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The huge sums that private equity firms make on their investments evoke admiration and envy. Typically, these returns are attributed to the firms' aggressive use of debt, concentration on cash flow and margins, freedom from public company regulations, and hefty incentives for operating managers. But the fundamental reason for private equity's success is the strategy of buying to sell-one rarely employed by public companies, which, in pursuit of synergies, usually buy to keep. The chief advantage of buying to sell is simple but often overlooked, explain Barber and Goold, directors of the Ashridge Strategic Management Centre. Private equity's sweet spot is acquisitions that have been undermanaged or undervalued, where there's a onetime opportunity to increase a business's value. Once that gain has been realized, private equity firms sell for a maximum return. A corporate acquirer, in contrast, will dilute its return by hanging on to the business after the growth in value tapers off. Public companies that compete in this space can offer investors better returns than private equity firms do. (After all, a public company wouldn't deduct the 30% that funds take out of gross profits.) Corporations have two options: (1) to copy private equity's model, as investment companies Wendel and Eurazeo have done with dramatic success, or (2) to take a flexible approach, holding businesses for as long as they can add value as owners. The latter would give companies an advantage over funds, which must liquidate within a preset time-potentially leaving money on the table. Both options present public companies with challenges, including U.S. capital-gains taxes and a dearth of investment management skills. But the greatest barrier may be public companies' aversion to exiting a healthy business and their inability to see it the way private equity firms do-as the culmination of a successful transformation, not a strategic error.

When Bruce Nolop was an investment banker, he saw only the glamorous side of acquisitions. Since becoming executive vice president and chief financial officer of Pitney Bowes, however, he's learned how hard it is to pull them off. In this article, he shares the lessons his organization has learned throughout its successful six-year acquisition campaign, which comprised more than 70 deals: Stick to adjacent spaces, take a portfolio approach, have a business sponsor, know how to judge an acquisition, and don't shop when you're hungry. Pitney Bowes's management and board of directors now use these five basic rules to chart the company's growth course. For example, when evaluating a potential acquisition, Pitney Bowes distinguishes between "platform" and "bolt-on" acquisitions to set expectations and guide integration efforts; the company applies different criteria, depending on the type. According to Nolop, any company can improve its acquisition track record if it is able to learn from experience, and he suspects that Pitney Bowes's rules apply just as well to other organizations. Buying a company should be treated like any other business process, he maintains. It should be approached deliberately and reviewed and improved constantly. That means mapping a complex chain of actions; paying attention to what can go right or wrong at different stages; and using standard, constantly honed, approaches and tools.

As the chief financial officer of The Walt Disney Company, Tom Staggs was responsible not only for the financial management of the company, but also for the communication of the company's financial and strategic objectives to its investor base. Because of Disney's stature as the world's most iconic entertainment brand, the company had a particularly broad investor base: over 991,000 common shareholders in fiscal year 2006 compared with 51,400 for Time Warner. Staggs had to develop and implement a communication strategy that was appropriate for the diversity of this investor base, which included individual, institutional, brokerage house, and mutual fund investors. In doing so, he had to be mindful of the fact that these constituencies often had different time horizons and investment perspectives. In addition, Staggs had to bear in mind several other factors. First, he had to consider that any message delivered was perceived by investors as a direct reflection of management's capability and credibility. Second, he had to consider how the company's stated objectives influenced the behavior of its employees. Third, he had to decide how to implement the communication strategy across a wide array of channels, keeping in mind the purpose of the forum, regulatory requirements, and investor expectations.

Examines some parts of Stryker Corporation's systems and procedures for approving and authorizing capital spending of many different types, including buildings, machinery, and working capital for existing businesses, as well as transactions with third parties such as acquisitions, joint ventures, and licensing agreements. Set in early 2007, nearly two years after significant modifications in these systems and procedures. Stryker has compiled a remarkable track record of consistently high growth in profitability over more than 20 years. The modifications to its capital budgeting procedures are partly intended to support the company's efforts to continue this success.

Riding the early morning Metro North train from Grand Central to Greenwich in late December 2004, the euro dominated Luke Anthony's thoughts. After bottoming out at about 0.85 $/€, in 2000 and 2001, the euro had appreciated sharply and now stood at 1.35 $/€ (Exhibit 1). Luke, an FX Strategist at a hedge fund, had to form a view about the likely path of the euro going forward. The evidence was in no way clear cut. Of the traditional factors, some were pointing toward further euro appreciation, but others seemed to favor the dollar. And there were a host of "new" factors to sift through. Sorting through the evidence would require both relatively standard thinking about forex markets and the more recent emphasis on prospective capital flows. And Luke had only this quiet week between Christmas and New Year's to form a cohesive plan for early 2005.

In September 2005, after years of bitter competition, Siebel Systems Inc. finally agreed to be acquired by Oracle Corporation. The two companies preferred different forms of consideration as payment for Siebel Systems and used a deal structure known as a "double dummy" to satisfy both parties. The case requires students to examine how the unique deal structure meets the tax and non-tax preferences of the corporations and their shareholders.

Introduces students to simple forms and solution techniques for real options found in corporate settings. Revised versions of problems appearing in an older problem set (293-095). The basic differences are that the new set is shorter, but also a bit more demanding.

Demonstrates the accelerating impact of leverage on returns under differing scenarios of property performance. The performance scenarios represent two points in time: the inception of the investment and the liquidation.

Describes Texas Pacific Group's purchase and operation of J. Crew, the catalog and specialty clothing retailer. Highlights the issues involved in financing such a transaction, and then focuses on the operational challenges of turning around the business, and of TPG's intensive involvement in the running of the business. Details the improvements in the business, and then the retrenchment, leaving the business facing a significant debt payment coming due. TPG must decide whether to sell the business and get out "whole," or whether it can develop and execute a more successful strategy going forward.

On September 20, 2000, Jonathan Weill, a Wall Street Journal reporter in Dallas, Texas, published a piece questioning the profitability and accounting of Enron Corporation. He based his article on a study of Enron's financial statements and conversations with staff at the Financial Accounting Standards' Board (FASB), accounting professors, financial analysts, and others. "It took me a while to figure out everything I needed to... It probably took a good month or so. There was a lot of noise in the financial statements." His piece was read by James Chanos, founder and president of Kynikos Associates, a firm that specialized in short-selling. How did Weill and Chanos figure Enron out when so many others were pushing up the stock price? How did they know to do that kind of analysis? Only the answer is simple: through study, application, and more application. You cannot develop financial analysis expertise overnight. Our objective in this document, however, is to present a very basic structure for financial analysis that will help move you toward that goal. We focus on what to look for in the financial statements, how to do basic ratio analysis, what financial forecasting entails, and how analysts use financial statement data in valuation. We intentionally focus on the mechanistic nature of financial analysis because these tools are fundamental building blocks common to the analysis of most firms. Without understanding this basic structure the unique issues facing a firm would be difficult to interpret.

Spreadsheet Supplement for case 808017

Spreadsheet Supplement for case 808048

Describes a prospective "venture debt" loan to a new venture from the perspective of Patrick Lee, a principal at Pinnacle Ventures. Forces students to grapple with the nature of financial risk in the start-up firm and assess the prospective risks and returns to a lender to such a firm. To reach a perspective on these issues, students need to assess the existing pro forma cash flows of the venture backed firm, overlay the cash flow implications of a venture debt loan, and assess how much additional "runway" (months till cash runs out) the venture debt will provide. Students must also look at the prospective returns to the venture debt firm from the warrants and the option to invest in follow-on financings that is provided to Pinnacle as part of the loan. Thus, they must look at risk and return from the prospective of both parties. Also provides information on the returns to venture capital, venture debt, and other forms of private equity, and asks students to address the issue of what the risk and return in these various private equity asset classes has been and is likely to be.

Gome, China's largest electronics retailer, is plotting the best course to go public. Unlike many high-growth businesses in China, Gome has only moderate financing needs. Its charismatic and ambitious chairman Wong Kwongyu has built an expansive retail network in China and successfully used trade credits by suppliers and banks to make Gome a highly cash generative business. The decision to go public has three inseparable components: why, where, and how. Does Gome really face substantial funding shortages for its operations? If so, are there any alternatives other than going public? If not, what are the other potential motivations to go public? Given these considerations, financial and otherwise, which stock market is the best one to list Gome's shares on? And between an IPO and a backdoor listing, which option suits Gome the best in terms of timing, costs, feasibility, and risks? Assuming Gome chooses to go public via a backdoor listing, what is the process and how are transactions structured? Lastly, for Wong and his top managers, how will each listing choice affect Gome's future development in the context of the pending market deregulation and expected industry consolidation?

Gome, China's largest electronics retailer, has the opportunity to acquire China Paradise, the number three player in the Chinese electronic retailer industry. This happened in the general context of a great market development and potential consolidation of the household electronic appliance retailing sector. Gome, Suning, and China Paradise, the three largest players in the market, all experienced phenomenal growth, but Gome is slowly losing steam and risks being overtaken by the current number two, Suning. In addition, following China's entry into the WTO and the end of its five-year protection period, foreign competition, such as Best Buy, has entered the market and is bound to change the competitive landscape. Gome needs to decide what to do, and if it proceeds, it needs to move very fast. The decision will hinge on answering a few important questions. Why did China Paradise want to sell? If China Paradise failed, how could Gome guarantee that it would not follow suit? Is this the best time to snap up China Paradise? Should it focus on fixing it's per store performance measure or should it still rely on the growth of the total size of the operation in terms of the total number of stores? Does the acquisition of China Paradise put Gome in a position that it would again be very high in total number of stores but falling behind in the per store performance? This might be a big concern, especially if the acquired operation has a different culture than its existing operation. How can Gome remedy that? How does the acquisition, if it happens, fit the overall corporate strategy of relying on thin margin and volume? How would this strengthen or hurt Gome in its positioning when competition with both domestic and international players is expected to intensify?