Venture Capital and Private Equity
(Venture Capital and Leveraged Buyouts)
523– Spring 2015
Professor:
Gordon Phillips
Office:
HOH 714
Office Phone: (213) 740-0598 (email contact
however is best).
E-mail:
[email protected]
Lecture Class
Wed. evening
6:30 – 9:30 JKP
Office Hours
Wednesday
Thursday
4:00 – 6:00
1:30 – 2:30
Introduction and Course Objective
FBE 523 uses a combination of lectures and the case method to introduce you to private
equity. Private equity is a broad designation that includes venture capital and also leveraged
buyouts of existing private and public companies. This course is time-consuming and challenging.
Do not take this course if you are not willing to participate fully in class. The class periods will be
a mixture of lectures and case discussion. Assigned readings must be completed prior to class.
The major emphasis is how financiers (venture capitalists, investment banks and private
equity partnerships) help growing firms using different types of securities at different points in the
industry's and firm's life. We will study venture capitalists on the finance side, young start-ups
and more mature firms that go private on the firm side. We will also study preferred stock, private
financing arrangements, Initial Public Offerings (IPOs) as this is how entrepreneurs cash out,
private equity funds and raising private equity during the recent financial crisis.
Learning Objectives
 Global Objectives: The objectives of this course are two-fold:
1. Provide an understanding of the institutions and economics of private equity.
2. To understand how to raise money for a businesses at different stages of their life.

Detailed Objectives
o Understanding fundamental private equity terms, concepts, principals, and
theories.
o Understand the securities used in private equity.
o Developing critical thinking and communication skills related to private equity.
o Evaluate a new company from a financial perspective.
o Understand a financing term sheet.
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Required Materials
1) Chapters from: Metrick and Yasuda (MY), Venture Capital and the Finance of
Innovation, Wiley 2010 (VCFI), available at the bookstore but frequently cheaper on
Amazon. Print ISBN-10: 0470454709 Print ISBN-13: 978-0470454701
2) CASES in case package (Harvard and Darden and my own case). First case, “Yale
Investments Office” is just a “reading case” no analysis. Of the remaining 7 cases, you
will be responsible for analyzing six of eight (you will have 1 additional free "pass").
Also note 2 of the cases are split into 2 parts for ease of exposition – both parts count
as 1 case together.
3) Course packet will also consist of the following articles.
1. Note on the Financial Perspective: What Should Entrepreneurs Know?
Harvard Business School Note #9-285-087.
2. How Venture Capitalists Evaluate Potential Venture Opportunities 9-085019 4 interviews with venture capitalists.
3. New Venture Financing #9-802-131
4. Note on the Valuation of VC deals. (Stanford Case E-95)
5. Method for Valuing High-Risk, Long-Term Investments Harvard Business
School Note #9-288-006.
6. Deal Structure and Deal Terms 9-806-085 (includes venture capital term
sheet)
4) Other articles I will post on blackboard including:
1) Kaplan, Steven N. and Per Stromberg, 2003, Financial Contracting Theory
Meets the Real World: An Empirical Analysis of Venture Capital Contracts,
Review of Economic Studies (Blackboard).
2) Ibbotson, I., J. Sindelar, J. Ritter, Initial Public Offerings, Journal of
Applied Corporate Finance, VOLUME 1 NUMBER 2 SUMMER 1988,
pp. 38-45, (Blackboard).
3) Klein, Zenner, Shivdasani, ”The Private Equity Revolution: Are You
Ready?”, Citicorp corporate and investment banking group,
(Blackboard).
4) Kohlbert, Kravis, Roberts, Leveraged Buyouts, Journal of Applied
Corporate Finance, VOLUME 2 NUMBER 1 SPRING 1989, pp. 64-72,
(Blackboard).
5) Inselberg, I. and H. Kaufold, How to Value Recapitalizations and
Leveraged Buyouts, Journal of Applied Corporate Finance, VOLUME 2
NUMBER 2 SUMMER 1989, pp. 87-96, (Blackboard).
5) Subscription to the Wall Street Journal online. For the Wall Street Journal: You
can subscribe online and get the student rate (70% off and online WSJ included,
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about $30 for 15 weeks) at the following URL:
https://buy.wsj.com/shopandbuy/order/subscribe.jsp?trackCode=aap1hybd
Prerequisites: Corporate Finance
Course Notes: Copies of lecture slides and other class information will be available through your
Blackboard account.
COURSE READINGS/CLASS SESSIONS
Daily Activities
Tasks, Readings, and Due Dates
Week 1
Jan 14
Introduction / Overview of Venture Capital
and Private Equity
Readings: (1.) MY Chapter 1-3, + (2.)
Week 2
Case 1: Yale Investments Office
Review of Valuation
Lecture on Security Issuance and Design
Case discussion: Yale Investments
Office
Read Class lecture notes
+ HBS Note: “Note on the
1/21
Financial Perspective: What
Should Entrepreneurs Know?”
Week 3
1/28
Case 2: Dynatronics case
Lecture on External Funds Needed (EFN)
Week 4
2/4
Dynatronics case: Part 2
/ Lecture on VC Strategy
Week 5
"How Venture Capitalists Evaluate
Potential Venture Opportunities ”
(3.) HBS Note: "New Venture
Financing".
Tu/Th Read (1.) MY, Chapter 8-10
(2. )HBS Note: "Method for
Valuing High-Risk, Long-Term
Investments"
(3.) Stanford "A Note on the
Valuation of VC deals"
Lectures on VC Securities
2/11
Week 6
2/18
Week 7
2/25
Do Dynatronics case: Part 1,
No case handin, just discussion in class
Lecture notes on EFN
Turn in Dynatroncs case: Part 2
Case handin or presentation
(1.) MY Chapter 7 + (2.)HBS note:
Lectures on VC continued
Case 3: Valhalla Partners
More on VC Preferred Stock
Case 4: Metapath Case
Turn in Valhalla case or presentation
Read MY Chapter 13-14
Read (1.) MY Chapter 15-16
HBS NOTE (2.) “ Deal Structure and
Deal Terms”
Week 8
3/4
Lecture on scenario analysis and simulation
/ Review Crystal Ball
Week 9
3/11
Midterm
3
Turn in Metapath case handin or
presentation
Do Crystal Ball tutorial
Read MY, Chapter 21, 24
Sp. Brk
Week 10
3/25
Week 11
4/1
ENJOY YOUR SPRING BREAK!!!
Simulation / scenario continued
Case 5: Genzyme-Geltex case
Lecture on Initial Public Offerings
Case 6: Netflix Case Part 1
Week 12
4/8
Case 6 continued: Netflix Case Part 2
Lecture on private equity and LBOs
Turn or present Genzyme Geltex case
Read: "Initial Public Offerings"
(blackboard)
Do Netflix I case (no turnin on this
part)
Turn in or present Netflix II case
Read: (1.) ”The Private Equity
Revolution: Are You Ready?”,
(blackboard)
(2.) "Leveraged Buyouts"
Week 13
4/15
Lecture on LBO valuation
Case 7: Brazos Partners: The Co-Mark
LBO /
Possible Industry Speaker
Week 14
4/22
Week 15
4/29
FINAL
(blackboard)
Turn in or present Brazos case
Read: " How to Value
Recapitalizations and Leveraged
Buyouts
Lectures on Convertible bonds and warrants
Case 8: Warren Buffet GE or Goldman
+ Course Overview.
Turn in or present Warren Buffet case.
Grading Summary:
Case writeups (5):
35% (5 written cases, 7% each)
Case presentation (1): 15% (1 case presentation, different case than the ones written up).
Given there are 8 cases this means that you will not turn in 2 of them. We will just discuss as
a class the case: Yale Investments Office, the 2nd one you will not turn in is your choice.
Midterm exam:
20%
Final or project:
20%
Participation:
10%
I evaluate participation by the quality of your course comments on our case discussions and will
keep track of participation. You are required to bring your name card to class.
Attendance is not part of the course grade but missing more than 2 classes will result in a loss of
5% of the participation grade and of course missing classes may affect your test performance.
Final grades represent how you perform in the class relative to other students. Your grade will not
be based on a mandated target, but on your performance. The average grade will conform to
Marshall MBA standards and it will be about a 3.5 – ranging from 3.4 to 3.6 depending on overall
class performance. Three items are considered when assigning final grades:
1. Your average weighted score as a percentage of the available points for all assignments (the
points you receive divided by the number of points possible).
2. The overall average percentage score within the class.
3. Your ranking among all students in the class.
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CLASS PROCEDURES AND ASSIGNMENTS DETAIL
Case Studies:
We will study 8 cases during the semester. While you will read them all, you will not have to
analyze fully all of them as you will only do 6 cases (5 with written case memos and 1 group
presentation).
The first case “Yale Investments Office” will not have a "turn-in" - you will just read it and think
about the discussion questions. You will have 1 "pass" on the subsequent cases and thus you will
only be responsible to turn in 6 cases from cases 2 to 8 below (5 with written case memos,
including Dynatronics, and 1 with require a group presentation).
NOTE 2 cases are split up into 2 parts – however both parts count as 1 case. I just split the case
into 2 to make sure you don’t get “lost” halfway through. Thus if you skip one of these cases, you
should skip both parts – you can’t just skip ½ of these cases. (Not recommended as these are two
cases in which you will learn a lot.)
Case 1: Yale University Investments Office (An introduction to venture capital and private equity just a discussion, but read the case and think about the discussion questions).
Case 2: Dynatronics ( covered in two parts, turn in just part 2) (IT case, bank and other financing)
Case 3: Valhalla Partners, 9-805-033 (Venture Capital – IT case).
Case4: Metapath Software, 9-899-160 (Venture Capital – IT case).
Case 5: Genzyme – Geltex (biotechnology case).
Case 6: NetFlix (covered in 2 parts, turn in just part 2). (famous IPO)
Case 7: Brazos Partners: The Co-Mark LBO
Case 8: One of my private equity cases.
The cases will deal with venture capital, initial public offerings and private equity used in buyouts.
Finally, the last “case” also has another different dimension. We will be analyzing a recent private
equity deal from the recent financial crisis using online data.
The objective in using case studies is to provide examples of companies or individuals that have
faced the topic at hand and to apply theoretical tools to real problems. I will distribute questions
and ideas that you may use as guidelines for analyzing the case.
In addition, for each case, I will assign study questions concerning the case. For most of the
class period, we will consider these questions and the material in the case. You are allowed and
encouraged, but not required, to meet in your groups outside of class to discuss and analyze the
cases. I expect that these groups will complement class discussion well. In addition, you may
discuss and analyze the cases with anyone you choose.
Each student will submit a two-page memorandum of analysis and recommendations at the
beginning of each case discussion. If you are working in a group, I will accept one memorandum
from the group and count it for all students in the group. If you choose to do this, the group
cannot exceed 5 students. Each memorandum should be typed and double-spaced. Do NOT
write up the memo as answers to the study questions. Write these as if you were writing a
executive memo with your recommendation to the major decision-maker in the case. The two-page
limit is for text only. You may attach up to 4 pages of additional excel exhibits or graphs.
Memoranda will not be accepted after the class has met. You can email the case hand-ins to:
[email protected] . Faxed memoranda will not be accepted.
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In your memoranda, you should argue as if you are in a funding meeting rather than in a
class. The process of arriving at the answer is as important as getting the answer.
Students sometimes ask that instructors’ case analyses be handed out after the class has
discussed the case. I will not do this, because there are usually no absolute right answers. The best
cases are deliberately written to be ambiguous. While there are no right answers, there are good
arguments and bad arguments. Among other things, this course is designed to help you learn to
distinguish between sensible and senseless arguments. Handing out my analyses would reduce the
ambiguity in the cases and partially defeat the purpose of doing cases. Handouts also tend to
circulate which is a problem when I teach the case in another semester. If you are uncomfortable
with ambiguity, do not take this class.
Finally, if your name is on the report as part of the group, it means you participated in the analysis.
You are on the honor code to observe this requirement. If for some reason you are not able to
participate in the case write-up with the group, you can turn in a write-up on that case or a
different case on your own.
The content of the case memorandum is as follows:
1. Write up your analysis as an executive memo to the major decision maker in the case. Use
an executive memo format with an introductory paragraph containing your executive
summary and recommendation. Do not answer the questions with a 1. 2. 3. Format. The
questions are merely designed to get you start thinking.
2. The case questions are designed to help you streamline the issues to be addressed. If you
believe that these questions do not effectively address the problems in the case, feel free to
go outside the parameters of the questions.
3. It is not necessary to rehash the case situation in your write-up. Do not, however, assume
that I know every single number and detail. Use your best judgment on how much of the
case to include in your write-up.
4. Most importantly, you must take a position regarding the problem in the case and make
specific recommendations on how to solve it. Support your recommendation as succinctly
and as effectively as you can.
5. The case write-up to be a double-spaced two-page (maximum) report with up to an
additional 4 pages of exhibits – for a maximum total of 6 pages. The case write-up should
be double spaced, in 12 point type with 1 inch margins.
*** I do not expect that you “kill the case” – but rather that you show a thoughtful, well-reasoned
approach. I am looking for well-structured arguments – some mistakes are fine and will of course
occur. ***
Case Presentation:
Each team will be assigned to present one case. For each case, one to two teams will present their
case presentation with their analysis to the class. Note case teams will have a maximum of 5
members. The presentation should consist of 20 powerpoint slides MAXIMUM with 30 minutes
maximum presentation time. These guidelines are strictly enforced. Your grade will be based on
both presentation skills (25%) and also content (75%). Each team member is required to speak
and be responsible for covering a minimum of 4 slides. Please come early to class the day of your
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presentation so you can load your slides onto the computer. You are also required to bring a
printed copy of your slides for me.
CLASS GUIDELINES
Add/Drop Process
The class will remain open enrollment (R-clearance) for the first two weeks of the semester. If the
class is full, students will need to continue checking Web Registration to see if a seat becomes
available. There are no wait lists for these courses, and professors cannot add students.
If you do not attend the first two class sessions or the first class session of the semester for a oncea-week class, I may drop you from the course without any notification. This procedure is so that
students from any wait list can be accommodated and to ensure the class forms teams and works
constructively together. In addition, if you are absent two or more times (for the weekly class)
prior to the last date to withdraw from the course, I may ask you to withdraw by that date. These
policies maintain professionalism and ensure a system that is fair to all students.
Retention of Graded Coursework:
Final exams and all other graded work which affect the course grade will be retained for 1 year
after the end of the course if the graded work has not been returned to the student; i.e., if I returned
a graded paper to you, it is your responsibility to file it, not mine.
523 Technology Policy
Laptop / tablet use is not permitted during academic or professional sessions unless we are working
on a case and then the use is solely for analyzing the case and no internet browsing is permitted.
Use of other personal communication devices, such as cell phones, is considered unprofessional
and is not permitted during academic or professional sessions. ANY e-devices (cell phones, PDAs,
I-Phones, Blackberries, other texting devices, laptops, I-pods) must be completely turned off during
class time. Upon request, you must comply and put your device on the table in off mode and FACE
DOWN. Videotaping faculty lectures is not permitted, due to copyright infringement regulations.
Audiotaping is permitted. Use of any recorded material is reserved exclusively for USC Marshall
students.
Statement for Students with Disabilities
Any student requesting academic accommodations based on a disability is required to register with
Disability Services and Programs (DSP) each semester. A letter of verification for approved
accommodations can be obtained from DSP. Please be sure the letter is delivered to me (or to TA)
as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m.–5:00 p.m.,
Monday through Friday. The phone number for DSP is (213) 740-0776.
Statements on Academic Conduct and Support Systems
Academic Conduct
Plagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own
words – is a serious academic offense with serious consequences. Please familiarize yourself with
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the discussion of plagiarism in SCampus in Section 11, Behavior Violating University Standards
https://scampus.usc.edu/1100-behavior-violating-university-standards-and-appropriate-sanctions.
Other forms of academic dishonesty are equally unacceptable. See additional information in
SCampus and university policies on scientific misconduct, http://policy.usc.edu/scientificmisconduct.
Discrimination, sexual assault, and harassment are not tolerated by the university. You are
encouraged to report any incidents to the Office of Equity and Diversity http://equity.usc.edu or to
the Department of Public Safety http://capsnet.usc.edu/department/department-publicsafety/online-forms/contact-us. This is important for the safety of the whole USC community.
Another member of the university community – such as a friend, classmate, advisor, or faculty
member – can help initiate the report, or can initiate the report on behalf of another person. The
Center for Women and Men http://www.usc.edu/student-affairs/cwm/ provides 24/7 confidential
support, and the sexual assault resource center webpage http://sarc.usc.edu describes reporting
options and other resources.
Support Systems
Students whose primary language is not English should check with the American Language
Institute http://dornsife.usc.edu/ali, which sponsors courses and workshops specifically for
international graduate students. The Office of Disability Services and Programs
www.usc.edu/disability provides certification for students with disabilities and helps arrange the
relevant accommodations. If an officially declared emergency makes travel to campus infeasible,
USC Emergency Information http://emergency.usc.edu will provide safety and other updates,
including ways in which instruction will be continued by means of blackboard, teleconferencing,
and other technology.
Blackboard
Please activate your course in Blackboard with access to the course syllabus. Whether or not you
use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard
learning management system and support information is available at blackboard.usc.edu.
Incomplete Grades Explanation:
In incomplete (IN) grade may be assigned due to an “emergency” that occurs after the 12th week of
classes. An “emergency” is defined as a serious documented illness, or an unforeseen situation that
is beyond the student’s control, that prevents a student from completing the semester. Prior to the
12th week, the student still has the option of dropping the class. Arrangements for completing an
IN course should be initiated by the student, and negotiated with the instructor. Class work to
complete the course should be completed within one calendar year from the date the IN was
assigned. The IN mark will be converted to an F grade should the course not be completed.
Assignment Submission Policy
Assignments must be turned in on the due date/time electronically via Blackboard. Any assignment
turned in late, by more than 15 minutes, will receive a grade deduction (for example, if your work
is a B+ grade, you will be given a C+ grade). If your internet breaks down on the due date, you
must deliver a hard copy at the beginning of class on that day. If you are unable to attend class on
that day, make arrangements for it to be delivered to the classroom or to my box by the start of
class. Late or not, however, you must complete all required assignments to pass this course.
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Evaluation of Your Work
You may regard each of your submissions as an “exam” in which you apply what you’ve learned
according to the assignment. I will do my best to make my expectations for the various assignments
clear and to evaluate them as fairly and objectively as I can. If, however, you feel that an error has
occurred in the grading of any assignment, you may, within one week of the date the assignment is
returned to you, write me a memo in which you request that I re-evaluate the assignment. Attach
the original assignment to the memo, and explain fully and carefully why you think the assignment
should be re-graded. Be aware that the re-evaluation process can result in three types of grade
adjustments: positive, none, or negative.
All grades assigned by faculty members are final. Students have the right to seek explanation,
guidance, counsel and reasons for the assignment of a grade. Students may appeal a grade
according to university policy as set forth in SCampus. Faculty may initiate a change in grade if
there is an error in the calculation of a grade. However, a faculty member may not change a
disputed grade outside the formal appeals process. In response to a disputed academic evaluation
by an instructor, a student is entitled to two levels of appeal after review by the instructor: first to
the chairperson of the department and then to the appropriate dean of the school. The full
university policy can be found on page 125 of SCampus and at:
http://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.
html
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Case Guidance Questions
These are guidance questions: Top cases frequently do not just answer
the questions. Think beyond these basic guidance questions.
IMPT: Use an Executive Memo Style, with an executive summary.
Remember to NOT to write up your memo in 1. 2. 3. format.
Dynatronics Case Guidance Questions:
Case Guidance Questions:
Part 1:
1. Why is the bank tightening the requirements on Dynatronics? In
particular why is the bank referring this growing firm to their factoring
high-risk division?
2. What are the cash flows for the new product line? Clearly state your
assumptions on the first page of your case write up.
3. What is the company’s weighted average cost of capital (WACC) –
assume that the company does issue 400,000 shares of stock using an
IPO and issues equity at $6.5 per share – which nets the company $5 per
share. Assume the amount of existing debt stays the same.
4. Is the new product line worth introducing? Calculate the NPV of the
new product line.
5. Is it worth it to increase the stocks of finished goods? Try several
different levels of inventory and try to see which level is the best. Try a
yearly IRR analysis here.
6. What would you say as the bank about financing new product lines?
What covenants would you include?
Part 2:
1. As the bank, what is an appropriate set of base case (i.e. no new product
or inventory policies) pro forma financial statements for Dynatronics for
the next 3 years?
2. Using these pro forma statements, estimate the company’s external
financing requirements for the 3 years 1989, 1990, and 1991. What
financing would you recommend as a financier for the current business?
3. If you do either or both of the new investment alternatives, what is the
company’s external financing requirements?
4. As an outside financing advisor, present a financing plan that details
both the source (debt vs. equity), and the amounts of external finance
that is needed.
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Case: Valhalla Partners
Case Guidance Questions:
1. Should Art Monks vote to make an investment in Telco Exchange?
What valuation do you think is appropriate? What would be the
deal terms? You will have to make lots of assumptions but do your
best to justify them and the deal terms you would require in order to
invest.
2. Based on the information in the investment memo, what are the top
3 risks you see in Telco Exchange?
3. What is your assessment of Valhalla’s due diligence process? In
your opinion, what is the most significant benefit of the process?
What set of risks does it present?
Case: Metapath Software
Case Guidance Questions:
1. Describe the past financing strategy of Metapath.
2. What are the pros and cons of the two financing options? The VC
option vs. selling out to Celltech?
3. Why are the venture capitalists choosing to offer preferred stock
with the particular terms and conditions outlined in the case to
Metapath? Describe the pros and cons of this particular preferred
stock.
4. What do you think the participating convertible feature is worth?
How much should Hanson be willing to accept as a sale price per
share to the venture capitalists to remove it?
5. What is your final recommendation?
Case: Genzyme/Geltex Pharmaceuticals Joint Venture
Case Guidance Questions:
1. What is the strategic importance of this project? How should we
evaluate the attractiveness of this opportunity?
2. Does anything worry you about this project? What could happen?
3. What is the meaning of “probability”? What are the relevant
probabilities in this case? How might we incorporate them into our
analysis?
4. What does the output of the monte-carlo simulation show?
5. How does this opportunity look to you now? (pre monto-carlo vs. post
monte-carlo)
6. How can we make it better? How can we improve the deal?
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NetFlix.com:
Case Guidance Questions:
PART 1:
1. How would you assess NetFlix’s performance to date as an outsider
financier?
2. What is NetFlix’s long-run objective? How does NetFlix plan to
achieve its long-run objective?
3. As an outside investor, construct an annual subscriber model that can be
used to forecast cash flows per subscriber for the next 5 years. What is
the value of a new subscriber using a discount rate of 20%.
PART 2
1. How much cash (External Funds Needed) does NetFlix need in order to
remain viable over the next 5 years? You will have to project
subscriber growth rates for the next 5 years. Assume total subscribers
(of all 3 types, trail, 6 months, and permanent) ends year 2000 at
250,000 initially.
2. Assuming that NetFlix does not change its business model, come up
with a value for NetFlix- both total value pre-IPO and a value post-IPO
using discounted cash flow? Come up with total firm values both preIPO and post-IPO.
3. Using the data from your answer in question #5, Calculate the per share
fundamental price pre-IPO and post-IPO. To calculate a per-share price,
the following data will be helpful. There will be 25,651,415 (see pro
forma capitalization in attached table) shares of stock issued and
outstanding upon conversion of the preferred stock BEFORE any
additional shares are issued. (These data are from the capitalization of
the firm as of Dec 31, 1999 from their statements filed with the SEC
(Securities and Exchange Commission).
4. What changes, if any, would you suggest as an outsider investor to its
business model? What are the value implications of these changes?
5. Should NetFlix go public? If not, what would you recommend?
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Case Analysis: Brazos Partners
Case Questions:
1. What is the Brazos’ private equity funds investment strategy? Does it
seem well suited for a first time fund? How do you assess the merits of
the GTT transaction?
2. How has the recessionary climate affected the Brazos’ investment
strategy, in both favorable and unfavorable ways?
3. Is Co-Mark an attractive investment? How attractive is the purchase
price? Conduct your own valuation of the firm.
4. The Brazos partners claim that structuring the deal as an asset purchase
rather than a stock purchase is beneficial, not just to Brazos, but also to
the management team. Assess this claim
Case Analysis: Sun Microsystems, ticker SUNW
(one of the final cases, you will pick just 1 of these real time cases):
See blackboard for full assignment details. The data for this real-time case can be
found online from two sources.
1. Main source: SEC EDGAR at
http://www.sec.gov/Archives/edgar/data/709519/000118143107006432/000118
1431-07-006432-index.htm
2. You will also need daily stock price data from a site that has stock price data
like the wall street journal or Nasdaq web site.
Case Questions:
1. Analyze why the company has chosen to issue a $750 million convertible
bond issue. What factors led them to choose this security? Use historical
cash flow data to understand these factors.
2. How does the company's option to call the convertible affect the decision to
issue and the convertible's value?
3. Determine both the value of the convertible bond and the effect its issuance
will have on the company's cost of capital.
4. How should the company's basic business risk and strategy affect its longterm capital structure policy?
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Case Analysis: Countrywide Financial, ticker CFC
(one of the final cases, you will pick just 1 of these cases):
See blackboard for full assignment details. The data for this real-time case can be
found online from two sources.
1. SEC EDGAR at
http://www.sec.gov/Archives/edgar/data/25191/000089882207001085/0000898
822-07-001085-index.htm
2. You will also need daily stock price data from a site that has stock price data
like the wall street journal or Nasdaq web site.
Case Questions:
1. Analyze why the company choose to issue a $2 billion convertible preferred
stock issue. What factors led them to choose this security? Use historical
cash flow data to understand these factors.
2. What is the value of the preferred stock under reasonable assumptions?
3. What affect will its issuance will have on the company's cost of capital?
4. Does this issuance affect the value of CFC stock? If so how? Try to come
up with some reasonable scenarios and analyze some cash flow data.
5. How should the company's basic business risk affect its long-term capital
structure policy?
5. .
Case Analysis: Goldman Sachs, Investment by Warren Buffet, (one of the final
cases, you will pick just 1 of these real time cases):
The data for this real-time case can be found on blackboard and from SEC
Edgar.
Please consult the document and data on blackboard.
Case Questions:
1. Analyze why the company has chosen to issue 5 Billion Preferred stock
+ warrants to Warren Buffet. What factors led them to choose this
security? Use historical cash flow data to understand these factors.
2. Determine both the value of the preferred stock and the warrants and the
effect its issuance will have on the company's cost of capital.
3. How should the company's basic business risk and strategy affect its
long-term capital structure policy?
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Case Analysis: GE, Investment by Warren Buffet, (one of the final cases, you
will pick just 1 of these real time cases):
Assignment:
1. Analyze why the company has chosen to issue 5 Billion Preferred stock +
warrants to Warren Buffet. What factors led them to choose this security? Use
historical cash flow data to understand these factors.
2. Determine both the value of the warrants and the effect its issuance will have on
the company's cost of capital. If the required return on the preferred stock is
10%, also consider the value of the preferred stock.
3. How should the company's basic business risk and strategy affect its long-term
capital structure policy?
More specific details can be found online (see blackboard) and at:
http://biz.yahoo.com/e/081020/ge8-k.html
and details of the warrants are at:
http://www.sec.gov/Archives/edgar/data/40545/000090951808000768/mm101608_8ke4a.htm
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Final Project
You may do a project instead of the “appointed” final case. If so you can do the project
with a teammate. Otherwise the final case is an individual effort. The reports can vary in
length but should be LESS than 20 pages including exhibits (15 pages is fine). Reports
should be double spaced with normal margins. If you can it may also be a good idea to talk
directly to the company’s executives when possible. Many companies in the area are
willing to talk to MBAs and it will give you some direct (hopefully high level) exposure as
well as improve your analysis.
The following represent potential topics for projects: Venture Capital Investment,
Leveraged Buyouts, and Initial Public Offerings.
It should be on a firm that has tapped the VC market or plans to tap it, an IPO or
LBO/Bankruptcy in the past 12 months. If it is an IPO company, the company should have
already gone public in the last 12 months or has filed statements with the SEC to go public.
I.
Venture Capital Investment
Put yourself in the position of a venture capitalist and analyze a small to medium sized
firm for a potential investment. Analyze an existing firm and talk to a venture capitalist.
Your project should have the following components:
1. A term sheet for the proposed investment. What securities will you offer? What
will be the terms and covenants? Over what items will you be willing to bargain?
2. What performance orientated items will you include as part of the terms and
covenants?
3. If you are not the first investor, how do past rounds of financing affect your terms?
4. A plan for due diligence for the investment.
5. An analysis of the company’s projected cash flows. What are the strengths,
weaknesses, critical factors.
6. An evaluation of the management team.
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II. Going Public: Analyze the performance of Initial Public Offerings after going public
to determine whether you should continue to invest in initial public offerings. Consider the
perspective of the investor and the firm. Is the price set "right"? What factors are
important for this firm.
Examples of Industries:
A. The Computer Industry: AOL, Google etc.
B. The Biotechnology Industry: Focus on Genetic, Amgen and others C. The Medical Technology Industry:
Your Analysis should include (again not merely comprise) the following issues:
1. A discussion and analysis of annual financial statements for the company and its
competitors. Discuss industry and competitor's ratios, identifying financial strengths
and weaknesses. What made the company decide to go public?
2. Has the company done "well" following the IPO? Investment/market share relative to
its competitors?
3. Cost of Capital: Estimate the required rate of return for stock, bonds for at least one
company in the industry using stock market data from the Daily Stock Price Record or
from the Wall Street Journal.
4. Given information in the prospectus and other competitors what should be the offering
price?
5. Discuss the price set by the investment banker vs. the closing price after the first day
of trading. Is there any difference? If so, should management be “upset”? Was the
company priced incorrectly? If so, why?
6. Your Suggestions: Do you recommend the company for an investment - What are the
risks, potential rewards?
III. Leveraged Buyout
Pick a company that recently went private using a leveraged buyout (LBO). Analyze the
following questions:
1. A discussion of the company’s performance and debt and capital structures over time
– what were the factors that led to the company’s LBO?
2. What is the company’s capital structure and value pre-LBO?
3. What securities did the buyout firm issue at the time of the LBO? What changes were
forecasted in the company’s capital structure in the future?
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4. What is the company’s capital structure and value post-LBO?
5. What happens to required rates of return for stocks, bonds, post-LBO?
6. What was the company’s “performance” after the LBO? How did the firm's cash
flows and business risk affect its "performance" after the LBO?
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