Nec Electronics

1098 Words Nov 30th, 2012 5 Pages
In the short-run a market may underprice or overprice a company’s value due to asymmetric information. Therefore, a company derives its fundamental value not from the market value of its stock but from the cash-flows that its assets generate in the present and future. It is extremely difficult to calculate NECE’s fundamental value using a Discounted Cash Flow method because (a) a discount rate is not available and (b) the free cash flows beyond 2007 are extremely difficult to calculate.
Therefore, we have employed an EBITDA multiple method to calculate the Enterprise Value of NECE. We have calculated an enterprise value of NECE based on FY-2007 income statement to be between 540 billion yen and 720 billion yen. The range allows for
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That’s a 54% undervalued stock price.
There are several factors that have led to the market price of NECE less than its fundamental price.
(1) The fear among investors that NECE might be delisted from Tokyo Stock Exchange due to concentrated ownership. Such fear can drive the stock price lower than its fundamental value.
(2) NECE’s stock Illiquidity in the market because 70% of the shares were held by NEC that wasn’t trading these shares also resulted in stock price decline. Such a situation should drive the stock price up due to less supply but in this case the demand might have been very little and thus illiquidity caused stock price drop.
(3) Failed merger talks are not necessarily bad news, but in this case bad news in the form of failed merger talks between NECE and Toshiba and failed acquisition intentions by Blackstone perhaps resulted in the stock price decline.
(4) Another factor is the fact that NECE was a subsidiary instead of an independent entity. This led to value destruction of NECE because it was mismanaged by NEC and NECE management.
(5) Corporate governance in Japan is different than in the US. Senior management team doesn’t like shareholder’s activism and doesn’t take the advice of its shareholders, especially minor shareholders, very well since management’s focus is on increasing stake-holder value rather than share-holder value.
(6) Communication segment of NECE was a drag on the NECE company that resulted in

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