Finance Simulation M&A in Wine Country by Timothy A. Luehrman and W. Carl Kester Harvard Business School For courses in: Finance Mergers and Acquisitions Valuation Negotiation General Management Strategy Finance Simulation: M&A in Wine Country In this multi-player simulation, students play the role of the management team at one of three publicly traded wine producers: Bel Vino, Starshine, or International Beverage. Starshine and Bel Vino consider a merger-of-equals transaction while International Beverage considers acquiring either Starshine or Bel Vino. Students review confidential information to determine value and set reservation prices before negotiating deal terms and accepting or rejecting final offers. The simulation is ideal for students who have had previous exposure to the fundamentals of finance. Finance Simulation: M&A in Wine Country prepare changes to operating assumptions analyze income statement Bel Vino (you) balance sheet Starshine decide WACC based DCF cash flow statement adjusted present value discount rates + TV International Beverage comparable companies comparable transactions ratios and growth rates Confidential Info Chat STOCK PRICE Copy to Clipboard OPERATING ASSUMPTIONS Increase in Domestic Revenues ($M) Increase in International Revenues ($M) $42.90 Intl. Bev.: $62.50 2.0 0.0 Reduction in Marketing Costs ($M/year) 0.0 Reduction in Other SG&A ($M/year) 1.0 PRICE PER SHARE CALCULATIONS Bel Vino $43 0.0 Reduction in Inventory (in Days COGS) 30.0 Increase in Accounts Payable (in Days COGS) 15.0 Two Year Increase in Cash Spent on PP&E ($M) $36.00 Starshine: 18.0 Reduction in Cost of Goods Sold ($M/year) Reduction in Debt Collection Period (in Days Sales) Bel Vino 0.0 $0 Stock Price WACC APV Analyzing changes in operating assumptions helps students understand valuation. Identifying Opportunities for Value Creation Before the simulation begins, students are assigned roles. All roles can view publicly available information about each company such as financial statements and analyst projections. hbsp.harvard.edu Each role is also shown confidential information about financial forecasts and opportunities for improvement. Using all the available information, students consider the opportunities for value creation and select possible merger and acquisition targets. Finance Simulation: M&A in Wine Country prepare make decisions share exchange calculator analyze accretion/ dilution calculator decide active bids/ bid history Chat Target Starshine Acquiror Bel Vino Confidential Info PER SHARE VALUATION Starshine $42.90 Bel Vino $36.00 NUMBER OF SHARES CURRENTLY OUTSTANDING Starshine 8,000,000 Bel Vino 10,000,000 MARKET VALUES OF EQUITY Starshine 343.2 Bel Vino 360.0 Total Value of Combined Entity 703.2 Number of New Bel Vino Shares Issued 9,533,333.3 Offer 1.192 New Bel Vino Shares for Each Existing Starshine Share Calculators help students decide the best terms for a deal. Determining Value and Setting Reservation Prices Students have access to multiple valuation models as they analyze the on: M&A in Wine Country value of their own company and the company they have targeted for a analyze decide possible deal. Changes in operating assumptions WACC balance cashare flowimmediately based DCF sheet reflected instatement the valuation models. Using these tools, students set hine International Beverage confidential reservation prices for each target. The valuation models include: WACC-based DCF (Discounted Cash Flow) Analysis ■■($M) ues ($M) ■■2.0 Key Ratios of Comparable 18.0 Companies ■■d ($M/year) ■■$M/year) APV (Adjusted Present Value) 0.0 Comparable Transactions 0.0 ear) 1.0 riod (in Days Sales) 0.0 COGS) n Days COGS) nt on PP&E ($M) Making and Evaluating Bids Students begin the bidding and negotiation process either face to face or using the built-in “chat” capability. Several calculators are available to help determine the best terms for adjusted discount comparable present rates + TV bids. companies making and evaluating value Share Exchange Calculator: calculates the ratio of shares exchanged in a merger ■■Accretion/Dilution Calculator: calculates the effect of a deal on earnings per share (EPS) ■■■■everage Decision Calculator: L calculates financing requirements for acquisition Once students have negotiated the essential terms of a deal, they enter formal bids into the simulation. Understanding Stock Market Reaction Stock prices rise and fall in reaction to the formal bidding process and simulate the stock market response to potential mergers and acquisitions. Fluctuations in share price directly affect the value ofratios a proposed comparable and transactions rates deal and students growth must consider how bidding activity affects stock prices. Confidential Info Chat STOCK PRICE Bel Vino $36.00 Starshine: $42.90 Intl. Bev.: $62.50 The simulation ends when an offer PRICE PER SHARE CALCULATIONS is accepted. It is also possible for the simulation to end with no deal Bel Vino being reached. $43 30.0 15.0 0.0 administration tools on next page ➜ $0 Stock Price WACC APV Administration Tools for Faculty A comprehensive Facilitator’s Guide covers key learning objectives, including: ■■class summary game details scenario setup Starshine deal prices Bel Vino deal prices stock price history BV-SS deals SS-BV deals IB-BV deals IB-SS deals no deals Bel Vino Bel Vino Identifying potential for value class summary creation in mergers and acquisitions BV’s reservation price of BV: $47.60 BV’s reservation price of BV: $47.60 Completed deal price $52.97 SS’s reservation price of BV: $57.53 IB’s reservation price of BV: $55.00 Analyzing and forecasting possible synergies Int. Bev Starshine 0 0 Selecting target companies Understanding the negotiation process, outcomes, and the “zone of possible agreement” (ZOPA) Graphs show the “zone of possible agreement” and completed deals. Stock Price History MC160620610 ■■Bel Vino zopa Select a Team Team 1 ■■■■team results Starshine zopa 70 Results are available immediately for class review and debrief. Summary results are provided for the entire class and detailed results are available for individual teams. Reservation prices, stock prices, and other metrics are presented in easy-to-read graphs suitable for classroom presentation. 56 42 Product #M12978 viewing simulation results 28 14 0 1 2 3 4 5 6 Bel Vino 7 8 9 10 Starshine 11 12 13 14 15 16 17 18 19 20 International Beverage Graphs for each team show the link between stock price behavior and bidProduct #3289 | Multi-player: 3 roles | Seat Time: approximately 90 minutes | Developed in partnership with Forio Business Simulations Preview and Free Trial Access Visit hbsp.harvard.edu A Preview of the simulation is available on our web site at hbsp.harvard.edu. A Free Trial allows full access to the entire simulation and is available to Premium Educators on our web site. Premium Educator access is a free service for faculty at degree-granting institutions and allows access to Educator Copies, Teaching Notes, Free Trials, course planning tools, and special student pricing. Phone: 1-800-545-7685 (+1 617-783-7600 outside the U.S. and Canada) Email: [email protected] Web: hbsp.harvard.edu Finance Simulation: Blackstone/Celanese By Nabil N. El-Hage and Timothy A. Luehrman Customer service is available 8 am to 6 pm ET, Monday through Friday Fax: 617-783-7666 also available This simulation recreates the landmark acquisition of Celanese AG by the Blackstone Group in 2003. Students take on the role of either company and conduct due diligence, establish deal terms, respond to bids and counterbids, and consider the interests of other stakeholders. #3712 Printed on recycled paper. ■■Comparing valuation methods, including WACC-based DCF (Discounted Cash Flow) analysis, APV (Adjusted Present Value) and multiples Finance Simulation: M&A in Wine Country
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