BUS539 Azusa Pacific Ferrari Financial Implications Case Study Paper The purpose of the capstone assignment is to demonstrate your ability to solve quantit

BUS539 Azusa Pacific Ferrari Financial Implications Case Study Paper The purpose of the capstone assignment is to demonstrate your ability to solve quantitative and qualitative research in business finance. You will demonstrate the ability as you examine the initial public offering pricing decision for the legendary Italian sports car company Ferrari by Fiat Chrysler management. The students will provide an understanding of corporate valuation and using discounted cash flow and peer-company market multiples of a company that exists in two sectors the automotive and luxury goods. The case study can be found under required texts and resources in the course syllabus. A supplementary spreadsheet to accompany this case is attached.

Your assignment should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to the Academic Integrity Policy.

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Write a five to seven page APA report, not including title and reference pages answering the questions below. Do not just answer the questions, but use the questions to formulate your report. Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to University’s Academic Integrity Policy.

Questions to be answered in your report:

Write a research report that outlines the topics –

What are the financial implications of Ferrari’s current strategy?
Do you agree with the financial forecast in Exhibit 8? If so, why? If not, what specific concerns do you have?
What do you think Ferrari is worth in Euros? Justify your recommendation based on current market multiples valuation and a DCF valuation.
In preparation for Ferrari’s listing on the New York Stock Exchange, at what price in U.S. dollars would you recommend that Ferrari shares be sold?
Identify and integrate biblical principles into the decision-making process that is appropriate and insightful.

Requirements of the assignment:

All papers must follow all APA requirements including an abstract. (10% deduction if not)
All papers must have a reference page. The textbook is an acceptable source.

Body of the paper 6 – 10 pages, no more or less.

Title page, abstract, and reference pages are required. However, they do not count towards any page count.
Writing should reflect an understanding of the chapter’s basic concepts, thorough research, and logic and critical thinking skills.
The introduction is attention getting with sufficient background information to establish the topic and a clear thesis statement.
The conclusion summarizes the main points and leaves the reader with a strong comprehension of the paper’s significance and the author’s understanding.
Grammatically correct – No spelling, grammar, or mechanics errors.
Do not use the first person. (10% deduction if used) UV7259
Rev. Apr. 14, 2017
Ferrari: The 2015 Initial Public Offering
The Ferrari is a dream—people dream of owning this special vehicle, and for most people it will remain a
dream apart from those lucky few.
-Enzo Ferrari,
Founder, Ferrari
It was October 20, 2015, the day before what was anticipated to be the first day of public trading for the
stock of legendary Italian sports car company Ferrari NV (Ferrari). Sergio Marchionne, chairman of Ferrari and
CEO of its parent company, Fiat Chrysler Automobiles NV (FCA), had announced a year previously that FCA
would be spinning off Ferrari into a separately traded company. As an independent company, the shares of
Ferrari (under the aptly named ticker symbol RACE) would be listed on the New York Stock Exchange
(NYSE), with an eventual listing in Milan. Marchionne’s plan was to sell 10% of Ferrari’s shares in an initial
public offering (IPO), and the money raised in the offering would go to FCA.
The worth of the Ferrari shares had been the subject of fierce debate among analysts and investors,
especially after FCA set an initial price range of USD48 to USD52 per share in early October.1 Following the
road-show meetings with potential investors in both Europe and the United States, Marchionne knew there
was strong demand for the 17.175 million shares that would be offered for sale in the IPO. If the offer price
was set too low, FCA would leave money on the table, which suggested pricing the deal at the top of the initial
range or beyond. However, if the offer price was set too high, poor first-day trading returns would sour the
investor’s initial experience with the company. It was time now for Marchionne—in negotiation with lead bank
UBS—to set the price at which the company’s IPO shares would be offered to investors that evening.
Ferrari—A Background2
The history of Ferrari, the business, was inextricably linked to Ferrari, the man. Enzo Ferrari, born to a
lower-middle-class family in Modena, Italy, in 1898, felt a powerful draw to racing from a young age. He moved
to Turin to work for Fiat after the First World War only to have his application hurtfully rejected. He eventually
landed an assistant job at a new automobile manufacturer nearby, and it was there that he competed in his first
race in 1919. Despite his passion for racing, he was not immediately successful; he finished fourth. Enzo Ferrari
USD = U.S. dollars, EUR= euros.
The background on Ferrari is partially drawn from Drew D. Johnson, ed., International Directory of Company Histories: Volume 146 (Detroit: St James
Press, 2013). Thomas Derdak, “Ferrari S.p.A,” pp 140–146.
This case was prepared by Michael J. Schill, Professor of Business Administration, and Jenny Craddock, Senior Case Writer. It was written as a basis for
class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ? 2017 by the University of Virginia
Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of the Darden School Foundation.
This document is authorized for use only by Amanda McCausland (amanda_mccausland@yahoo.com). Copying or posting is an infringement of copyright. Please contact
customerservice@harvardbusiness.org or 800-988-0886 for additional copies.
Page 2
joined the team of racecar maker Alfa Romeo as a test driver, and his role soon grew to include racing Alfa
Romeos on behalf of the company and selling cars to wealthy clients around northern Italy. Over the years, he
raced his way to multiple victories and built a large dealership from which he sold and serviced Alfa cars. In the
late 1920s, Alfa Romeo encountered financial difficulties and shut down its involvement in the racing circuit.
Unable to be around cars and not race them, Enzo Ferrari founded his own racing scuderia (“stable” or
“team”) in 1929—Scuderia Ferrari. Over the ensuing years he continued to run both his dealership and Scuderia
Ferrari (which Alfa Romeo frequently used to represent the company at races). Alfa Romeo eventually bought
80% of Scuderia Ferrari and returned the management of the racing program to company headquarters.
Following the acquisition, Enzo Ferrari realized that he would never achieve his ambition of running Alfa
Romeo’s racing program and left the company in 1939 after two decades of service. The parting agreement
forbade him from racing or using the name Scuderia Ferrari for the next four years, so he returned to one of
his old scuderia buildings in Modena the next year and established his own manufacturing firm while waiting
out the racing ban.
However, with Italy’s involvement in the Second World War, Mussolini’s fascist government forced Enzo
Ferrari to focus his manufacturing operation on building aircraft engines for the war rather than cars. When
Allied forces bombed the factory, Enzo Ferrari moved his operations from Modena to Maranello. After the
war, Enzo Ferrari debuted his first Ferrari racecar, which quickly won a high-profile race in Turin in front of
Italy’s elite. Before long, members of European society were contacting Ferrari for cars of their own. The
following year Ferrari’s car designers finished a nonracing road car. During the following decade these
handmade cars, produced in batches of 10, became the prize of every car enthusiast in Europe and North
America, with a client list including kings, princes, and members of America’s wealthiest families.
Despite his commercial business success, Enzo Ferrari’s single focus continued to be racing. Throughout
the 1950s and 1960s, he used the profits from his sports car sales to fund competition in Grand Prix and
Formula 1 races. Enzo Ferrari was so present on the racing circuit that he became Italy’s national symbol of
motor racing. His negligence toward road car production (and the ensuing design and production flaws) became
evident, and Ferrari sales declined throughout the 1960s.
Refusing to cut costs and miss races, Enzo Ferrari sought external funds to keep the company afloat. He
went to Fiat for help, an ironic turn following his longtime disdain for Fiat. In 1969, Fiat purchased 50% of
Ferrari shares and took control of all road car production. Ferrari retained ownership in the remaining 50%
and continued to manage the racing operation. Fiat’s efforts to modernize the factory and update the
manufacturing process paid off, and by 1980, annual road car production reached 2,000, more than double
what it had been prior to Fiat’s involvement. At the time of Enzo Ferrari’s death in 1988, Fiat’s stake in Ferrari
was 90%, with the remaining 10% held by the Ferrari family.
Ferrari—The Car Business
After Ferrari’s death, his namesake company entered a period of aimlessness and decline—annual sales
consisted of only 2,000 cars in the early 1990s. In 1992, Fiat hired Luca Cordero di Montezemolo, a marketing
maven who had once worked as both an assistant to Enzo Ferrari and later as the Ferrari team leader, as
chairman of Ferrari. Montezemolo wasted no time in making sweeping changes at the automaker. The product
line grew from two outdated models to nine new ones and a commitment to engineering excellence was
A key aspect of Montezemolo’s quality and branding strategy over the period from 1992 to 2014 involved
holding production volumes below demand in order to instill a perception of exclusivity. In 2014, for example,
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Page 3
Ferrari sold just 7,255 cars compared to the nearly 40,000 cars sold by FCA’s sister company, Maserati.3 The
restricted production created long waiting lists, but customers who were designated as preferred customers due
to their regular purchases were allowed to bypass the waiting list. This policy prompted many buyers to regularly
purchase Ferrari cars just to stay on the preferred customer list. Ferrari also produced limited-edition “halo”
cars that were exclusively sold to a select group of loyal customers. One notable such offering was the roofless
F60 America, which was announced in 2014; only 10 of the USD2.5 million roadsters were produced and all
were sold in advance of the cars’ actual production, with commitments based simply on a full-scale maquette.
The limited production policy ensured high resale value. For example, in August 2014 Bonhams auctioned a
1962 Ferrari GTO for a jaw-dropping USD38 million.4 Montezemolo believed that the waiting list and limitededition model policies promoted the Ferrari brand without jeopardizing customer satisfaction. Ferrari had
recently been named the most powerful brand in the world by Brand Finance, the intangible-asset-valuation
By 2014, Montezemolo’s restricted-volume strategy was creating increased tension with the leadership at
Ferrari’s parent company, FCA. In September, Marchionne, who was business-school educated and had long
pushed Ferrari management to increase volume, asked Montezemolo to leave the company. On his way out,
Montezemolo reportedly said that Ferrari was now American, and that statement wasn’t meant as a
compliment.5 After Montezemolo left, Marchionne stepped in as chairman and immediately pushed for higher
volume—particularly to China and the Middle East. Marchionne indicated that Ferrari shipment volume would
rise to 9,000 units by 2019. He maintained that the volume increase was justified by both “growing demand in
emerging markets” and “demographic changes as the size and spending capacity of target clients.” By
maintaining restricted volumes in Europe and the Americas, Marchionne believed Ferrari could maintain its
levels of perceived exclusivity and preserve the value of brand, even with a higher vehicle output. Exhibit 1
provides Ferrari historical data on shipments by car model.
In 2015, the company had four sports cars and two grand touring cars in production, in addition to a halfdozen limited-edition vehicles (see Exhibit 2 for descriptions of the current product line). Ferrari’s brand
power was such that the average car selling price exceeded USD267,000, and Ferrari was one of the most
profitable companies in the global auto-manufacturing industry, with operating margins far greater than
industry average. Exhibits 3 and 4 provide financial statement information for Ferrari.
In addition to its revenue from car, engine, and parts sales, Ferrari maintained a steady stream of income,
totaling roughly 15% of yearly sales, from its sponsorships and licensing activities, a line of business that was
developed under Montezemolo’s leadership. Not only did Ferrari lend its name to its Formula 1 racing team
and collect on those sponsorship agreements and shared revenues with the Formula 1 World Championship
commercial revenue, but, starting in the mid-1990s, the company also licensed its brand power and iconic
prancing horse logo to a “select number of producers and retailers of luxury and lifestyle goods” ranging from
watches and sportswear to perfume and video games.6 Ferrari launched its first retail store in 2002, and by 2015,
the company sold Ferrari-branded merchandise through 32 franchised or company-owned Ferrari stores and
on its website. In 2010, the first Ferrari theme park, Ferrari World, opened in Abu Dhabi and featured the
world’s fastest roller coaster—Formula Roussa. Ferrari management believed there were ongoing opportunities
to expand the company’s brand presence further “in attractive and growing lifestyle categories…including
sportswear, watches, accessories, consumer electronics and theme parks, which…[would] enhance the brand
experience of…loyal clients and Ferrari enthusiasts.”7
Ward’s Automotive Yearbook (Southfield, MI: Penton Media, 2016).
Mark Ewing, “Ferrari at the Crossroads,” Forbes, December 15, 2014: 106–108.
5 Ewing.
6 Ferrari prospectus.
7 Ferrari prospectus.
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Page 4
The formation of FCA resulted from the merger of Fiat, the leading Italian car manufacturer, which had
been founded in 1899, and Chrysler, the third-largest U.S. auto company, which had been founded in 1925.
The two companies partially merged in 2009, as Fiat hoped to expand its exposure beyond a struggling
European market and Chrysler hoped to use Fiat’s technology to build more fuel-efficient, smaller cars to sell
in North America. Over the next few years, Fiat bought additional stakes in Chrysler before assuming full
ownership in early 2014, in the midst of a highly competitive year for the global automotive sector.
FCA was currently the world’s seventh-largest automaker. With operations in approximately 40 countries,
FCA designed, manufactured, distributed, and sold vehicles for both the mass market (under the Abarth, Alfa
Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, and Ram brands) and the luxury market (under
the Maserati and Ferrari brands). Despite its broad portfolio of vehicles, FCA received disproportionate
benefits from its luxury automotive sector—FCA’s luxury brand division provided 21% of 2014’s EBIT despite
just 5% of revenue. Exhibit 5 provides operating details on FCA’s car portfolio.
Facing a range of competitive and economic threats in 2014, Marchionne announced a five-year business
plan. The plan sought to aggressively reorganize the company over the period from 2014 to 2018 by focusing
on strengthening, differentiating, and globalizing FCA’s portfolio of brands and standardizing production
architecture for multiple brands to increase productivity. Soon after the plan was announced and just weeks
after Montezemolo’s exit, Marchionne announced the intended separation of Ferrari from FCA. The plan
provided that FCA would sell 17.175 million shares in an IPO, with the proceeds going to FCA. Several months
after the IPO, FCA would spin off the 80% of Ferrari stock it held. The spin-off entailed simply distributing
FCA holdings in Ferrari to the existing FCA shareholders as a stock dividend. Following the spin-off, 90% of
Ferrari shares would be publicly traded and the other 10% retained by the Ferrari family. FCA saw the upcoming
Ferrari IPO and spin-off as having several purposes.
1. Generate a large cash payment to FCA through the sale of the IPO shares, while simultaneously
transferring some of FCA’s debt to Ferrari (Ferrari debt was expected to be EUR2.3 billion after the
2. Promote and extend the value of Ferrari’s brand among the world’s premier luxury lifestyle companies.
3. Allow Ferrari direct access to sources of equity and debt capital on favorable terms.
4. Attract American investors by listing on the NYSE—historically one of Ferrari’s most important
product markets.
5. Attract and reward technical and management talent by allowing them to have direct ownership in
6. Unlock “hidden value” that shareholders were not currently attributing to FCA share values under the
consolidated structure. While the entire FCA group (including Ferrari) was trading for a market
capitalization of EUR21 billion, Marchionne believed that both Ferrari and the rest of FCA would
trade for much more than that if the companies traded independently.
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Page 5
The Premium Car Industry
The premium car industry historically included a wide range of entry points. In order to categorize the
industry further, some analysts divided the sector into a normal premium segment and a super luxury segment.8
Normal premium brands included Audi (owned by Volkswagen), Mercedes (owned by Daimler), BMW, and
Japanese luxury brands Lexus and Infiniti. The super luxury brands included lower-volume makers such as
Ferrari, Rolls-Royce (owned by BMW), Porsche, Bentley, and Bugatti (all three owned by Volkswagen), all of
which shared a historic European legacy as a key component of their branding power.
Some argued that Ferrari’s business was closer to such luxury-good firms as Hermès or Prada than that of
car manufacturers. These firms maintained similarly high-margin, low-volume, and low-volatility business
models. While the level of Ferrari’s capital investment was much higher than that required of most luxury goods
firms, Ferrari spent substantially less on advertising and used Formula 1 as its marketing tool. Exhibit 6
provides capital market and financial data for car-related companies and luxury brands.
In 2015, the premium car industry exhibited continued strength in its traditional markets in the developed
world while also enjoying growing demand from China, the world’s single-largest automotive market.9
WardsAuto claimed that the annual growth of units of the Chinese luxury car sales had exceeded 20% over the
past five years and now exceeded 1.5 million units per year.10 While the global car market expanded by 3.5% in
2014, the premium sector enjoyed considerably more gains. For example, in 2014 BMW Group sold over
1.8 million BMW-brand cars and over 4,000 Rolls-Royce–brand cars, up 9.5% and 11.9%, respectively, from
the previous year.
The IPO Process
The process of going public—selling publicly traded equity for the first time—was an arduous undertaking
that, at a minimum, required about three months. (Table 1 provides a timetable for a typical IPO.)
Before initiating the equity-issuance process, private firms needed to fulfill a number of prerequisites:
generate a credible business plan; gather a qualified management team; create an outside board of directors;
prepare audited financial statements, performance measures, and projections; and develop relationships with
investment bankers, lawyers, and accountants. Frequently, firms held “bake-off” meetings to discuss the equityissuance process with various investment banks before selecting a lead underwriter. Important considerations
when choosing an underwriter included the proposed compensation package, track record, analyst research
support, distribution capabilities, and aftermarket market-making support. After the firm satisfied the
prerequisites, the equity-issuance process began with a meeting of all the key participants (management,
underwriters, accountants, and legal counsel for both the underwriters and the issuing firm) to plan the process
and reach agreement on specific terms. Throughout the process, additional meetings could be called to discuss
problems and review progress.
Following the initiation of the equity-issuance process, the company was commonly prohibited from
publishing information outside the prospectus. The company could continue established, normal advertising
activities, but any increased publicity designed to raise awareness of the company’s name, products, or
geographical presence in order to create a favorable attitude toward the company’s securities could be
considered illegal. This requirement was known as the “quiet period.”
Christian Breitsprecher et al., “Premium Car Makers—the Sweetest Piece of the Pie,” Macquarie, January 6, 2014: 42.
Breitsprecher et …
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