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CMGI is considering acquiring yesmail, an e-mail marketing firm. In assessing the potential acquisition, it must assess the fit with its own organization, which consists of a unique blend of venture capital investments and publicly traded subsidiaries.

UST, Inc. is a very profitable smokeless tobacco firm with low debt compared to other firms in the tobacco industry. The setting for the case is UST's recent decision to substantially alter its debt policy by borrowing $1 billion to finance its stock repurchase program.

Spreadsheet Supplement for case 200064

In December 1996, Enron Europe and The Eastern Group were on the verge of signing an innovative transaction in the utility industry. Eastern was going to buy a long-term option to convert natural gas into electricity from Enron, thereby giving it the economic right to operate a "virtual" power station. This structure was vastly different from the traditional independent power plant (IPP) structure, and the executives involved had to convince their superiors of its wisdom before they could proceed. This case was jointly written for Large-Scale Investment and Corporate Financial Engineering, and it covers topics related to both project finance and financial engineering. It illustrates a new paradigm in the electric power industry: the creation of virtual power stations backed by physical power stations with merchant exposure. It also illustrates how physical operations (constructing and operating a power plant) can be used to offset contractual obligations and trading exposures.

Health Development Corp. (HDC) owns and operates health clubs in the Greater Boston area. HDC engaged a local investment banker to explore a sale of the company. The most likely buyer views HDC's prior purchase of real estate as a negative. HDC's management is convinced the purchase enhanced value, and a discounted cash flow analysis confirms that it was a substantially positive net present value decision. Nevertheless, the real estate reduces the valuation according to the approach used by the potential buyer. The challenge is to structure a transaction that allows HDC to realize its full value.

The announcement in January of the merger between America Online and Time Warner marked the convergence of the two most important business trends of the last five years--the rise of the Internet and the resurgence of mergers and acquisitions. M&A activity is at a fever pitch, spurred in large part by the breathtaking influx of capital into the Internet space. And all signs indicate the trend will only accelerate. Against this background, an impressive group of experienced deal makers came together to share their experiences of what makes mergers work. They were assembled in Scottsdale, Arizona, under the auspices of the M&A Group, a professional society formed in 1999 for CEOs interested in M&A as a business strategy. Participants included top executives from Internet start-ups like Teligent; venture capital firms like Baroda Ventures; financial institutions like Merrill Lynch and PricewaterhouseCoopers; and major corporations like Allstate, Tyco International, SmithKline Beecham, Rohm and Haas, VF, Crown Cork & Seal, and Hughes Space and Communications. The spirited and surprisingly frank discussion cut a wide swath, considering issues such as whether most mergers fail to pan out as well as expected, how to increase the odds of success, the nuts and bolts of the integration process, the trade-offs between acquiring a company and growing from within, the importance of cultural issues, and why anyone would want to be on the board of a merged company.

Francisco Partners (which focuses on buyouts of high-technology firms) aims to be the largest first-time fund ever raised. The rationales for the fund, fundraising strategy, and partnership terms and conditions are among the topics explored.

Spreadsheet Supplement for case 200063

Spreadsheet Supplement for case 200063.

An entrepreneur is forced to analyze the tradeoffs between different equity providers through a detailed analysis of venture financing terms and cash flow forecasts. The founder of a Web-based IMS for schools must negotiate a term sheet, determine funding needs, value her company, and finalize a venture deal. To obtain executable spreadsheets (courseware), please contact our customer service department at [email protected].

Supplements the (A) case.

Some of the senior managers at Ameritrade, an Internet brokerage firm, are selling their holdings in the firm. Why are the managers selling, how will it affect shareholders, and what should the CEO do about it? The CEO is concerned that the market will interpret managerial sales as a signal that the managers believe the firm to be overvalued. He also wonders whether the sales might interfere with the firm's plan to raise funds in the capital markets. Finally, he thinks that, at a minimum, such sales undermine a carefully thought-out compensation plan that pays managers with stock options to align managers' incentive with those of the shareholders.

Dell Computer Corp. announced a share repurchase program shortly after a significant stock price drop. In this announcement, the company also states that it will use options contracts. This case looks at the options transactions and how they relate to Dell's employee stock option program and the share repurchase program.

A new associate at a venture capital firm must choose which of three potential investments to recommend to the firm's partners. Each potential investment has strengths and drawbacks.

This case involves part of a module on financing large projects in the elective curriculum course entitled "Large-Scale Investment." It is set in August 1999, just after Iridium, a global communications firm, declared bankruptcy. Although the case describes Iridium's creation, development, and commercial launch, it concentrates primarily on the firm's financial strategy and execution as it raised more than $5 billion of capital. It describes the specific securities Iridium issued, the sequence in which it issued them, and the firm's financial performance prior to bankruptcy. Using analyst forecasts, students can value the firm prior to its bankruptcy, but will recognize how difficult it is to value technology start-ups given the uncertainty in demand.

This note addresses the methods used to value companies in an M&A (mergers and acquisitions) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation such as book value, liquidation value, replacement cost, market value, trading multiples of peer firms, and comparable transaction multiples.

Spreadsheet Supplement for case 200033