FBE 525



FBE 532 - Class Objectives and Problem Assignments

J. K. Dietrich

Week 4 – February 2, 2006

Goals and Objectives

(1) Define venture capital and discuss the potential social and economic value of this type for financing of tart-up or other firms;

(2) Describe the structure of the venture-capital market in terms of the most common type of venture capital investors and funds and how the structure of deals can meet investors’ needs and concerns;

(3) Describe the types of venture capital deals in terms of instruments used (like classes of debt instruments and equity claims and warrants) and the way the deal structure determines payoffs and allocates risks of investments in firms;

(4) Define highly leveraged transactions (loans) and the role they can play in corporate restructuring;

(5) List and analyze the sources of value that underlie corporate restructuring.

Suggested Review Reading for next Week

RWJ, Chapter 19.

Case Questions for Next Week (John Case Company Case)

(1) Should Mr. Johnson and the other managers seriously consider buying the firm? Why or why not?

(2) How much money does Mr. Johnson still have to raise from external sources? What terms and conditions should he attempt to obtain on the external financing? What should terms and conditions should he settle for? Are the conditions on the present commitments satisfactory?

(3) If the management group should go through with the purchase, how and when should they try to cash in?

Notes: Mr. Case’s bond is a junk bond with face value $6 million and market value $4 million, i.e., he gives the management team only $4 million in cash, not $6 million. For question (1), we do not have enough data to attempt a DCF analysis but there is good information on comparables. Finally, in considering the warrant package, keep in mind the following: the number of warrants issued is arbitrary – what we care about is the value of the equity given to the venture capitalist when the firm is eventually taken public again. You can make assumptions regarding this amount without explicitlly valuing the warrant package using option pricing methods since again we lack data on inputs such as volatility, etc. Use a simple multiples approach to figuring firm value at the time of the eventual IPO.

Important Vocabulary List from Class

VENTURE CAPITAL, VENTURE CAPITALIST

“ANGELS”, PRIVATE (LIMITED) PARTNERSHIPS, AFFILIATES OF FINANCIAL INSTITUTIONS

SEED MONEY, FIRST ROUND FINANCING, SECOND ROUND FINANCING, MEZZANINE FINANCING, BRIDGE FINANCING

DEAL STRUCTURE

LEVERAGED BUY-OUT (LBO)

GOING PRIVATE, TENDER OFFER, REVERSE STOCK SPLIT, STRIP FINANCING

JUNIOR AND SENIOR DEBT

MONITORING

Suggested Wall Street Journal (WSJ) or other Articles

Continuing Stories (Multiple articles)

Bidding war for Guidant by Boston Scientific and Johnson and Johnson (great summary stories on Friday, January 27, 2006, including fascinating one on A1)

Disney to acquire Pixar (multiple stories, for example January 24, B4, January 25, A3 and B1)

Ford plans massive restructuring (lead article January 24, A1)

SEC requires disclosure on executive compensation

Single Stories or New Last Week (Date, Page)

Venture-Capital Bets Swells Stanford’s Endowment” (January 23, A1)

Deal for Albertson’s with private-equity firms and Supervalu to be announced (January 23, A3)

Knight Ridder plans to Streamline to Entice a Buyer” (January 24, A2)

Arcelor may win over Thyssen in competitive bidding for Dofasco (January 24, A8)

FedEx is buying Chinese partner (January 25, A2)

Chipotle IPO saw first day doubling of share price (January 26, C1)

First Data is spinning off Western Union subsidiary (January 26, B4)

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