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The managing director of this specialty foundry must decide whether to approve a major investment to automate part of her plant's production process. The case presents information sufficient to build cash flow forecasts of production costs incremental to this investment. Discounted cash flow (DCF) analysis reveals that this investment project is attractive but that the benefits hinge on important assumptions about the plant's business volume, the manager's ability to lay off workers over the objections of a labor union, and the hurdle rate. The objectives of the case are to (1) introduce students to the mechanics of DCF analysis of go/no-go capital investment decisions, (2) consider the principle of incremental analysis as the foundation for identifying relevant cash flows for a project, (3) explore the classic trade-offs in capital-for-labor investments, and (4) review analytical adjustments required in comparing projects of unequal lives.

Spreadsheet for case UV0072

Set in December 2000 immediately following the merger announcement between PepsiCo Inc. and the Quaker Oats Company, asks students to examine the implications of the merger for the rivalry between Coca-Cola Co. and PepsiCo, and for value creation by each firm. Because the merger would allow PepsiCo to control Gatorade, which held an 83% share in the sports drink market, PepsiCo would further strengthen its already wide lead over Coca-Cola Co. in the noncarbonated drinks segment. Would Coca-Cola's historically stellar performance in terms of value creation be threatened by the merger?

In November 2000, a money manager needs to make a decision regarding an offering of convertible bonds by Corning. The analysis requires her to compare the insights available from standard descriptive ratios to those available from valuation analysis. This case is intended to be a student's first exercise in analyzing convertible bonds and assumes some familiarity with option pricing theory and bond valuation. In addition, the case highlights the importance of going beyond the convertible bond calculations. The volatility of Corning stock has increased in the past year, and makes the call option more valuable, but at the same time Corning appears to be issuing converts at a time when both its share price and stock market valuations are at historic highs. Thus it is imperative that the student "have a view" on the sustainability of stock market valuations and the outlook for Corning.

Alfonso Cortina, chair of Repsol-YPF S.A., accepted the award from the Financial Times for the best merger in the energy sector in 1999. The acquisition, which closed on June 28, 1999, boosted the firm's share price despite a strategy of hostile acquisition and significant change in the firm's capital structure.

This technical note, written for students, gives a first "how to do it" introduction to studying by the case method. The note argues that success follows from a combination of good attitude, good "infrastructure," and good execution. This could be distributed along with a course syllabus or advance materials and was written with the objective of helping students more quickly achieve levels of effective preparation and discussion.

In February 2000, a managing partner of a U.K.-based private equity fund, Palamon Capital Partners, faced the decision of whether to invest in an Italian software company, TeamSystem, S.p.A. The rationale for this investment was a belief in the rapid future consolidation of the enterprise software industry in Italy, in combination with improvements in operating performance believed to arise from a stronger investor orientation after the transaction. The transaction entailed a leveraged recapitalization of the target that would significantly change its ownership, control and leverage. The task for the student is to evaluate the attractiveness of the investment, based on a strategic appraisal, a valuation of the target with its new capitalization, and an assessment of the proposed deal structure.

In December 2000, the shareholders of General Mills were presented with a merger prospectus and proxy statement that outlined the terms by which General Mills would acquire Pillsbury from Diageo plc. Payment was composed of shares of General Mills stock, assumption of Pillsbury debt, and an unusual contingent payment. The task for the student is to assess and value the contingent payment in an effort to judge the attractiveness of the proposal and to recommend how shareholders should vote on the proposal. The contingent payment resembles a contingent value right (CVR), which provides downside protection to the sellers in an acquisition. CVRs can be modeled as two options: (1) a long put struck at a low stock price and (2) a short call struck at a higher stock price. The combination of a CVR with the underlying stock of the buyer transforms the payment to the seller from floating stock to a fixed collar. Student analysis can decompose the contingent payment into its two basic options and value the whole instrument. The teaching objectives of this case are: (1) to exercise student skills at identifying and valuing options, (2) to illustrate how the use of contingent payments can bridge differing views about the value of a target firm, and (3) to suggest the important role of synergy expectations in the evaluation of payment terms.

This technical note introduces students to the use of earnouts and other forms of incentive payments in the context of mergers and acquisitions. The note describes the use of incentive payments in M&A, recent deals in which earnouts were used, the trend and volume of earnout deals, the benefits and disadvantages of earnout structures. The large concept in the evaluation of earnouts is their similarity to call options. This conceptual approach provides the foundation for considering how an earnout might best be structured, and how its value might be estimated. The note concludes with a generic valuation example and refers the reader to a spreadsheet model that might serve as a template for future assessments of earnouts.

In July 2000, two founders of this new Web-hosting company are contemplating raising $5 million to $15 million in a second-round financing from venture capitalists. The task for the student is to forecast the firm's cash receipts and disbursements in an effort to determine the firm's "burn rate," i.e., the rate of cash consumption and how long the financing will sustain the firm. The new economy setting of this case permits the instructor to extend well-known financial skills and concepts to an industry that attracts high student-interest. This case is ideally used in an introductory finance course as an early exercise in forecasting, modeling, sensitivity analysis, and interpretation. It can be a useful foundation for later classes in cash-flow estimation and valuation. This case presumes that the students have already been exposed to the structure and interpretation of the statement of cash flows (SOCF), and the relationship of the SOCF to the income statement and balance sheet. The case also may offer opportunities for interdisciplinary teaching with instructors in marketing and entrepreneurship.

This case recounts the announced terms of five prominent acquisitions of the late 1990s, and asks the student to suggest a preliminary strategy for integrating the target firm into the buyer. The five acquisitions are America Online/Time Warner, British Petroleum/Amoco, Daimler-Benz/Chrysler, Union Pacific/Southern Pacific, and Warner-Lambert/Agouron Pharmaceuticals. The objectives of the case are: 1) to highlight the linkage of the post-merger integration approach with the strategic motives for the acquisition; 2) to consider the range of possible challenges to successful post-merger integration; 3) to explore the varieties of integration strategy, especially surrounding decisions about autonomy of the target company within the buyer, importance of interdependence between the buyer and target, and need for speed of integration.

New options on weather from Enron are described, in particular floors, swaps, and caps on heating degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it.

New options on weather from Enron are described, in particular floors, swaps, and caps on heating degree days. An electric utility is considering whether to purchase a weather derivative to offset the risk of low volume of kilowatt hours. After understanding the nature and purpose of the contract, students will structure the option in preparation for valuing it.

Spreadsheet supplement for case UV0620.

Useful as a background reading to prepare students for case studies about searching for acquisitions, this technical note offers eight guidelines drawn from theories about the economics of information, networks, options, and contagion.

In April 1999, the CEO of Repsol S.A., the large Spanish oil company, seeks to design the terms of an unsolicited tender offer to the shareholders of Argentina's largest oil company, YPF. The value to be paid per YPF share has been set. Remaining to be decided are: (a) form of payment, and (b) form of financing, if it is to be a cash deal. The task for the student is to sort through the advantages and disadvantages of three financing alternatives, using a framework such as FRICTO, and to make a recommendation. The objectives of this case are to: (1) illustrate the linkage between acquisition price, form of payment, and acquisition financing; (2) exercise analytical frameworks for comparing financing alternatives; (3) consider the important role of synergy expectations in designing financing. The case was prepared for use in an MBA elective on mergers and acquisitions, though could be easily adapted for teaching concepts of corporate financing.