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Spreadsheet Supplement for case 295065

The history of the venture capital industry is reviewed, and the key institutional features described.

Presents the capital cash flow method for valuing risky cash flows. In this method cash flows are calculated to include the benefits of interest tax shields. In a capital structure, with just ordinary debt and common equity, capital cash flows equal the flows available to equity--net income plus depreciation less capital expenditure and the change in working capital--plus the cash interest paid to bondholders. The interest tax shields decrease taxable income and thereby increase cash flows. Since the interest tax shields are included in the cash flows, a before-tax interest rate that corresponds to the riskiness of the assets is appropriate to value the capital cash flows.

Spreadsheet Supplement case for 295069

Amoco Corp. is negotiating to sell a wholly-owned subsidiary, MW Petroleum, to Apache Corp. MW owns large reserves of oil and gas comprising many properties at different stages of engineering, development, and production. The proposed acquisition is a large one for Apache and poses several important financing and valuation problems. This case focuses primarily on valuation.

Explores the strategy, financing, and governance of a new type of organizational form, dubbed the Leveraged Build-Up by its inventor, Kohlberg, Kravis, Roberts & Co. The company makes leveraged acquisitions of small publishing companies, managing them in a very decentralized way. It has grown dramatically between 1989 and 1993. K-III's organization and governance structure combines many of the characteristics of leveraged buyouts with those of venture-backed companies. Each individual operating company is highly leveraged, achieving the discipline of debt and avoidance of free cash flow problems that otherwise plague pubishing companies. At the same time, the top management mandate is to acquire companies, requiring continual infusions of cash. Explores the tension between the debt repayment obligations and the demand for additional financing.

Provides an overview of patent and trade secret protection. Also discusses the legal processes through which intellectual property is protected and litigated.

The United States has the best stock markets in the world, many people believe. And the SEC works hard to keep them that way. The U.S. markets are the broadest and fairest anywhere. The average American can trade with little fear of rigged markets or insider dealings. But there is a dark side to this environment of perfectly liquid markets. Unwittingly, the U.S. system nurtures market liquidity at the expense of good governance. The system prevents shareholders from engaging managers in candid dialogues and providing informed oversight and counsel. It encourages capable executives to neglect their fiduciary duties, thus injuring the long-term interests of companies and shareholders. Clever tinkering with insider-trading and disclosure laws cannot get around the basic conflict between market liquidity--which requires transient, arm's length shareholding--and close, honest shareholder-manager relationships.

A Montreal animated film producer and distributor requires an infusion of capital to finance its growth. The film industry can be a high risk industry and finding investors is difficult. Two venture capital companies are approached to allow the business to grow. It is now time to negotiate the deal.

In October 1992, Eugene Shanks, president of Bankers Trust New York Corp., and Brian Walsh, head of the Global Investment Bank (GIB) business unit, are considering a proposal for a large and complex financing involving the North Sea Oil Co. (NSOC). The financing structure involves the use of derivatives, exposing Bankers Trust New York Corp. to substantial oil price risk and credit risk. Its size of $700 million and lengthy duration makes managing and laying off these risks in the financial markets a matter of prime concern. The proposed deal has been brought together by GIB, which was formed recently by merging Bankers Trust's capital markets and corporate finance functions. If successful, this deal will be an important barometer of the value that can be created by combining these traditionally separate functions.

Briefly describes the crude oil markets and common derivatives contracts written on oil. The contracts are oil forward and futures contracts, and over-the-counter oil price swaps.

In mid-1993, representatives of Rhone-Poulenc, a leading nationalized French firm, worked with the French government to plan the imminent privatization of the firm. One aspect of the privatization was to create incentives for employees to buy and hold shares in the firm. A partial privatization earlier in 1993 proved that workers were reluctant to hold equities, even after receiving discounts and subsidized financing. The key financial officers of the firm received a proposal from Bankers Trust that would offer employees a unique investment in the firm, which might increase employee participation in the share offering. This alternative would guarantee employees a minimum rate of return yet allow them to enjoy appreciation of the firm's shares. The financial officers have to decide whether to propose this employee stock ownership alternative to the French government and to Rhone-Poulenc's board for inclusion in the forthcoming privatization.

Spreadsheet Supplement for case 295049

Spreadsheet Supplement for case 295033.

Goodyear's transition to radial tires from bias and bias-belted tires was difficult and expensive, but successful. Afterward, in 1983, the company embarked on a major diversification program. Three years later, after investments exceeding $1 billion in oil and gas pipelines and reserves, Goodyear was attacked by a corporate "raider" and is considering abandoning its diversification program in favor of a highly leveraged restructuring.

The president of Image Processing Systems has plans to expand but is facing the challenge of obtaining financing. After considering and rejecting the use of venture capital, he is actively considering a proposal put forward by McDermid, St. Lawrence, Chisholm; a mid-sized Canadian investment company. The proposal involves a private placement of equity followed by an IPO.

The merger of two computer software firms with very rapidly growing non-overlapping products makes great strategic sense, but presents difficult valuation and accounting problems. How can a firm pay $225 million to acquire another firm with negligible current earnings, and which promises to produce an immediate $150 MM one-time charge to earnings which will be followed over a five-year period by $65 million of amortization of intangible assets?

Gives a conceptual understanding of derivative products, their applications, and valuation. After a brief treatment of exchange-traded derivatives, explores over-the-counter (OTC) derivatives, emphasizing the market, credit, legal, operational, and other risks associated with these instruments.

Spreadsheet Supplement for case 295005

Spreadsheet Supplement for case 295024