values. Note that information from exhibit 6 and 8 are from 2007.
Fundamental Value of NECE at 03/2007
Assumptions used in valuing MCU division: I. MCU is able to match the average EBIT margins of comparable firms, which is 17.70%. II. 15% of the ¥83 billion depreciation cost is attributed to MCU for the next few years. III. A conservative approach of 9 times EBITDA multiples is used.
Assumptions used in valuing CCD division: I. EBIT margins of the remaining business are 5%. II. 45% of the ¥83 billion depreciation cost is attributed to MCU for the next few years. III. 7 times of the EBITDA multiples is used.
Assumptions used in valuing communications division: I. EBIT margins could be negative. II. To avoid loss, exiting this line is an attractive option. III. Estimated cost of exit at most ¥100 billion.
The fundamental value of NECE on 03/2007 is the summation of each division’s fundamental value: