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Course Module in Corporate Financial Management
I. Overview of suggested content (HBS cases unless otherwise noted) Title Valuation Overview 1. What's It Worth?: A General Manager's Guide to Valuation (HBR Article) And Note on Mergers and Acquisitions and Valuation (Ivey Note) Discounted Cash Flow (DCF) and Multiples 2. Radio One, Inc. Amtelecom Group Inc. (Ivey case) 3. Spyder Active Sports— 2004 Alternative: Kohler Co. Supplement: Corporate Valuation and Market Multiples (HBS Note) Adjusted Present Value (APV) 4. Sampa Video, Inc. Alternative 1: Seagate Technology Buyout Alternative 2: Kmart, Inc. and Builders Square Supplement: Using APV: A Better Tool for Valuing Operations (HBR Article) Equity Cash Flow 5. Acova Radiateurs Alternative 1: Philip Morris Author Product Number 97305 Publication Year 1997 Pages Teaching Note ---
1995 (Rev. 2000)
Ruback Dunbar Villalonga Villalonga Luehrman
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2000 2004 2005 2005 2005
15p 32p 23p 20p 9p
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Andrade Andrade Meulbroek Luehrman
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2001 (Rev. 2003) 2001 (Rev. 2002) 2000 (Rev. 2002) 1997
3p 19p 25p 8p
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1995 (Rev. 1999) 1989 (Rev.
Harvard Business School Publishing 800-545-7685 (Outside the U.S. and Canada 617-783-7600) firstname.lastname@example.org www.hbsp.harvard.edu/educators
a standard bestseller used over two days at Harvard Business School. the article then proposes the Adjusted Present Value. The next two segments contrast the traditional DCF and multiples techniques to value public (segment 2) and private (segment 3) companies. The two alternative cases illustrate valuation in a more in-depth buyout context—Seagate (a two-session case) focuses on the volatile technology sector. It concerns the acquisition of a series of urban radio stations across the United States. closes the module with Acova Radiators. concerning the expansion of a video chain. on the equity cash flow (ECF) method. The first alternative. The supplementary HBR article “Using APV: A Better Tool for Valuing Operations (HBR Article)” describes an APV analysis in clear step-by-step fashion using a hypothetical company example. The Ivey note. Students are required to value a project using APV. Harvard Business School Publishing 800-545-7685 (Outside the U. The teaching note provides one. In Segment 4. Segment 2 recommends Radio One. The alternative Amtelecom Group case.Company Valuation: An HBSP Course Module Companies and Kraft Alternative 2: BW/IP International.harvard. while Kmart focuses on the traditional retail sector. Rationale for selecting and sequencing the items in this module The module starts with the bestselling Harvard Business Review article “What’s It Worth? A General 1 Manager’s Guide to Valuation.. WACC. Segment 3 offers two new cases on valuing privately held companies and shareholder conflicts in family firms. and Capital Cash Flow (CCF) methods. Spyder Active Sports—2004 concerns exit options for the founder and private equity partner of a high-end ski apparel manufacturer.edu/educators . Kohler Co. and Canada 617-783-7600) custserv@hbsp. The Amtelecom case includes a sumof-parts valuation. Inc.” The article first describes the limitations of the standard WACC (Weighted Average Cost of Capital) version of DCF (Discounted Cash Flow) valuation of companies. multiples (comparable companies). which can be covered in a single session. 1994) 1992 Luehrman 293058 16p 295147 II.hbsp. Sampa Video. The last two segments explore the alternative valuation techniques mentioned in the lead HBR article. demonstrates the DCF.S. and Equity Cash Flow methods as better suited for valuing operations. Options. is a short case that highlights the impact of a project’s debt capacity on valuation. and ownership claims. opportunities. focuses on valuing a minority stake and issues of control premiums in a plumbing fixtures company. and break-up value methods for valuing companies in the mergers and acquisitions context.edu www. Segment 5. about Adjusted Present Value (APV). 1 This module assumes students are familiar with the discounted cash flow (DCF) and Weighted Average Cost of Capital (WACC) concepts. Both cases have worked well in HBS executive programs on valuation.and two-day teaching plans and ECF and CCF valuations of Acova. a candidate that students must value for a leveraged buyout (LBO) in an international setting.harvard. The complementary case. The supplementary technical note “Corporate Valuation and Market Multiples” reviews the implementation and limits of the multiples valuation method. As an alternative. both at introductory MBA and executive levels. Note on Mergers and Acquisitions and Valuation. explores valuation of a Canadian telecommunications subsidiary for sale to a buyer or for an initial public offering (IPO).
295085. had the opportunity to acquire 12 urban stations in the top 50 markets from Clear Channel Communications.harvard. Financial analysis.edu/educators . Finally. Richard S. Joint ventures. Subjects: Acquisitions. 295069. Subjects Covered: Acquisitions. Inc. North Carolina. Today the WACC standard is insufficient. 1994) Note on Valuing Equity Cash Flows (Luehrman. What's It Worth?: A General Manager's Guide to Valuation Timothy A. So it is not surprising that valuation is the financial analytical skill general managers want to learn more than any other. What do generalists need in an updated valuation tool kit? In the 1970s. Pauline Fischer Radio One (NYSE: ROIA and RIOAK). BW/IP International. Dominique Fortier (Richard Ivey School of Business/UWO) The object is to define what is meant by mergers and acquisitions and to understand why they happen. Inc. 10p. Ruback. Augusta. the largest radio group targeting African-Americans in the country. 2001) III. Foerster. Mergers. The second alternative. The stations were being sold by Clear Channel Communications. Detailed description of recommended items Valuation Overview 1. Present value. discounted-cash-flow analysis (DCF) emerged as best practice for valuing corporate assets. Over the years. 13p. The proposed acquisitions would double the Harvard Business School Publishing 800-545-7685 (Outside the U. Indiana. is an integrative case that values an acquisition candidate using both the adjusted present value and equity cash flow methods. Luehrman (Harvard Business Review) Behind every major resource-allocation decision a company makes lies some calculation of what that move is worth.harvard. Capital costs.S. WACC has been used by most companies as a one-size-fits-all valuation tool. and the reasons why some mergers succeed while other fail are examined. Rev 2005) Note on Valuing Private Businesses (Crane.Company Valuation: An HBSP Course Module Philip Morris Companies and Kraft. Improvements in computers and new theoretical insights have given rise to tools that outperform WACC in the three basic types of valuation problems managers face.hbsp. Radio One was also negotiating the acquisition of nine stations in Charlotte. 14p. Radio One. Capital budgeting. and Canada 617-783-7600) custserv@hbsp. to obtain Federal Communications Commission (FCC) approval for its acquisition of AMFM. The impact of these deals on shareholders of both the acquiring and acquired companies is investigated. Georgia. (NYSE: AFM). And one version of DCF--using the weighted-average cost of capital (WACC)--became the standard. explaining how they work and when to use them. (NYSE: CCU) in the winter of 2000. and Indianapolis. Valuation Length: 11p Note on Mergers and Acquisitions and Valuation Steve R. Inc. Valuation Length: 14p Discounted Cash Flow (DCF) and Multiples 2. some valuation frameworks are provided. in order to determine the value of a firm. Inc. Technical notes for further reading: Note on Capital Cash Flow Valuation (Ruback. uses a variety of valuation techniques to assess a merger from both companies’ perspectives. Timothy Luehrman presents an overview of the three tools.edu www. 201060.
Valuation. along with its impact on the owner and his family.harvard. Subjects Covered: Acquisitions. Subjects Covered: Financing. and IPO via an income trust offering. who held 4% of common stock. Dwight Crane. Kohler.7 million revenues.Company Valuation: An HBSP Course Module size of Radio One. has to decide whether to settle with the dissenters and. were required to sell their shares to the company.edu www. 2004 Length: 23p Alternative: Kohler Co. a regional telecommunications.. To alleviate these problems. if so. Valuation Setting: Canada. the board has decided to sell off Amtelecom Communications. chairman and CEO. $61 million revenues . Learning Objective: To provide an opportunity to study valuation of a private company and the process of harvesting wealth. Herbert V.S. and Canada 617-783-7600) custserv@hbsp. Spyder Active Sports—2004 Belen Villalonga. Raphael Amit Kohler Co. Private equity. cable television.edu/educators . Jr. Jacobs was ready to consider alternative types of equity transactions that would provide a source of liquidity to him and his family. Setting: Colorado. Apparel industry. The three sales alternatives being considered are: selling to a strategic buyer. Radio. apply discounted cash flow. In addition.hbsp. including sale of Spyder to another apparel company and sale of a large block of stock to a private equity firm.. In 1995. Also brings up family business issues because the transaction would have a significant effect on two of his children who are involved in the business. establishing a major international brand that appealed to ski racers and other active skiers. is a large. Includes color exhibits. As part of a recapitalization aimed at preserving family ownership of Kohler Co. AGI's stock has been performing poorly. The case focuses on the strategic and financial evaluation of the proposed acquisitions. and Amtelecom Communications. Amtelecom Communication's capital requirements are not being satisfied because cash is being diverted to ICS Courier to cover its losses. 2002 Length: 32p 3. Communications industry. a national fixed-route courier business. $81. Present value. James Quinn David Jacobs founded a high-end ski apparel company in 1978. A group of dissenting shareholders filed a lawsuit claiming that the buyout price undervalued their shares by a factor of five. a private equity firm in Denver. (AGI) must make a recommendation to the board of directors regarding the best way to sell its Amtelecom Communications subsidiary. Subjects Covered: Financial strategy. non-family shareholders. Poses issues of valuation of a privately owned company and presents alternative ways to harvest wealth from a private company.harvard. 50 employees. he sought external financing to support further growth of the company and structured a financial deal with CHB Capital Partners. at what Harvard Business School Publishing 800-545-7685 (Outside the U. By 2004. Valuation Setting: District of Columbia. Mergers. In April 2000. and gain a basic understanding of income trusts. private family firm. and Internet business. IPO. 1999 Alternative: Amtelecom Group Inc. Learning Objective: To teach valuation in a strategic setting and provide an opportunity to apply sum of parts valuation to value a diversified firm. best known for its plumbing fixtures. Mergers & Acquisitions. Belen Villalonga. Learning Objective: To provide students the opportunity to forecast the cash flows associated with the proposed acquisitions and to value those projections using discounted cash flows as well as transaction and trading multiples. Growth strategy. AGI owns and operates ICS Courier. Craig Dunbar. Subsidiaries. conduct a transactions analysis to determine the standalone value of a firm. He successfully built and grew the company. IPO via a common share offering. Andrew Cogan (Richard Ivey School of Business/UWO) The CEO of Amtelecom Group Inc..
a group of private investors and senior managers were negotiating a deal to acquire the disk drive operations of Seagate Technology.edu www. Debt management. which requires a more advanced valuation. The investor group had to decide how much to offer for the operating assets.hbsp. to discuss leveraged buyouts. Financial strategy. Shareholder relations. Stuart C. Length: 9p Adjusted Present Value (APV) 4. spreadsheet exhibits If both cases are used. Exhibits are available in electronic form to facilitate analysis of the data (HBS courseware 9-205-707). specifically adjusted present value (APV) and weighted average cost of capital (WACC). Learning Objective: To illustrate cash flow valuation (adjusted present value and WACC). a software maker. sets forth the basic steps for using the method. Learning Objective: To examine the valuation of privately held firms from the perspectives of the controlling shareholder(s) and minority shareholders. Luehrman (Harvard Business School Technical Note) Provides a basic introduction to the use of market multiples for business valuation. Further complicating the analysis was the fact that. The decision calls for a detailed valuation of the company at the time of the recapitalization. including estimating the cost of capital from comparables. Management must value the project under different financing strategies and methods. and Canada 617-783-7600) custserv@hbsp. then Kohler.S. and when each is appropriate. Stockholders. both in traditional settings within mature industries. unlike in traditional buyout settings. Supplement: Corporate Valuation and Market Multiples Timothy A. Valuation Setting: 2001 Length: 3p Alternative 1: Seagate Technology Buyout Gregor Andrade. as well as the impact of financing decisions on value. Inc. Learning Objective: To explain how to implement APV and WACC.. and to Harvard Business School Publishing 800-545-7685 (Outside the U. Explains the method's reliance on the Law of One Price. Valuation Length: 20p • • Downloadable. as well as in the more volatile technology sector. and capital--intensive industry. Subjects Covered: Family owned businesses. Gilson In March 2000. Subjects: Capital budgeting. Mergers. Valuation. Learning Objective: To introduce the use of market multiples to estimate the value of a business. Sampa Video.harvard. as well as how to finance the transaction. Todd Pulvino. Stocks. and reviews some practical issues arising in its application. volatile.Company Valuation: An HBSP Course Module share price. Subjects Covered: Acquisitions. to discuss tax implications associated with corporate divestitures.harvard. Gregor Andrade A video rental store is considering offering home delivery service. the target company was in a highly cyclical. Legal aspects of business. Financing. including the applicability of discounts for lack of marketability and lack of control. The motivating factor for the buyout was the apparently anomalous market value of Seagate's equity: Seagate's equity value was just a fraction of the value of its minority stake in Veritas Software Corp. Capital investments. should follow Spyder. Provides the necessary data for students to value the company using both a discounted cash flow approach and a multiples (comparable companies) approach.edu/educators . Students must identify and understand the different valuation assumptions that can lead to a wide range in price. Present value. Recapitalization. Cash flow.
Jonathan Barnett In 1997. Subjects: Capital structure. In the midst of the fiercely competitive home improvement retail industry. factory. Discount department stores. Present value.S. Green's offer included a $10 million cash payment.5 billion in noncancelable Builders Square lease obligations.5 billion revenues. a subsidiary of Source Perrier. But the particular version of DCF that has been accepted as the standard-using the weighted-average cost of capital (WACC)--is now obsolete. or assets-inplace. and the assumption of approximately $1. Learning Objective: To give students an opportunity to value Acova using the flows-to-equity technique.harvard. Computer hardware. Timothy Luehrman explains APV and walks readers through a case example designed to teach them how to use it. Debt management. 1997 Supplement: Using APV: A Better Tool for Valuing Operations Timothy A. an existing business. 500 Employees. Present value. Leveraged buyouts. Capital structure. Divestiture. and Canada 617-783-7600) custserv@hbsp. $6. adjusted present value (APV). Builders Square.edu www. Valuation Setting: Building materials industries. $2. Corporate reorganization.Company Valuation: An HBSP Course Module qualitatively evaluate potential costs of financial distress in a capital-intensive technology-driven setting. Mergers & Acquisitions. and Builders Square Lisa Meulbroek. 1990 Length:12p Harvard Business School Publishing 800-545-7685 (Outside the U.harvard. Luehrman (Harvard Business Review) For the past 25 years. or market position--is to use a discounted-cash-flow (DCF) methodology. Capital costs. Liability. Leveraged buyouts. Project evaluation. Divestiture. Valuation Length: 8p Equity Cash Flow 5. is especially versatile and reliable. Valuation Setting: Silicon Valley. Options. Retail industry. Mergers & Acquisitions. Valuation Setting: France. Plumbing & HVAC. International business.edu/educators . Acova Radiateurs Lisa Meulbroek In March 1990. It will likely replace WACC as the DCF methodology of choice among generalists. Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase of its ailing 162-store home improvement chain. Capital budgeting.hbsp. Source Perrier had decided to sell Acova. Kmart would remain contingently liable for the lease payments if the new entity were to fail. Subjects: Acquisitions. Inc. Restructuring.8 billion revenues Length: 19p • Two-session comprehensive case Alternative 2: Kmart. International finance. product line. managers have been taught that the best practice for valuing assets--that is. Financial analysis. and (3) should Kmart accept the offer or hold out for a higher offer or more offers? Learning Objective: To incorporate off-balance-sheet financing of operating lease guarantees into a valuation exercise (using multiples and the APV approach) focused on a money-losing subsidiary. Leasing. Capital structure. Today's better alternative. APV is used to value operations. Like WACC.(2) is the Green offer a good deal for Kmart?. the questions posed include (1) what is the value of the Builders Square subsidiary?. and Baring Capital Investors thought it might make a good leveraged buyout candidate. Software. as well as to evaluate the merits of this technique relative to the valuation methodologies typically used by buyout firms. Baring Capital Investors faced a decision about whether and how much to bid for Acova Radiateurs. Corporate control. Financial strategy. a warrant to purchase a 28% stake in the new entity in the future. Subjects: Acquisitions. That is still true. 337M FF.
Indra A. Luehrman. In a capital structure. Andrew D. Investment management. Crane. and provides some guidance about when to use it. Fortune 500 Length: 21p Alternative 2: BW/IP International. (295149). Capital costs. by Timothy A. the managers of BW/IP International were presented with an attractive acquisition candidate. mid-size. Securities analysis.edu www. low-leveraged. Subjects: Capital budgeting. Fluid control. however. Valuation Setting: California.harvard. a before-tax interest rate that corresponds to the riskiness of the assets is appropriate to value the capital cash flows. Richard S. Subjects: Acquisitions. Tobacco industry. Reorganization. A variety of valuation techniques are employed to assess the plausibility of a restructuring plan. The case asks students to consider how BW/IP can convince its lenders that the acquisition is a good idea. Also permits a careful comparison of the capital allocation processes at a large. It uses company example and transaction data on Harvard Business School Publishing 800-545-7685 (Outside the U.S. To buy the target company. Inc. 8p. Valuation Length: 10p • Teaching Note. Reinbergs This case provides a brief overview of valuation for owners of closely held companies. Valuation Length: 13p Note on Valuing Equity Cash Flows Timothy A. Earnings multiples and their drivers are discussed. Luehrman Note on Valuing Private Businesses Dwight B. Presents two straightforward valuation exercises. Restructuring Setting: Food industry. Subjects: Capital budgeting. versus a small. and Canada 617-783-7600) custserv@hbsp. BW/IP would have to borrow more money and take on more administrative problems at a time when its managers are already very busy. Subjects: Capital budgeting. Financial management. The interest tax shields decrease taxable income and thereby increase cash flows. Present value. shows how to use it. Timothy A.hbsp. Inc.edu/educators . Cash flow. with just ordinary debt and common equity. Introduces the "equity cash flow" valuation methodology. $250 million revenues. public company. Cash flow. 1988 Length: 16p HBS Technical Notes for Supplementary Reading Note on Capital Cash Flow Valuation Richard S. 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. Equity financing. Students are also given the opportunity to extract information from the common stock prices of the participating firms.Company Valuation: An HBSP Course Module Alternative 1: Philip Morris Companies and Kraft. Loan evaluation. pump & seal industries. Machinery. private company. Luehrman A technical note for advanced students on the topic of valuing highly-levered equity. Food. although rules of thumb and discounted cash flow are mentioned. Ruback Presents the capital cash flow method for valuing risky cash flows. highly-leveraged. In this method cash flows are calculated to include the benefits of interest tax shields. Since the interest tax shields are included in the cash flows. Regan Less than a year after completing a leveraged buyout of their own company.harvard. Ruback Gives students the opportunity to explore the effect of substantial free cash flow on corporate acquisition and operating strategies. discusses the sources and signs of its built-in biases. The focus is on a comparable transactions approach.
Valuation Length: 14p Harvard Business School Publishing 800-545-7685 (Outside the U. financial databases for company screening. It includes a three-page bibliography with references to further sources on valuation methods.edu/educators .harvard.hbsp.edu www. Financial ratios. and professional advisors from appraisal and valuation communities. Learning Objective: To teach participants how to value privately owned businesses. Subjects: Financial analysis.Company Valuation: An HBSP Course Module private deals as an exercise in screening for comparable companies and valuation based on multiples. Small business.S. Price earnings ratio.harvard. and Canada 617-783-7600) custserv@hbsp. private transaction data.
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