A very personal “Thank you”

Yesterday at work, when I was writing a post in an internal community and started to type the last name of the addressed person, the system made a suggestion with a very famous name of of an ex-racing driver. For a second I caught myself thinking that one day Mark Webber will probably have a corporate email address and a department code, PAG for Porsche and ELR for their racing department (if I’m not mistaken).

Today Porsche announced that Mark will retire from racing at the end of the season. Crying smileys were quite literal, and I can now make a good use of the half full (or half empty) bottle of good German white wine. It’s an end of an era in racing, yes, but it makes me incredibly sad on a very personal level.

Actually, in a weird way I have Mark to thank for my current job. Back in 2014 I sent an application for an internship to a car company. I had finance as major in my business studies, and a car company was never going to be a natural addressee for me. I gave it a go an a couple of weeks later I found myself at an interview with their Strategy department. It went okay-ish, but the fact that I had no clue about the automotive industry was quite apparent, which the manager sort of highlighted and said that they needed someone with passion for the industry. I said something like “Well I won’t claim that I know every single model of your company, but congratulations on the podium in Saõ-Paulo this weekend, it was great to see A. on the podium in his last race.” Then the manager asked me, whether I believed it would make strategically sense for the brand to enter F1, and this question more or less saved my arse, since I knew the facts about the workings of FIA- FOM and the teams, some figures about Mercedes investments in the whole topic, and could build a nice argument, why it would be a rubbish idea. A week later they called me and said I had the placement. Half a year later they recommended me to another department. On October, 1st I celebrated my first year at the company, a week later I was at my first meeting with two members of the board.

The thing is, that race I mentioned was a pure horror. That first Porsche win in WEC has cost me more nerve cells than all the racing altogether. I remember crying till morning, and feeling terrified out of my mind. The 6h of Saõ-Paulo 2014 was one of the worst and the best races I have ever watched. Thank you, Mark for that wave from the stretcher, it got my heart going again.

I still remember Spa 2014, Mark’s second race for Porsche. I was so bloody happy to get Mark’s autograph. It was a black an white picture of Mark leaving, with his yellow-blue-Aussie-flag coloured helmet in his hand, now one of my best friends has the original and I have four more autographs on the pictures and a flag spread around my room.

I have seen Mark win, twice. I have spent hours watching his 919 Porsche in the garage with issues. I got a high-five from him after his win at the Nürburgring in 2016 and an air-kiss at Le Mans when it was raining like crazy and me and my friend were waving – well attempting to wave – 1×1,5 m flags at the scrutineering at Place de la Republique in Le Mans. Thank you, Mark, for that. It meant a lot.

Mark is an incredible character – inspiring, honest, strong. The racing world will miss him. I personally will miss him in racing, and will stay infinitely grateful for what he did – unknowingly – for me personally.

Thank you, Mark. Thank you so much.

The bottle of sweet wine from Rhein-Hessen is almost empty, and I am really in need of something to fill the emptiness in my heart left with Mark’s retirement from racing.

A small follow up to the fury post about the “biography”

The previous post of fury has lead to a conversation with the author of the book in question. This conversation has actually answered a lot of ifs as well and some whys.

Well, you might imagine that I have to fight hard not to add a sarcastic comment here and there. What is actually funny, though, Ms Sturm didn’t comment on some factual faults, I have pointed out 😉

A book for people banned on the Internet

When I had heard of Sebastian Vettel’s biography written by Karin Sturm, I thought I should get it. I even asked Ms Sturm on twitter whether it was the Tom Bower “skeletons in the closet” style or the Wikipedia style. She said it was neither. Well so far the book has a bit more interview quotes than the Wikipedia article, but other than that it’s Wiki.

One thing upfront, I haven’t finished the book, and I doubt I ever will, so my only hope is that somewhere in there it gets better. What I have read so far is more than disappointing it’s disgusting.

The fact that it’s Wiki,would be just disappointing, and I would just lay the book away and go reread something exiting like Tom Bower’s book, which is at least entertaining, or something with a claim to be true like the Autobiography of David Coulthard (even if you couldn’t care less about DC it is worth reading). Ms Sturm’s book takes the disappointment to the whole new level:

Zu Saisonbeginn [2009] hatte der Australier mit Sicherheit noch mit den Folgen seines Fahrradunfalls zu kämpfen, der ihn ja auch schon große Teile des Wintertestprogramms gekostet hatte. Im November war Webber in seiner Heimat, bei einem von ihm selbst veranstalteten Charity-Event, auf dem Rennrad von einem Auto angefahren worden und hatte sich nicht unkomplizierte Beinbrüche und auch einen Bruch in der Schulter zugezogen – Letzteres verschwieg er damals sogar seinem Team.

– Karin Sturm, p. 193

At the beginning of the season [2009] the Australian certainly had to cope with the consequences of his Bike accident, which had already cost him major parts of the winter testing programm. In November in the charity event he organised in his home country, Webber was riding a bike and got hit by a car and sustained not uncomplicated leg fractures and a broken shoulder – he has concealed the latter even from the team. 

The first point about missing the winter testing program may be partially true, but it is still worth mentioning that he was there when they launched the RB5 in Jerez in February (see e.g. Mark Webber, 2010 – A Season to Remember p. 9ff). The part about the broken shoulder is from a completely different chapter. Mark did suffer a broken shoulder and did conceal it from the team. Only it happened in October 2010, and not in November 2008, in a completely different accident (see Mark Webber, 2010 – A Season to Remember p. 176, The Telegraph). Ms Sturm’s book is not about Mark, obviously, but I am not sure that factual mistakes about googlable information should make it into a book.

This is the disappointing part. Another disappointment is the way the opinions are presented in a manner of the ultimate truth. It is clear that the paddock press takes sides, and one must be delusional to think that any of it as the whole truth. The whole Vettel-Webber saga, seems to be mostly the doing of the press rather than the drivers themselves. And Ms Sturm clearly follows the party line adopted by the German media: Seb is the saint, Mark is the villain. She clearly adores Sebastian in every way, but I am not sure she has any factual prove to the things she claims to be true. According to her, after the infamous Korean accident, Mark personally sent the troops of the British press into a crusade against Sebastian. Just a quote:

Mithilfe seiner [Webbers] guten Beziehungen zu den Britischen Medien stichelt er dann hintenrum doch gewaltig weiter.

– Karin Sturm, p.251

Using his good relationship with the British Press he keeps on taunting from the back. 

It is just to illustrate the tone Ms Sturm’s choses to write about Mark Webber, the guy is a pure evil, as are apparently “his people”. This is what Ms Sturm writes about the aftermath of the Brazilian Gran Prix 2010, when Red Bull won the WCC:

[…] sitzt im Fahrerlager jemand einsam und missmutig vor dem Red-Bull-Häuschen: Ann Neal, die Lebensgefährtin von Mark Webber. Vielsagend für die Stimmung – während  Vettel mit seinem Sieg und seiner souveränen Glanzleistung erneut unterschtreicht, wer in dem englisch-österreichischen Team derzeit der Bessere ist, können sich der Australier und seine Leute einfach nicht mit der sportlichen Philosophie von Mateschitz abfinden, eine WM im fairen Fight auf der Strecke und nicht durch Stallorder gewinnen zu wollen.

– Karin Sturm, p.266

[…] in the paddock, someone is sitting alone in front of the Red Bull hospitality: Ann Neal, Mar Webber’s partner. It speaks volumes amout the mood – while Vettel with his win and his solid performance undelines once again, who is the better one in the english-austrina team, the australian and his people cannot accept the sporting philosophy of Dietrich Mateschitz, to win the Championship is a fair fight at the circuit and not through the team orders. 

There might be some people who will find it acceptable, or even good journalism. I don’t. And not because I don’t agree, or I like Mark a lot, or because I suggest she is lying, but because I believe that making statements about people without any actual proof, does not qualify for good journalism.

I probably will not finish this book, my nerve cells are dear to me. This all just reminded me how much the press has hurt the people they write about. I remember a year ago Helmut Marko said something like Vettel is better than Hamilton and Rosberg together. Helmut was soon forgotten, but Sebastian was once again called arrogant. Those weren’t his words, but it was his name they stuck to. It’s sad that there is Sebastian’s name attached to this book. I hope he is a better person than that.

Horner talking, or How to stab people in the back

Don’t go to F1 searching for honour. People do and say horrible things, as if this were the only way. While everyone is busy with Christmas Shopping, Christian Horner is dutifully running the “Red Bull won’t miss Sebastian Vettel” campaign. So why not to give an interview to the BBC.

I don’t think Christian is making things up, but he is clearly very selective with the truth. He forgets to mention mechanical failures that cost Seb the practice sessions and car set ups, he forgets to mention all those times when the team made mistakes in strategy. He also forgets to mention that in Italy Seb was on older tyres, it was a great move, that Daniel pulled off, no question there, but you still need context.

I have always disliked sneaks. If you are unhappy with someone’s behaviour or attitude you go and talk to the man himself, you don’t go telling the press. Christian, who year after year praised Sebastian’s work ethic has suddenly decided to imply that Sebastian didn’t work hard enough, because he didn’t like the regulations. But stating it as a reason to leave for Ferrari. Well, sorry to disappoint, but Ferrari have the same set of regulations to comply to, so the move doesn’t exactly change anything in this respect.

What appointed me a lot more than selective memory of the Red Bull team principal, was the personal touch to it. “Knowing Sebastian as well as I do” implies good interpersonal relationships of some sort, and odds are there is some trust involved. He says this, and then lists all the things that can potentially undermine Sebastian’s credibility. Horner knows that that crazy unfounded hate did hurt Sebastian a lot more than he showed, and what he did now, was give the bloodthirsty press and couch experts a nice set of sticks to beat Sebastian up. It is disgusting.

Pie in the sky or baking at its finest

Look, I know, I have forgotten about the blog for a while. And I am pretty rubbish at writing regurlary. But I have come across a topic which I can actually say something about.

The lawsuit between Constantin Medien and Bernie and Co in London is a pretty interesting thing to observe. Some people say some things that are pretty fascinating. One of such things that ended up in the press is Donald Mackenzie’s statement regarding the valuation of the business.

DM: No, they, I think they put it in because, well, the client asked them to and because they could make the numbers work. They made all sorts of ridiculous assumptions in that document. That the Concorde Agreement would stay in place for ever. That earnings would go up endlessly for ever. And the risk of the whole business was as low as you could imagine. So they got it wrong. I think they had something like 70% of the value, the value that they put in that document, relating to the Concorde period after 2012. And we hadn’t even signed Concorde from 2008 to 2012. So it was a very pie in the sky valuation, in my opinion.

Pitpass

The assumptions sound rather bold, but the thing is that this is industry standard. What E&Y did was a simple Discounted Cash Flows Valuation, which requires all sorts of ridiculous assumptions. To value a company you need two sorts of things: cash flow forecasts into infinity and a discount rate.

Usually 3 stage model is used:

  • 1st stage is a detailed forecast of the firm’s cash flows for the next 5 years. You analyse your strategic position, the value drivers, you forecast revenues and costs making most of the assumptions based on the analysis of your previous periods and the management’s plans
  • 3rd stage is so-called perpetuity stage, where you assume that your revenues will continue into infinity. The  logic behind this is that you expect the firm to be there forever, but making forecast for the next 5 years is hard enough, to forecast anything that happens in 100 years is pretty much impossible. What you need for this stage is the perpetual growth rate, which we’ll discuss later.
  • 2nd  stage – which E&Y probably have just left out – is the normalization phase. This is the period in which the yearly growth rate of revenues converges towards the perpetual growth rate from the 3rd stage. Usually it is assumed that the growth rate decreases linearly, but usually the functional form of the transition is not that important.

At the first sight an assumption about perpetual revenues growth is ridiculous, but actually it’s more than logical. The cash flow forecasts are made in nominal terms, they don’t take into account an inflation rate. This means that if you want to assume constant revenues in real terms you still need your nominal cash flows to grow. The industry standard is to take the GDP growth rate in the country of operations and add the inflation on top. In this case you assume that the cost increases induced by inflation can be charged from the customers. Oh and there is a mathematical shortcut to calculate the Present Value of a perpetuity. The thing is called Gordon Growth Model and looks like this: FCF / (r-g) where FCF is free cash flow of the first period, r – cost of capital and g – growth rate. Doesn’t look like rocket science.

One could argue, that there is no guarantee that F1 is worth anything without the Concorde Agreement, and one should only take into account the cash flows for the years for which the agreement is in place. The problem is that the company has all the possibilities and plans to extend the contract, and this possibility has to be paid for. To assume that the new agreement will be signed is very logical.

This is the first part. Now the question is how risky the whole thing is, how much the investors want to be paid for the risk and for time value of money.

The industry standard to calculate the cost of capital is the Capital Asset Pricing Model (CAPM), which is composed of the following components:

  • the risk free interest rate
  • the so-called beta (the measure of the company’s systematic risk)
  • and the Market Risk Premium calculated as the difference between the return on the market and the risk free rate

The model is based on a bunch of assumptions that don’t really hold, for once for CAPM to work you need the interest rate at which you can borrow money be equal to the rate at which you can lend money – which is kinda not true. Another assumption is that capital markets are efficient, that all the information is reflected in the stock prices and there are no information asymmetries between the management and the investors. Further the model is based on the assumption that there are no transaction costs and no taxes. This is what I call a pie in the sky. The problem is that the alternatives are not really applied in the industry, and they have other sorts of assumptions, which are not really any better.

The risk free rate is the easy bit. You usually take the the yield curve of the government bonds of the countries with high credit rating. The yield curve gives you the interest rate of the bond with different maturities. Then you  have a choice: either you discount each cash flow at the corresponding interest rate, or you use the interest rate of about 9 year bond for all cash flows (which maturity you choose depends on the growth rate you’ve assumed before). The difference is minimal and the latter approach is more popular for complexity reduction reasons.

Beta is a complicated thing. As I said above it measures the systematic risk of the company. Systematic risk is everything you can’t diversify like general state of the economy. If the risk is diversifiable that’s what a rational investor would do, so the company doesn’t have to pay for it. The companies that produce luxury goods are more reactive to the market conditions and have higher than 1 betas, the companies that produce essential stuff usually have lower than 1 betas.

For traded companies beta is calculated using a linear regression of stock returns on the market returns for the past 5 years. The market in the model is assumed to be a perfectly diversified portfolio of all investment opportunities. Such thing simply doesn’t exist, that’s why people usually take a big national index. There is a bunch of problems: is the 5 year period representative for the future eternity? is the market and your stock liquid enough to provide a reliable estimate? which index do you take: DAX, Eurostoxx, MSCI World? do you take monthly data or weekly?

But what if your company isn’t listed? You can use the beta of comparable companies, the firms from the same industry, which have the same risk profile. But F1 doesn’t really have comparable companies, let alone listed comparable companies. You know that the beta for the entertainment industry is about 1.31 (calculated as a weighted average of the regression betas in the entertainment industry), but it doesn’t mean that F1 has the same risk as the entertainment industry. It would be logical to assume beta higher than 1, yes, but how much higher?

The market risk premium is another ingredient of the pie. It is the difference between the risk free return and the market return. The problem is that you don’t know what the market return is going to be in the future. So you usually take the historical data, calculate average and assume it’s going to stay the same. Nice assumption. The question is how far back in time you go: 20, 30, 70, 150 years? do you include crisis years? do you take geometric or arithmetic average? The latter choice gives you a difference of approximately 4% (based on German data, I’m sure UK or US aren’t that different).

You put all the things together and get the cost of capital = risk free rate + beta * market risk premium. And this is the number you use into infinity. Needless to say that it’s fairly easy to make the numbers work by just varying the components of the CAPM.

Did E&Y do something wrong? Methodically probably no. But the methods aren’t really robust, so that any value you get can be questioned, which both sides are now trying to do.