BYD’s Takeover Target in the EV Industry

1 BYD’s Takeover Target in the EV Industry Introduction The clamour for environmental sustainability has led to innovations aimed at reducing the emission of greenhouse gases into the environment. The motor industry has stayed in the environmental sustainability lane. The leading companies in the manufacture of electric cars are BYD, Tesla, and SAICO. Stage 2 of the assignment undertook the competitor analysis in the electric vehicle industry. It established that BYD electronics have higher prospects of leading the industry due to its large market share and strong financial base. The stage 2 analysis showed that BYD had a higher profit margin than its peers in the industry. The company also showed higher trends in ROE, revenues, D/E, and current ratio than the industry and its competitors in the electric vehicle industry. In addition, BYD's average revenue and asset growth rate were higher than its industry peers. Thus, BYD is undeniably the future leader of the industry and has the potential to acquire another company in the industry to expand its operations and grow its market share.

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In this stage, the analysis will select the company that BYD can acquire in the industry and elaborate on the criteria for selecting the company proposed for takeover. The analysis will also evaluate the takeover and compute the price of the takeover. The evaluation will take into consideration the financial ratios of the company, the market capitalization of the company, and the financial statements of the company. Also, the analysis will consider reports that are in the public domain and which may offer more information about the company's current status and public perception of the company.

The Selection Criteria To effectively select a company that is suitable for acquisition by BYD, the analysis will assess the market served currently by the company, the reputation of the brand, the revenue streams of the company, the cost of capital of the company, The current market that is being served by the company to be acquired is also a crucial criterion in that the market determines the value the company will add to BYD. The market served will be compared to the entire market of the region in which it is operating to assess the company's market share. Also, the assessment of the company's market share will determine its competitiveness level in the market in which it is operating. Under the market, an international presence is of great advantage for BYD. An international company has greater prospects for further growth and has experience with new markets. Thus, a suitable company for acquisition by BYD will have to be an international company.

A company with a good brand reputation will enable BYD to expand its market base, hence leading to increased revenues. Also, the company needs to have products that are unique

3 and different from the products of BYD. BYD already produces electric vehicles. So, a suitable company for BYD to acquire will need to have a unique product that can open BYD to new markets. A good brand will also enable BYD to sell its electric vehicles through the company. Of course, the company should be producing electric vehicles as part of the products the company offers in the market. As such, BYD will not have to start afresh to establish the technology and workforce needed to manufacture electric vehicles. Thus, the company will have to be active in the motor industry because BYD will use the company to manufacture its electric vehicles in new markets.

The other criterion is that the company must be good at exploiting new technologies in producing its goods and services. The application of technology will be assessed by examining the amount of money the company uses on research and development. The company should have an innovative culture similar to the innovative culture at BYD. The similarity in culture will enable BYD to quickly penetrate the acquired company's products into the new markets resulting from the acquisition. Also, the company to be acquired will have to be located in a new market area so that BYD will enhance the supply chain of its products from China to the region where the company is positioned.

Incidentally, the company to be acquired should have good financial records. The company will be evaluated in terms of revenues, financial ratios, assets, and the amount of debt.

A valuable company will have consistent revenues from definite sources. For instance, if the company is known to manufacture and sell vehicles, the sales should be consistent and clearly shown on the historical income statements. Also, good financial records will show that the company has efficient management that ensures productivity. In retrospect, high and consistent income indicates that a company has an efficient workforce that understands their roles in the

4 company very well and who will create value for BYD. As such, financial performance will be examined closely because it is a critical criterion for selecting a suitable company for acquisition

by BYD. Valuation of Ford Motors Financial Ratios The financial ratios of Ford Motors will be categorized into profitability ratios, liquidity ratios, efficiency ratios, and leverage ratios. Profitability ratios assess the company's propensity to make profits. The analysis's profitability ratios will include the profit margin and the return on equity. Profit margin shows the number of cents per dollar Ford Motors generates as profit for investors. The following table summarizes the profit margin of Ford Motors.

Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201 8

Profit Margin -1.25% 13.15% -1.01% 0.03% 2.29%

Figure 1: Ford Profit Margin The profit margin of Ford Motors constantly decreased from 2018 to 2020 when it went up to -1.01%, then increased tremendously in 2021 to 13.15% in 2021. The company's net profit margin then reduced constantly too -1.25%. According to Boudette (2023), Ford lost $2.2 billion in 2022 because it devalued its two huge investments. Also, the reporter reported that the company struggled with high production and supply chain costs. Figure 2 below shows the graph of the profit margin of the company.

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Profit Margin 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00%

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

On the other hand, return on equity is the income generated from every dollar invested in Ford Motors. The trend of ROE for Ford Motors is similar to its net profit. The company's return on equity reduced constantly from 2018 to 2020, when it hit the minimum point. Between 2020 and 2021, the company's ROE increased to the highest value of 36.83%, and then it fell to 4.98% in 2022. The fall in ROE is given the same reason as the fall in net profit because the ROE is a function of net profit. Figure 3 and figure 4 summarize the information on ROE. Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201 8

ROE -4.98% 36.83% -4.14% 0.25%

Figure 3: Ford ROE

10.27%

ROE 40.00% 30.00% 20.00% 10.00% 0.00% -10.00%

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

6 Figure 4: Graph of Ford ROE Liquidity ratios show if the company can repay its financial obligations. The ratios that the analysis will utilize are the current ratio and cash ratio. The current ratio of Ford assesses the company’s ability to repay its short-term debts using its current assets. Figures 5 and 6 below summarize Ford’s current ratio for five years.

Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201 8

Current Ratio 0.85 0.91 0.95 0.9 0.82

Figure 5: Ford Current Ratio

Current Ratio 1 0.95 0.9 0.85 0.8 0.75

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 6: Graph of Ford’s current ratio The company’s cash ratio assesses whether the available cash is enough to settle the company's current liabilities. FFord’s cash ratio increased consistently from 2018 to 2020, then reduced to 0.85 in 2022. Generally, the company's cash ratio remained high throughout the period under consideration. Figures 7 and 8 summarize the cash ratio of the company.

Year 12/31/202 2 12/31/202

Cash Ratio 0.85 0.91

7 1 12/31/202 0 12/31/201 9 12/31/201 8

0.95 0.9 0.82

Figure 7: Cash ratio of Ford 1

Cash Ratio

0.95 0.9 0.85 0.8 0.75

1/1/2018 1/1/2019 1/1/2020 1/1/2021 1/1/2022

Figure 8: Graph of Ford’s cash ratio The efficiency ratios the analysis will consider are inventory turnover and days sales in receivables. Inventory turnover is an important ratio because it shows if the company uses the assets at its disposal to make sales. Ford's inventory turnover remained almost constant, slightly varying between 2018 and 2022. The high inventory turnover implies that the company utilizes its assets to make sales. Figure 9 and 10 below summarizes the company's inventory turnover.

Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201 8

Inventory Turnover 9.54 9.5 10.43 12.48 12.14

Figure 9: Ford Inventory Turnover

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14 12 10 8 6 4 2 0

Inventory Turnover

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 10: Graph of inventory turnover

Inventory Turnover 14 12 10 8 6 4 2 0

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 10: Graph of Ford Inventory Turnover Ford’s days sales in receivables increased consistently from 2018 to 2022, indicating that the company’s propensity to collect debts from debtors has increased consistently. Figures 11 and 12 summarize the company’s days sales in receivables.

Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201 8

Days Sales in Receivables 36.32 30.43 28.68 21.62 25.48

Figure 11: Ford’s days sales in receivables

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Days Sales in Receivables 40 30 20 10 0

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 11: Graph of Ford’s days sales in receivables

Days Sales in Receivables 40 30 20 10 0

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 12: Graph of days sales in receivables of Ford Incidentally, the leverage ratio the analysis will consider is the debt–to–equity ratio. The ratio shows the extent to which the company is geared. Ford’s debt-to-equity ratio increased from 2018 to 2020 and decreased between 2020 and 2022, indicating that the company reduced its financing through debt and shifted to equity financing. Figures 13 and 14 summarize Ford’s debt-to-equity ratio.

Year 12/31/202 2 12/31/202 1 12/31/202 0 12/31/201 9 12/31/201

Debt-Equity Ratio 3.2 2.8 5.2 4.6 4.2

10 8

Figure 13: Ford’s debt-to-equity ratio

Debt-Equity Ratio 6 5 4 3 2 1 0

1/1/2018

1/1/2019

1/1/2020

1/1/2021

1/1/2022

Figure 14: Graph of Ford’s debt-to-equity ratio The value of Ford Motors According to Yahoo Finance (2023), the share of Ford is trading at $12. The common stock outstanding for the company is 4139 million. Therefore, the market capitalization of the company is $49.751 billion. However, the valuation will use the enterprise value approach to determine the value of the company because the enterprise value approach takes into account the cash and debt of the company. Thus, the value of the company is $146.155 billion. This is the value BYD will pay to acquire Ford Motors. The valuation is summarized in the following figure.

11 Figure 15: EV Value of Ford Motors The growth in revenue and assets will greatly benefit BYD in enhancing its operations and penetrating new markets. The company has a positive average growth in revenues and assets.

The table below summarizes the revenue and asset average growth rate.

Year 12/31/202 2 12/31/202 1

Revenues

12/31/202 0 12/31/201 9 12/31/201 8 Growth Rate

158057 136341 127144 155900 160338

Growth 15.9277 1 7.23353 18.4451 6 2.76790 3 0.48704 5

Assets

Growth 255884

-0.447798938

257035

-3.826222307

267261

3.374371947

258537

8.651360994

237951

Figure 16: Ford’s revenue and asset average growth rate

1.937927924

Also, the company’s weighted average cost of capital is 7%, which is affordable for BYD. Final Discussion and Conclusion The study was centred on identifying a company that BYD will acquire to underpin its leadership in the electric vehicle industry. The findings indicate that Ford Motors is a strategic company that BYD will acquire and gain market traction and growth. The company's financial ratios indicate that it is profitable, liquid, efficient, and well managed its debt. The company also has an enterprise value of $146.155 billion. Also, the company’s revenue and asset growth are positive. Incidentally, the company has a weighted average cost of capital of 7%.

The findings mean that Ford is a good company to acquire for BYD. The financial ratios indicate that the company is in financial health. Also, an enterprise value of $146.155 indicates

12 that the company is highly valuable. The weighted average cost of capital of 7% indicates that the company has a good credit history. The positive revenue and asset growth indicate the company's operations are efficient. These findings are crucial to the study because they show that Ford Motors is a valuable company.

Balawardhana (2020) researched Ford Motors and found similar results to the results arrived at by this study. Balawardhana (2020) discovered that Ford's electric vehicles are giving the company a great boost in market expansion and revenues. In 2020, Balawardhana (2020) valued the company at $33.46 billion, and this study valued the company at $49.751 billion, indicating that the company's value has increased.

The study's main limitation is that it used accounting figures availed by the company.

Therefore, the study assumes that the financial statements available to the public are well-audited and reflect the truth about the company's financial position. Also, the study only exhausted some of the valuation criteria. Thus, the study suggests further study on the company, including an intensive study of the company's dividends, stock history, and financial statements.

The information is crucial in deciding whether to acquire a company or not. When evaluating a company for acquisition, it is crucial to consider financial ratios, historical revenues, and the company's assets. It is also crucial to consider how the company's financing is structured.

Incidentally, using the enterprise value approach to value a company is crucial because it considers the company’s debt and cash.

Reflection The assignment taught me how to research a company for acquisition. Also, the study enlightened me on how to undertake company valuation, including ratio analysis, financial

13 statement analysis, and calculating enterprise value. Incidentally, the assignment taught me how to report valuation results.

References Balawardhana, M. (2020). Marketing and Digital Future - Ford Motor Company. Marketing and Digital Future with Ford Motor Company, https://www.researchgate.net/publication/345228131_Marketing_and_Digital_Future__Ford_Motor_Company.

14 Boudette, N. (2022, February 2). Ford Lost $2 Billion in 2022 as Some Investments Soured.

Retrieved from New York Times: https://www.nytimes.com/2023/02/02/business/fordearnings-fourth-quarter-2022.html Yahoo Finance. (2023). Ford Motor Company (F). Retrieved from Yahoo Finance: https://finance.yahoo.com/quote/F/financials?p=F