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Case Studies in Structured Finance The John M Case Leveraged Buy-Out Ian Giddy August 2000

Case Studies in Structured Finance The John M Case Leveraged Buy-Out Ian Giddy August 2000. QUESTIONS : What are the most important operating and financial characteristics of the Case Company ? 2. Is the company worth Mr Case's $20 million asking price ?

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Case Studies in Structured Finance The John M Case Leveraged Buy-Out Ian Giddy August 2000

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  1. Case Studies in Structured Finance The John M Case Leveraged Buy-Out Ian Giddy August 2000

  2. QUESTIONS : • What are the most important operating and financial characteristics of the Case Company ? • 2. Is the company worth Mr Case's $20 million asking price ? • 3. Can the $20 million purchase be financed so that management can retain at least 51% ownership ? What sources should management tap ? In what amounts? Is the return being sought by the venture capital reasonable ?

  3. QUESTIONS cont. 4. How compelling a buyout opportunity is this proposition for the four managers ? 5. Would you, as a commercial banking lender, provide the loan needed to finance the seasonal buildup in accounts receivable and inventory ? On what terms ? 6. Would you, as the venture capital firm, provide the balance of the funds needed ? If so, on what terms ?

  4. POSITIVES : • The company has a stable product • The company enjoys good profit margins • There are important barriers to competitor entry • The business is not too asset-intensive • The four key managers know the business well

  5. NEGATIVES : • Sales growth is probably quite limited • This low-tech product has not patent protection • Even if outsiders find it difficult to penetrate the market, that may not apply to vendors already in the industry, most particularly, the Watts Company

  6. Simplified Balance Sheet for a restructured J.M.Case CompanyAssets Liabilities

  7. FEASIBILITY OF THE PRICE : • Book Value Basis • Stock Market Valuation Basis • Comparable Company Value • Discounted Cash Flow Basis

  8. Book Value Basis : • Asking price : twice the value of the company’s equity • Why would anyone pay this ? • If the profitability of the company justifies it • - in this case, it appears to – ROE around 20 % or $ 2 million in 1984

  9. Stock Market Valuation • If a company is publicly traded, the valuation accorded its outstanding market shares can be a starting point for valuation • In this case, the company is not publicly traded, so no opportunity is available here

  10. Comparable Company Value • Common practice to compare its value with those accorded to publicly traded companies in a similar business • After comparisons made, it is seen that the Case asking price is in line with the market value of a publicly traded competitor

  11. FINANCING SOURCES : • Bank Loan • Loan from Mr Case • Venture Capitalists' Investment

  12. KEY TO SUCCESS • Some of the most important factors in the success of such an LBO are : • Enthusiasm and experience of the incumbent managers in an already well-operated business

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