jonathan b. welch, northeastern university

AXXON (VENTURE) CAPITAL, INC.

Jonathan B. Welch, Northeastern University

Case Objectives and Use

The case provides an insider’s view of a venture capital firm during a tumultuous period for the venture capital industry, 1999-2003, a period punctuated by the dot.com meltdown. It describes how venture funds are raised, and how investments in startup companies are analyzed and made in hopes of providing the required returns for limited and general partners. The case illustrates the venture capital method of valuation during a risky period of ‘down rounds’ in 2001. It provides macro economic and financial data from which students can develop alternative valuation scenarios for an investment in an Internet based software application company for retailers. It can help students analyze and evaluate warning signs and become better investors. The case is written for MBA and upper level undergraduate courses such as Financial Management, Financial Strategy and Entrepreneurial Finance that seek to introduce the topic of venture capital.

Case Synopsis

She was not your typical venture capitalist. Sheryl Marshal, Managing Partner of Axxon Capital, Inc., founded her venture capital firm to invest in minority and women-owned startup companies. Several wealthy former clients of hers from a period in her life when she served as ‘stockbroker to the stars’ in Boston provided initial funding of $18 million. The SBA provided another $34 million when Axxon successfully applied to become a Small Business Investment Company (SBIC).

Axxon invested in several companies. One went bankrupt and three were doomed to failure. Sheryl was intrigued by an opportunity to invest in a promising Internet based software company, RetailUP, during a C round of funding in February 2001. It looked like a very promising investment. The pre-money valuation of the deal of $48.719 million provided by the lead VC was quite a bit below Sheryl’s own estimate.

She was eager to invest even in light of Alan Greenspan’s comments about ‘irrational exuberance.’ She was undeterred by a close VC friend who felt, ‘There was just too much capital chasing too few good ideas.’ She didn’t heed Economists who were cautioning about a slowing down of the economy. She was not concerned about terrorism. Furthermore, even though larger companies were eying the retail software application space, she didn’t have good reconnaissance. So, how good a deal was it?

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona AZ. All rights are reserved to the author and NACRA. © 2004 by Jonathan B. Welch. Contact person: Jonathan B. Welch, College of Business, Northeastern University, 360 Huntington Ave., Boston, MA 02115. 617-373-4572, [email protected]

mailto:[email protected]

BOARDWALK ACQUISITION CASE

Hugh Grove, Tom Cook, & Rod SchusterUniversity of Denver


The major decision problem is to make a recommendation for the potential acquisition of NanoThin Corporation (NTC), and, if positive, to support it with a strategic analysis, corporate culture and integration analyses, and an acquisition price to help close the deal. The key decision maker, the Chief Financial Officer (CFO), must estimate net income and free cash flows as one basis for valuing NTC. Since NTC is privately held, estimating appropriate valuation multiples and the weighted average cost of capital will be challenging. This case is intended for graduate and senior level courses in finance and accounting. Case topics include financial forecasting, business valuation using different valuation multiples and free cash flow methods, comparable financial benchmarks, and strategic analysis.

Case Synopsis

The students are challenged to make a recommendation concerning the acquisition of a company that helps the acquiring company, a NASDAQ listed public company, expand into the emerging industry of nanotechnology. This acquisition recommendation must include a strategic analysis, corporate culture and integration analyses, and a financial valuation of the company. The students take the role of Steve Sanders, the CFO, who is in charge of making this acquisition recommendation to Phil Krause, the Chief Executive Officer (CEO) and Chairman of the Board. Steve has the tasks of doing a strategic analysis, corporate culture and integration analyses, and a business valuation of NTC. The major decision problem is to make a recommendation concerning the potential acquisition of NTC, and, if positive, to support it with a strategic analysis and an acquisition price to help close the deal. All the company names and data have been disguised at the parent company’s request since the final decision has not yet been made.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights reserved to the authors and NACRA. © 2004 by Hugh Grove, Tom Cook, and Rod Schuster. Contact person: Hugh Grove, Daniels College of Business, University of Denver, 2101 S. University Blvd., Denver, CO 80208, 303-871-2026, [email protected]


THE CASE OF THALES

Gaylen K. Bunker & Collin J. BunkerWestminster College


The story of Thales was told by Aristotle, in his writings several hundred years later, to show that acquiring wealth had certain fundamental principles, the most significant of which was the formation of a monopoly. The strategic issues in the case focus on early information, the selection of the opportunity, what position to take in the production process, and how to finance the venture. The fact that Thales, who had little money, was able to gain monopolistic control over the most important product in the region is striking. Students are asked to put themselves in Thales’ position and make a series of decisions that will lead them to success. The case was written for business school undergraduate courses in business strategy, project management, and corporate finance.

Case Synopsis

The case deals with Thales, the father of western philosophy, who lived in the Greek city of Miletus, in western Turkey (Ionia), in the early part of the fifth century BCE. He was the first selected to be one of the Seven Sages of Greece and as such was on the cutting edge of the new discipline of philosophy. The local populace did not respect Thales’ occupation and challenged his economic value to society. Thales decided to demonstrate to all his detractors that a philosopher could employ his unique talents to quickly acquire a financial fortune. He had traveled extensively throughout the known world and studied with the priests of Egypt, where he gained knowledge of astronomy and its effect on weather. While it was still winter, he used this knowledge of astronomy to determine that the coming growing season would be abundant. With this information and his observations of the local economy, he determined that the two most important crops were grapes and olives. Thales directed his attention to the bottleneck in the olive industry, the pressing of olives, where a quick decision would have the greatest impact. Thales had little money, but had sufficient confidence to risk all he had in purchasing options for the use of all of the olive presses during the coming harvest. By controlling all the olive presses, Thales created a monopoly. This monopoly allowed him to set prices at any level he determined resulting in the amassing of a fortune in a very short period of time.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Gaylen K. Bunker and Collin J. Bunker. Contact person: Gaylen K. Bunker, The Bill and Vieve Gore School of Business, Westminster College, 1840 South 1300 East Street, Salt Lake City, Utah, 84105, 801-486-6465, [email protected]


CASHLESS AT PAYDAY

Anne Macy, West Texas A&M University


The case explores the payday loan industry and the people who use it. Through the case students investigate the payday loan industry and alternative methods of obtaining the money. During the evaluation process, students calculate the cost of the loan and of the alternative sources for the money. The students must decide what is the best choice for individuals needing quick cash. Through the decision process, the students are encouraged to consider the difficulties faced by people of poor credit or limited savings. The payday loan industry thrives on people shut out of traditional banking means, either explicitly or implicitly. The predatory nature of payday loans introduces an ethic element into loans. Furthermore, the case acts as a warning to students who are in danger of a poor credit rating. The case was written for undergraduate finance courses focusing on credit/debt management in personal finance. The case can also be used in a banking course with the material on sub prime lending.

Case Synopsis

The case is written from the point of view of Steve, whose brother Scott recently took out a payday loan. The original material for the case was drawn from interviews with a local agent of the Federal Bureau of Investigation. Through Steve, the students examine the process, costs and alternatives of payday loans. Payday loans are cash advances against the next paycheck. Individuals write a check to the firm for the amount of the loan and the interest. The check will be cashed at the next payday, which must be less than a month away. Payday loans are a growing segment of the sub prime lending industry constituting a $45 billion business. The industry caters to individuals who are temporarily short on cash, such as college students. The customer must have a checking account and a steady job. Typically, the individual does not have access to a credit card. The average loan is rolled over four times, increasing the difficulty of repayment along with the cost. The cost of payday loans is over 100% and typically over 1000%.

In an effort to help his brother, Steve investigates a loan from a credit unions, cash advances on a credit card, writing a bad check along with taking out a payday loan. Steve learns that banks intimate many people who have marginal credit ratings or limited funds and who turn to payday loans instead. Credit cards and credit unions provide cheaper alternatives but one must have a high enough credit rating to qualify. As Steve reviews what he learns, the payday loan manager asks him, “For people who need the cash, what are their alternatives and at what cost?”

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. 2004 by Anne Macy. Contact person: Anne Macy, College of Business, West Texas A&M University, Box 60187, Canyon, TX 79016, 806-651-2523, [email protected]


COUNTY LINE MARKETS

Lou D’Antonio & Ronald RizzutoUniversity of Denver


This case is intended for graduate and senior level courses in finance and accounting. The case topics included financial performance. Here the applications of finance and accounting principles are used to analyze business performance at the store level. A unique aspect of the case is that the students are asked to support their notion of “fairness” as part of their analysis. Business performance and valuation analysis are key topics in advanced courses in undergraduate programs. The case is also suitable for MBA and MS-Finance courses as well as graduate Master of Accounting seminars. The addition of the “fairness” notion adds an interesting business ethics component to the case. As this case is integrative in nature, it should be covered toward the end of the course and after the student has been exposed to some elements of ethics in the business environment.

Case Synopsis

The key decision variable for County Line Markets corp. is how to measure store performance. County Line Markets (CLM) is currently a regional grocery chain with 67 stores. CLM corp. started as a family owned business in 1905 and has grown steadily into its current status as one of the key players in the regions food industry. Currently, the management team is in the process of reviewing the criteria by which they measure the financial performance of each store. As the company has expanded from its traditional location in the center of the established city to the various suburban areas different customer demographics and the need for additional working capital to finance their expansion have been encountered. At the last meeting with their bank the CFO requested an increase in the corporation’s credit facility. At that meeting both the chief loan officer and the CFO agreed that it would be helpful if the CFO would provide an analysis of performance at the store level. The loan officer felt that while corporate wide performance had met expectations that it was now time to get a better handle on individual store performance before store growth got out of hand. The idea of a specific performance based method for analyzing store performance was also considered very useful should the firm decide to acquire one of their competitors.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Lou D’Antonio and Ronald Rizzuto. Contact person: Lou D’Antonio, Daniels College of Business, University of Denver. 2101South University Blvd. Denver, Colorado 80208. 303-871-2011, [email protected]


DISTINGUISHING CHARACTERISTICS

Anne Macy, James K. Owens, & Neil Terry, West Texas A&M University


The case shows the application of financial ratios to different industries. By exploring how financial ratios differ by industry, the students learn how some ratios are not applicable to certain industries. In particular, the differences among manufacturing, service, and retail firms are addressed. The case moves the analysis of financial ratios from a mechanical process to one where managerial insights come to the forefront. The students must match the correct financial statements with the corresponding firm. Along with calculating the ratios, students practice analyzing the ratios and encounter the shortcomings of ratio analysis.

The case was written for the finance class in an M.B.A. program. It’s intent is to be used at the start of the semester not only to discuss the definitions and calculations of financial statements and ratio analysis but also to set the stage for the remaining semester as the issues of cash flows versus profits, the optimal level of debt, controlling costs and fixed versus current assets are initiated and explored. While this case is a variation on several popular cases of identifying industries, it is unique in that the differences among retail, service and manufacturing industries are explicitly examined.

Case Synopsis

John Halvorford interned for an investment firm during the summer of his M.B.A. program. Just before John was to present the financial ratios of ten different companies to the board, he discovered that his assistant did not complete the work and that the assistant neglected to match the ratios to the appropriate firms. Students are placed in the role of John and must complete the work.

As the students calculate the ratios, differences among the industries emerge. There is no such thing as an optimal or universal answer for a ratio. Financial ratio values are unique to each industry and differ substantially whether the firm is in manufacturing, retail or service. John discovers that the debt levels and the amount of fixed and current assets differ substantially among the industries. Furthermore, there is an emphasis on cash flows more than on profits. The types of costs the firms face varies which alters the margins. Through the investigation, John learns that managers face a certain set of industry constraints regarding financial statements as they mitigate the financial risks of their industry. John must decide, “Which ratios matter for which industries?”

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. 2004 by Anne Macy, James Owens, and Neil Terry. Contact person: Anne Macy, College of Business, West Texas A&M University, Box 60187, Canyon, TX 79016, 806-651-2523, [email protected]


DOES THE GREENHOUSE EFFECT CONTROL GENERATE VALUE?THE CASE OF ENERGÍA HIDROELÉCTRICA DE NAVARRA, S.A.

Francisco J. López Lubián & Ricardo Moreno, Instituto de Empresa


The case provides information to analyse the strategy developed by Energía Hidroeléctrica de Navarra (EHN), discuss the split of the company creating a new company, and identify value drivers, including future capital structure. The case deals with analysing the strategy and the technical problems related with the valuation of a company. It requires an advanced level of knowledge in valuation to be able to deal with the problems arising from case discussion. As such, this document should be used as a summary case in advanced valuation courses, including seminars specifically focused on valuation or current corporate finance issues.

Case Synopsis

At the beginning of 2003, Esteban Morrás, CEO of Energía Hidroeléctrica de Navarra (EHN) was pondering the future of the new company Corporación Energía Eléctrica de Navarra (CEHN). After two years of difficult negotiations, EHN´s Directors were putting the final touches to a deal that would split the company´s assets and business between Iberdrola and the other EHN shareholders. The downside of the deal was that the new EHN, which would be called CEHN, was a smaller and weaker company, and needed a new equity partner to tackle its ambitious business plan.

Mr. Morrás was to be appointed CEO of CEHN, and he believed that the main issues affecting the new company were:

1. CEHN needed a partner capable of and willing to invest a few hundred million Euros in order for CEHN to cancel its debtor position against Iberdrola and fund its ambitious business plan.

2. CEHN needed a partner willing to enter into some sort of shared-control agreement with is existing shareholders.

3. CEHN needed a partner that would add credibility to the business and help in the development of the company’s emerging international business.

The case provides information to analyse the strategy developed by EHN, discuss the split of the company creating the new CEHN, and identify value drivers, including future capital structure.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Francisco J. López Lubián and Ricardo Moreno. Contact person: Francisco J. López Lubián, Instituto de Empresa, Madrid, Spain, C/ Castellón de la Plana, 8. [email protected]


FUNDING THE VOLUNTEER FIRE DEPARTMENT

Randall R. KincaidQueens University of Charlotte


This case shows how a decision-maker in a public setting can use both economic principles and data to reach an informed decision. The town manager of Davidson, NC, faces rising costs and falling revenues for the town’s volunteer fire department, and asks, “How shall we fund the department in the future?” “Shall we rely on property taxes more, or shall we seek ways to spread the costs more equitably?” Thus the case raises the question of how a government can pay for services it provides to not-for-profit organizations, which, by definition, do not pay property taxes. The case also presents important principles of taxation, which can come alive in a decision-making situation. It is intended for undergraduate courses in economics and public finance, for MBA macroeconomics courses, for public policy courses, and for in-service study by public officials.

Case Synopsis

Leamon Brice, Town Manager of Davidson, NC, faces a difficult budget problem. Costs for providing fire protection likely will rise substantially in the near future, and revenues likely will fall. Costs rise if the town can no longer recruit enough volunteer firefighters, and must begin paying professionals. Revenue falls if the county government stops paying a fixed amount to each volunteer department to cover fire protection in the unincorporated area around the town. Revenues have already fallen as the local college, a not-for-profit entity that generates a quarter of the calls to the department, has cut its voluntary contributions to the department. In researching the issue, Mr. Brice considers several principles of taxation: tax expenditures; benefit vs. ability-to-pay taxation; and tax equity. These principles, he believes, shed significant light on the situation.

Mr. Brice must decide whether to seek another basis for funding the fire department, one that requires the not-for-profit organizations in town to pay their fair share. He first attempts to get the local college to make a contractual contribution in lieu of taxes. Failing that, he considers changing the basis for funding the department from property taxes to fees, much like current fees for stormwater protection, refuse collection, and building inspection, charges that all entities, regardless of tax status, must pay. Thus, he faces four choices for action: do nothing; await a triggering event that raises expenditure or lowers revenue for the department; form a study committee to collect more information; or recommend the fee-based financing method to his governing board.

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the author and NACRA. © 2004 by Randall Kincaid. Contact person: Randall Kincaid, Queens University of Charlotte, 1900 Selwyn Rd, Charlotte, NC 28274, 704-995-9842, [email protected]


GRIFFIN LUMBER COMPANYAND THE SOFTWOOD LUMBER DISPUTE

Charles Mossman & Brock CordesUniversity of Manitoba


This case introduces small business decision-making in a developed business with a challenging environment. The entire industry faces countervailing and anti-dumping duties, creating drains on cash flows. Issues of validity of protectionism can be discussed. The case provides an opportunity for students to consider several alternatives using financial statements with basic analysis. The case also serves as a vehicle for a discussion of entrepreneurial decision-making.

Case Synopsis

Brian Caldwell, the owner and chief executive of a group of small businesses, is considering the prospects for one of them, Griffin Lumber Company. Early in 2000, Griffin had become profitable through selling lumber products to American customers by benefiting from a strong US real estate market and a weak Canadian dollar. However, after an ill-timed expansion, the US real estate market had weakened, forcing Brian to cut back operations. Gradually the market rebounded, due to low US interest rates. However, beginning in 2001 the US took increasingly strong protectionist action against Canadian softwood lumber companies, resulting in a severe cash flow drain on many companies, including Griffin during the next two years. For a while Brian was able to respond to the difficult market, because demand for lumber remained strong in the US, offsetting some of the tariff damage. However, by the fall of 2003, despite a preliminary finding by the World Trade Organization against high US duties, the pressure had not diminished. Griffin's cash position was very poor, and Brian had to decide whether to continue to operate.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Charles Mossman and Brock Cordes. Contact person:

Charles Mossman, I.H. Asper School of Business, University of Manitoba, Winnipeg, MB, Canada R3T 5V4, 204-474-9985, [email protected]

GOLAR LNG – BUYING LNG SHIPS FOR $175 MILLION.

Ravi SarathyNortheastern University


The case is about Golar LNG, an LNG (Liquefied Natural Gas) shipping company, deciding whether to order LNG ships to transport LNG world-wide, between LNG sources (refineries) and LNG customers. This is a major capital investment decision, since each ship costs $175 million, and can last 40 years. Golar must think about how global LNG supply and demand will evolve, which in turn determines the need for LNG ships. Then, Golar has to analyze the LNG shipping industry and decide whether forecasted total global LNG shipping capacity would be less than demand over the next two decades or so. It has to develop scenarios about LNG ship utilization rates, the daily charter rates (price), ship operating costs, and thus, the cash flow from buying and operating new ships, and ultimately, ROI. The case also presents information on the LNG value chain so that Golar can decide whether diversifying beyond LNG carriage is desirable. The case can be used in finance courses, where the focus would be on capital investment decisions and NPV analysis, and in strategy courses, where the emphasis would be on analyzing the LNG industry, its value chain, and deciding Golar’s long-term strategy.

Case Synopsis

Golar LNG (Liquefied Natural Gas) presents a decision to be made: whether Golar should purchase one or two new LNG ships, each costing $175 million, with a useful life of 40 years. The case presents information on the LNG industry and LNG demand and supply trends, and why leading nations are increasing their LNG consumption. The LNG value chain, with LNG transportation by ship being one element, is detailed, its global nature emphasized. Information about global LNG ship demand and supply is detailed, along with Golar’s current LNG fleet. Golar’s operating results are presented in its financial statements, balance sheet and cash flow. Students can develop and analyze the financial returns from buying a new ship, and study scenarios such as with lower ship charter rates, lower utilization rates, higher costs, leading to their recommendation of whether to purchase one or more ships. The case also presents information on Golar’s desire to diversify out of LNG shipping and take on additional value chain activities, such as upstream and downstream LNG activities. These involve questions of risk, investment requirements and the company’s strategic competencies.

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the


North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Ravi Sarathy. Contact person: Ravi Sarathy, Northeastern University, Boston, MA 02115; 617-373-4806; [email protected]

PORSCHE EXPOSED

Michael H. Moffett & Barbara S. PetittThunderbird, The Garvin School of International Management


The case debates the use of financial derivatives (in this case foreign currency options) as a method for the management of the economic exposure experienced by Porsche as a result of its global sales. Porsche serves as an excellent focal point for this debate given that it produces in only one currency environment, the euro zone, and then exports product globally. In addition, the decision-making of senior management is also questioned because the firm has continued to be highly controversial in its attitudes and practices related to financial reporting, and the associated practices of management towards shareholder relations and corporate governance as a whole. The case could be used in a class in international finance, international financial management, or corporate finance.

Case Synopsis

It was January 2004 and Porsche – the legendary manufacturer of performance sports cars – wished to reevaluate its exchange rate strategy. Porsche’s management had always been unconcerned about the opinions of the equity markets, but its currency hedging strategy was becoming something of a lightning rod for criticism. Although the currency hedging results had been positive, many experts believed that Porsche had simply been ‘more lucky than good.’ There was a growing nervousness among analysts that the company was actually speculating on currency movements, and therefore was not in the best interests of shareholders. Analysts were estimating that more than 40% of current year earnings were to come from currency hedging. Porsche’s President and CEO, Dr. Wendelin Wiedeking, now wished to revisit the company’s exposure management strategy.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. 2004 by Michael H. Moffett & Barbara S. Petitt. Contact person:


Michael H. Moffett, Thunderbird, The Garvin School of International Management, 15249 North 59th Avenue, Glendale, Arizona, 85306, 602-978-7174, [email protected]

PREMIER, INC. (A) AND (B)

Anne T. Lawrence, San Jose State University


This case is designed to help students identify and formulate an appropriate management response to ethical conflicts of interest in an organizational setting. After studying the case, students should be able to identify conflicts of interest and classify them by type. They should also be able to evaluate critically an existing ethics policy, with respect to its adequacy in addressing conflicts of interest; respond effectively to public or media criticism of an organization’s ethics; and formulate an appropriate conflict of interest policy. This case is suitable for graduate or upper-division undergraduate courses in business ethics, business and society, or healthcare administration. The concept of conflict of interest should be introduced prior to analysis of the case.

Case Synopsis

The (A) case focuses on a challenge facing Premier, Inc., a leading hospital purchasing organization, precipitated by public criticism of its organizational ethics. Premier was a voluntary alliance that provided group purchasing services for more than 200 affiliated not-for-profit hospitals and health care systems in the United States. A series of investigative articles in The New York Times, beginning in March 2002, charged Premier with multiple conflicts of interest. Among its allegations, The Times argued that seller-paid fees; investments by Premier and its executives in vendors; and investments by vendors in Premier-sponsored equity funds, research institutes, and conferences all biased the selection process for medical products and services. As a result, Premier did not always choose items of the best quality or value for its affiliated hospitals. Moreover, The Times charged, new products – particularly those developed by small firms – were effectively locked out, suppressing medical innovation and hurting patient care. Premier was particularly vulnerable to public pressure because it depended heavily on federal regulatory approval. In early 2002, Rick Norling, CEO, and other top executives of Premier faced the difficult task of formulating an effective response to the conflict of interest charges raised by The Times.

The (B) case is an epilogue to the (A) case. It describes Premier’s decision to hire an independent ethics consultant, the process it established to direct his work, and the major recommendations made by the consultant.

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling of the situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting, October 7-9, 2004, Sedona, AZ. All


rights are reserved to the authors and NACRA. © 2004 by Anne T. Lawrence. Contact person: Anne T. Lawrence, San Jose State University, San Jose, CA 95192-0070, 408-924-3686, [email protected]

REPSOL’S TAKEOVER BID FOR YPF

Concepcion Martín Berzal Instituto de Empresa


Repsol’s takeover bid for YPF is a comprehensive review case, covering a full range of issues students should have mastered by the end of a course in Corporate Finance. This case may be used in the final sessions of an introductory course on Corporate Finance or as part of an optional course. The company concerned is one of the main Spanish firms operating in the petroleum sector and in the case is at a point where it has to decide whether or not to go ahead with plans to combine with the largest Argentinean oil company, YPF. This case allows students to analyze the interactions between strategic and financial decisions of the firms, it introduces students to the problems concerning take-over bids as compared to mergers and the various risks the company faces, to review the different valuation methodologies (DCF,APV and relative valuation), to analyze the financing decision as a source of value creation for the shareholder, including aspects such as the effects of a cash acquisition on the capital structure of the acquiring company, estimation of the financial needs of the new group and analysis of the different sources of finance (i.e. either taking on debt or increasing capital by means of a rights issue).

Case Synopsis

In March 1999, Alfonso Cortina, chairman and CEO of the Repsol Group, was considering buying the remaining shares in the Argentinean oil company YPF Repsol needed to own 100% of YPF’s stock. In January of that year Repsol had bought 14.99% of YPF at a price of US$ 38 per share at public auction, which had meant paying out US$2 billion. As a part of this transaction Repsol had also obtained an option to buy the rest of YPF within three years. However, the negotiations towards a possible merger agreement had come up against considerable difficulties. Repsol’s interest in YPF stemmed from the fact that merging the two companies could provide Repsol with a platform from which to launch its future growth. The merger would increase the size of its hydrocarbon exploration and production business, by adding the Argentine company’s assets. It would also strengthen and expand Repsol’s international presence, principally in Latin America, where most of YPF’s business was located. Finally, it would bolster the construction of an integrated chain in the gas business, by adding YPF’s reserves in Brazil to Repsol’s existing leadership position in Spain and Argentina. Alfonso Cortina was worried. Any delay in the merger talks could serious harm Repsol as the price of oil was climbing sharply.

The author developed the case for class discussion rather than to illustrate either effective or ineffective handling ofthe situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting. October 7-9, 2004, Sedona, AZ. All rights are reserved to the author and NACRA. © 2004 by Concepcion Martín Berzal. Contact person:


Concepcion Martín Berzal, Instituto de Empresa, Castellon de la Plana 8, 28006 Madrid, Spain, 91-568-9600, [email protected]

STARBUCKS COFFEE COMPANY

Armand Gilinsky, Jr., Sonoma State UniversityRaymond H. Lopez, Pace University


The case presents students with the challenge of evaluating the capital structure policy of a rapidly growing firm in a stable to slightly declining industry. Starbucks has revolutionized the specialty coffee and ready-to-drink market segments of the coffee industry primarily in the United States but, in the last few years, in other global markets as well The firm has financed this “Starbucks Revolution” with primarily internally generated cash flow. With corporate debt at interest rate levels the lowest in 40 plus years, is it time to use some borrowed funds at Starbucks to lower its weighted average cost of capital (WACC)?

Financial forecasts of the firm’s income statements and balance sheets are required to compare the impact of different capital structures on the firm’s cash flows, earnings levels, profit margins and shareholder valuations. The introduction of higher levels of financial risks must be analyzed and evaluated in conjunction with the firm’s stated strategic objectives of expanding into global markets. Students must balance the financial risks of using debt with the business risks of global growth, tempered by the possible positive aspects of global diversification.

Case Synopsis

Starbucks has been in business for approximately 20 years with the last eleven being as a publicly held firm. Although they used two convertible bond offerings in the early and middle 1990’s, they have been essentially debt free since those issues were converted into common stock by 1996.

In 2003 the interest rate environment was conducive to borrowing with rates across the yield curve at 40 plus year lows. For tax paying entities, the after-tax cost of these funds was reduced even further. A firm with Starbucks operating performance, strong brand equity and excellent growth prospects could surely take advantage of very cheap funding that could be used to support its strategic objectives. Using a prudent quantity of debt would lower the firm’s weighted average cost of capital and should contribute even more to shareholder value.

The authors developed the case for class discussion rather than to illustrate either effective or ineffective handling ofthe situation. The case, instructor’s manual, and synopsis were anonymously peer reviewed and accepted by the North American Case Research Association (NACRA) for its annual meeting. October 7-9, 2004, Sedona, AZ. All rights are reserved to the authors and NACRA. © 2004 by Armand Gilinsky and Raymond Lopez. Contact person:Raymond Lopez, Lubin School of Business, Pace University, 1 Martine Avenue, White Plains, NY 10606, 914-422-4165, [email protected]


jonathan b. welch, northeastern university

Economy & Finance