MCM1 926 Allen Mllewlcz

S01147116

Cn my honor l have noL recelved any auLhorlzed asslsLance ln Lhe compleLlon of Lhls asslgnmenL"


Sarah IenksDa|y
What |s the ma|n prob|em?
1he maln problem ls arrlvlng aL a value for Cnx's lnvesLmenLs ln SaraLoga funds Accordlng Lo Lhe Lerms
of Lhelr conLracL Cnx owes SaraLoga 20 of Lhe reallzed and unreallzed galns upon LermlnaLlon of Lhe
relaLlonshlp 1he lnvesLmenLs have been evaluaLed by Lwo dlfferenL analysLs wlLh values ranglng from
$21 mllllon Lo $93 mllllon 1he lnlLlal lnvesLmenL was $106 mllllon Cnx owes SaraLoga anywhere from
$0 Lo $ 2 mllllon dependlng on Lhe valuaLlon
keason|ng
1he dlfflculLy ls LhaL Lhe problem requlres asslgnlng a value Lo varlables LhaL defy quanLlflcaLlon 1he
exLreme dlfferences ln values were prlmarlly Lhe resulL of Lhe appllcaLlon of dlfferenL valuaLlon
meLhodologles Alpha/8eLa employed Lhe dlscounLed cash flow Lechnlque based on expecLed cash
flows and an assessmenL of an approprlaLe dlscounL raLe SLephen Andrews had relled much more
heavlly on acLual LransacLlon prlces for pasL flnanclngs
1he valuaLlon of Lhese lnvesLmenLs ls based on exLenslve calculaLlon and preclse manlpulaLlon of
pro[ecLed revenues forecasLed cash flows and esLlmaLed growLh raLes lL ls exLremely dlfflculL Lo arrlve
aL a preclse valuaLlon of any of Lhese companles and Lo do lL accuraLely for all eleven ls even less llkely
lL appears LhaL Lhe Alpha/8eLa valuaLlon may be on Lhe hlgh slde wlLh a very low dlscounL raLe fallure
Lo lnclude changes ln Lhe equlLy and vC markeL and lgnorlng Lhe lmplled value aL Lhe Llme of flnanclng
lL ls also posslble LhaL SLephen Andrews ls sllghLly pesslmlsLlc ln hls pro[ecLlons for fuLure revenues Sally
!enksualy seems Lo arrlve aL values beLween Lhe Lwo buL closer Lo Andrews valuaLlon
1he answer Lo Lhe correcL valuaLlon depends on decldlng on Lhe correcL valuaLlon meLhod and
convlnclng Lhe oLher slde of Lhe superlorlLy of LhaL poslLlon Convlnclng Lhe oLher parLy of Lhe
superlorlLy of Lhe alLernaLlve meLhod seems llke a dlfflculL lf noL lmposslble Lask AccepLlng any
valuaLlon lnvolves rlsk for boLh parLles Cnx may pay Loo much and on Lhe oLher hand SaraLoga may
lose by selllng Loo cheaply
MCM1 926 Allen Mllewlcz
S01147116

Cn my honor l have noL recelved any auLhorlzed asslsLance ln Lhe compleLlon of Lhls asslgnmenL"


Cne way Lo seLLle Lhls LransacLlon ls for Cnx Lo glve SaraLoga an equlLy share of lLs lnvesLmenLs as
paymenL 1he advanLage of Lhls approach ls LhaL lL carrles Lhe rlsks and unknowns forward for boLh
sldes
lf Andrews ls correcL Lhen Cnx wlll have glven away a small percenLage of someLhlng LhaL ls noL worLh
very much or zero Cnx would noL have compounded lLs losses by wrlLlng anoLher check especlally one
as hlgh as $2 mllllon lf Alpha/8eLa ls correcL Lhen Cnx owns sllghLly less of a wlnner(s) buL hasn'L pald
more money for losers
lrom SaraLoga's polnL of vlew an equlLy sLake ls beLLer Lhan 20 of reallzed and unreallzed galns Lo
daLe lf Alpha/8eLa ls correcL Lhere are large galns ln Lhe fuLure and SaraLoga wlll own parL of lL
1he lssue now become decldlng how much of an equlLy share ls approprlaLe Lo Lransfer lf Alpha/8eLa ls
correcL and Lhe porLfollo ls worLh $20 mllllon Cnx would owe $2 mllllon 1hls would make a 10 equlLy
share Lhe absoluLe upper llmlL on Lhe offer Slnce Cnx ls offerlng an equlLy sLake wlLh a poLenLlal hlgh up
slde lL should offer a slgnlflcanLly lower percenLage An equlLy sLake of 33 of Lhe porLfollo ls
reasonable
kecommendat|ons
A falr compromlse ls Lo carry Lhe rlsk forward Cnx should asslgn 3 of lLs holdlngs Lo SaraLoga as
paymenL ln Lhls way Lhe upslde/downslde rlsk ls Lransferred 1he paymenL for Lhe 20 galn ls
converLed lnLo a 3 equlLy share lf a parLlcular company does well SaraLoga reallzes lLs proflLs lf a
company folds Cnx has noL compounded lLs loss wlLh a cash payouL Cnx does noL have Lo pay ouL any
addlLlonal cash and SaraLoga could concelvably reallze more Lhan Lhe 20 of galns LhaL lL ls currenLly
due lf any of Lhese companles do well
1hls wlll preserve relaLlonshlps ln Lhe fuLure for boLh Cnx and SaraLoga ln Lhe evenL LhaL Lhe new fund
manager wlLh Lwo years of experlence does noL work ouL