Rod corporate valuation

Sizeable corporations with a large share of the markets they operate in or that are a part of major conglomerates involve multiple stakeholders and possess unique strategic value beyond basic financial performance
To value these unique strategic capabilities of such corporates, we apply a premium to market valuations or discount future cash flows showcasing the future benefits of such strategic value add.


Take ARM Holdings, uniquely positioned in the global semiconductor industry as the innovation leader designer of semiconductor processing units used in electronic devices 90% of smartphones, including both Apple and Android, use ARM designed products. With exponentially growing consumer electronics like wearables, home electronics and upcoming internet of things devices, ARM is positioned to grow exponentially. 

Softbank a Japanese telecom to a digital media conglomerate, acquired ARM for a record 31.4 billion dollars. Valuing arm at 20 times revenue and 37.4 times EBITDA!

Whereas the average valuation in the semiconductor industry was 16.8 times EBITDA!

This may seem steep, but ARMs positioning as the innovation and market share leader – targeting all upcoming segments of the internet of things market, assures that it will experience exponential growth for the foreseeable future

Assuming ARM maintains its market share of 35%, it will grow at a breakneck pace.

We value ARM basis the free cash flow to the equity method. With ARM’s business of research and development, we can assume no changes in working capital, negligible capital expenditure and a debt-free business. Hence the operating cash or profit is the free cash generated by ARM

Operating cash staying consistent as a % of revenues, we project future cash flows for the next 5 year period.
For post 5 year period we use a concept called terminal value where we essentially value the business at the end of five years when it has reached steady growth
The cost of equity capital is the minimum return expected by equity investors and taking this as 8% for a developed market.

Future growth of 5% is the rate at which ARM will grow after 5 years.
We discount the free cash flows by the cost of capital to derive the net present value of 30.5 billion dollars and also matching with the enterprise value.


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