Nec Electronics - Nece

Valuing NECE during 2005 and early 2006,the Perry team developed a set of assumptions used to value NECE. They used an approach that employed EBITDA multiples for each segment.Sales forecasts for each of NECE's divisions are given in Exhibit7. For the MCU business,the Perry team thought that NECE would be able to match the EBIT margins of comparable firms listed in Exhibit 8.Total depreciation costs were expected to remain around 83 billion yen for the next few years,and 15% of these costs were attributable to the MCU business and about 45% to the communications division.Although trading EBITDA multiples for comparable MCU firms were more than 10,the Perry tea believed using 9 times EBITDA would provide a more conservative estimate of value in this sector.The outlook for the communications business was not favorable,and EBIT margins for this division could be negative EBITDA multiples for comparable firms averaged 4.9,but the high future capital expenditure needs made exiting this line of business an attractive option.Perry analysts thought that it would be possible to exit the Communications business entirely at a cost not more than 100 billion.The cost would be lower if the business could be sold to a global player with access to overseas customers.

For the remaining business(Consumer,Computing,and Discrete),Perry thought that NECE might be able to achieve EBIT margins of 5% going forward,somewhat less than its competitors(see Exhibit 8),and that this division would be valued at 7 times EBITDA.

In considering the value of NECE,several other rough assumptions seemed reasonable.Many believed that the capital expenditure of NECE would be roughly equal to depreciation in each segment.About 20% of the R&D expenditures were believed to be associated with the MCU segment and 30% with th Communications segment.