manager magazin: Mr. Kames, Volkswagen sells around 10 million cars, generated around 10 billion euros in profit in 2020 despite the corona pandemic and is valued at 92 billion euros on the stock exchange. The Chinese electric competitor Nio sells 44,000 cars, was on the verge of financial failure two years ago – and is worth 64 billion euros. Has the financial market gone crazy with its valuations?
Christian Kames: In fact, Nio is one of the ten most valuable car companies in the world and is currently worth more than BMW and almost as much as Daimler.
What’s going on there? Are some underrated or the other overrated?
Both. The traditional car manufacturers invest in electromobility and software, they are more solid than many of the newcomers; but investors have hardly noticed it so far. The capital market is currently hungry for anything that looks like disruptive technology.
Especially in the automotive sector …
… there alone, almost $ 50 billion in stock market capital flowed into new companies that stand for industrial transformation in the past year. These bets on the future then lead to the high ratings of Tesla, Nio or Xpeng, for example.
Tesla is now almost one of the established manufacturers, Nio and also the Chinese electric rival Xpeng have at least got off to a good start. Other newcomers, on the other hand, have been selling hope so far. Aren’t these bets too risky for investors?
You are risky, yes. But is that why they are too risky? Risk financing is currently being moved to the stock exchange. What used to be venture capital is now flowing into Spacs …
… listed envelopes in which companies are then packed that would otherwise not make it onto the stock exchange …
… You mustn’t generalize that. As a venture capitalist, you know that not every investment will work by a long way. This is also the case with these Spac models. Quite a few of these start-ups will fail; maybe nine out of ten will have trouble. But one of them can do it; and being listed on the stock exchange gives him the chance to raise capital later.
But why does it have to be this strange way over a spac?
Because for many it is currently the fastest and most attractive way to get money and go public. For example, $ 24 billion starting valuation is certainly not bad for a company like the Californian electric car startup Lucid that has not yet sold anything. That opens up completely new possibilities.
The hype surrounding the Spacs – around 300 of these vehicles are now listed on the stock exchange worldwide – is somewhat reminiscent of the hysteria surrounding the Neuer Markt 20 years ago. When does the bladder run out of air this time?
Ask me again in a year. In Germany, for example, the Spacs have only just arrived. In Germany, we like to focus on the risks first – and see the opportunities later. Even if the bubble loses air again and even if some of the billions in valuations evaporate again: after a Spac transaction, companies are in a position to make massive investments for the first time. And they are becoming much more serious competitors for traditional providers – especially in the auto business – than would be possible without these investments.
In our cover story “Mission Tech” about Volkswagen we describe how what is perhaps the most traditional of all automakers wants to transform itself into an electric mobility and software company. Does the financial market underestimate the innovative strength of companies like VW or BMW?
Indeed, this power is underestimated. But most companies still do too little to ensure that their strength and hidden values are perceived. Sometimes more transparency and external capital help. General Motors, for example, has taken an interesting path with its participation in Cruise, which is a specialist in autonomous driving.
GM has not earned anything with it.
But the market value has already risen significantly. When you invest in autonomous driving, you don’t even know for sure whether you will get a valid result in the end. But GM brought external partners into the project, and they helped finance the billions in investments. Softbank, Honda and, most recently, software giant Microsoft have increased the credibility of Cruise through their investments, and a start-up with negative cash flow is now worth 30 billion dollars – significantly more than some of GM’s established brands.
Where should the German manufacturers look for partners?
There are enough possibilities. Many of them still do not want to involve external partners in future issues. But even large companies can hardly finance every new technical development themselves. And given the current valuations and the enormous willingness to invest on the capital market, you should start thinking. This applies to both manufacturers and suppliers. First of all, they would have to create the units in which partners can participate.
Some of the corresponding units already exist. Volkswagen, for example, is together with Ford an Argo involved, a company similar to Cruise. The software subsidiary CarSoftware Org could perhaps also be upgraded with the help of external partners. But are these subsidiaries or holdings far enough for such a step?
That is the wrong logic. The partners’ money and know-how accelerate development, the capital market sees it, and suddenly the value of the entire company increases. It’s a classic win-win situation.
And why do all the German board members overlook these clear advantages?
Perhaps a certain reluctance towards such transactions plays a role, perhaps the fear that the high valuations will turn out to be a bubble at some point. But in view of these conditions on the capital market, a large corporation should seriously ask itself whether it has to finance the high investments in the transformation on its own. Or whether he would not prefer to get partners and thus also increase the market value. Siemens has shown the way with Siemens Energy and Healthineers.
The spin-offs of the energy and health divisions were not entirely undisputed.
But successful. The Siemens Energy spin-off has significantly increased the value of the remaining Siemens AG. And Healthineers is rated significantly higher than its parent company Siemens AG because of its focus on health technology in relation to profit. Only then can the subsidiary Healthineers play a serious role in the consolidation of the industry, which is also shown by the takeover of Varian in the USA for 16 billion dollars.
Your conclusion from this would be that a company like Volkswagen can become a software company through takeovers and / or mergers?
If it takes too long to build organically, takeovers can become part of the strategy; this applies to the auto industry as well as to other industries. And for that I need a listed acquisition platform. The French electronics company Schneider Electric did it with its daughter Aveva. And they have done very well with it so far.
The spin-off from Siemens Energy has already found an imitator. Daimler boss Ola Källenius divides the company and distributes the shares of the truck subsidiary to the Daimler owners with the exception of a remaining minority stake? He could have sold the shares in Daimler Truck on the stock exchange. Why is he giving up the cash?
The shareholders currently own Mercedes-Benz cars and trucks via Daimler AG; so they own the shares in both parts of the company. That is the pure teaching.
As Daimler owners, they would also benefit from the income from a sale. The company could invest the money, which would make it more valuable in the long term.
Admittedly, there are always debates about this. But if the car share and the truck share are ultimately worth more than the share of the combined Daimler AG, and this is almost always the case, then that’s good for the time being.
The new companies do not get any additional money for investments for the time being.
You can get that later; for example, when Daimler AG sells its announced minority stake in the truck subsidiary. And the spin-off has another positive effect. The previous holding company will be charged a conglomerate discount on the stock exchange. It only disappears if the split-off society is truly independent; and you get them much faster with a spin-off.
Mr Kames, what does that mean, taken together, for investors? Stay away from the Spacs? The risk is too high, don’t you prefer to concentrate on real values like Volkswagen, Daimler or BMW?
No, that would be too easy. The Spacs are just a different kind of investment. You are riskier. If you have decided to invest in venture capital so far, you will usually only take a small part of the money – and put the rest on traditional investments. It should be the same here. Spacs and the companies listed therein are high-risk investments. Institutional investors see it that way too.
Are Spacs not for retail investors?
The same applies: you shouldn’t put everything on one card when it comes to your investments.