CASE 1 – Concrete Manufacturer

Question
Your client, a concrete manufacturer is considering acquiring a small local firm. What factors
should be considered? After considering these factors, would you recommend the acquisition?

Information to be given if asked

 Margins
- The target firm is currently profitable, with margins of 5%.
- Your client’s margin is 15%.
- Your client attributes its higher profit margin to economies of scale in trucking and
mixing, and a stable labour force

 Market
- Both companies compete in the geographical market, the South-eastern U.S.
- Your client’s customers are large construction firms and contractors generally in the
office and commercial building construction business.
- The smaller firm sells mainly to other small businesses and contractors. (Swimming pool
installation firms, patio builders, etc.)
- Additional research shows that the smaller customers for concrete are growing, while the
major office building construction market is stagnant.
- The smaller firm has strong contacts with many local customers, and is often the
preferred supplier due to their customer responsiveness.

 Financing
- Your client is not able to fund the acquisition internally, but could obtain bank financing
at a rate of 10%.
- Similar acquisitions generally are made for two to three times current sales of the target
firm.

Solution
From a financial point of view, the acquisition is not attractive if there are no synergies between
the firms. With profit margins of only 5%, the income generated by the smaller firm will not
cover the capital charges (interest due to the bank) on the acquisition price. (Acquisition price =
3 x sales. Interest on this amount will be 10% x 3 x sales, or 30% of annual sales. Profits are only
5% of sales. This analysis, of course, ignores the tax shields.) However, if your client were able
to use some of its competitive advantages to improve the financial outlook of the target firm, the
acquisition would be advisable. It is reasonable to expect that synergies would arise from
economies of scale in trucking and mixing, which could raise the profit level of the target firm,
and make the acquisition more attractive.
 CASE 2 – Sports Franchise

Question
A wealthy woman, Mrs. Wentworth, who is worth millions, wants to invest in either the
Cleveland Cavaliers (a basketball team) or the Cleveland Indians (a baseball team). She is
indifferent between choosing between the two teams, but would like to maximize the profit from
the investment. Which team should she buy?

Information to be given if asked

1. She wants to own a sports team: however, the interviewee must recognize that there are other
investments that she should consider.
2. The purchase price is the same for both franchises. Let us say that there is a $100 million
price tag.
3. The financing terms available to Mrs. Wentworth are the same, regardless of the team she
chooses.
4. The Balance Sheets of both teams are the same in terms of liabilities and assets.
5. Neither franchise owns the stadium. The interviewee must ask for this information to be
given credit.
6. Ticket Prices on average are $25 for basketball games and $6.50 for baseball games.
7. The number of basketball and baseball home games is 41 and 81, respectively.
8. The stadium capacity is 20,000 for basketball games and 54,000 for baseball games.
9. Utilization on average is 70% for both sporting events.
10. The interviewee should explore other streams of revenue but are irrelevant (important
streams are - licensing of apparel, concessions and parking) for purposes of this analysis. It
is important that interviewees recognize these as possible sources of value to the investment.
11. The key is to figure out whether ticket prices can be raised. The interviewee must figure out
a model to answer this question. Possible sources of data - historical sales patterns,
comparable data for other franchises in other cities and overall market demand. After
exploration of this issue, it turns out that they cannot be raised.
12. Examine if 100% utilization can be reached. Research shows that Cleveland residents are
indifferent. Do not give this information away, make the candidate probe for it.

Solution
Everything cancels out except that baseball has more seats available. Thus, the baseball
investment has a potential for greater revenue.

Equation = # of seats * # of games * stadium capacity * utilization

 CASE 3 – Cardiovascular Health Program
This case has been presented in a conversational form. The interviewer will have to read the
conversation below and pick out the useful information to be communicated to the interviewer

Case
Your client is a major pharmaceutical company, which has been approached with the following
business proposition. You have been asked to lay out how you client should evaluate the
opportunity:
A small hospital in West Virginia has developed a total cardiovascular health program for its
outpatient population. The program has been in place 3 years and has been highly successful in
improving the cardiovascular health status of the patients as measured by several parameters.
The hospital would like to “sell” this program to other hospitals for a fee, but could not
undertake such a task on their own. Instead, the W. Virginia hospital would like to license the
program to your client, and your client would market it to other hospitals.

Ok. I want to make sure I’m addressing the key issue here—the client wants me to develop a
methodology for evaluating this opportunity to license a cardiovascular health program from this
hospital and market it. The client doesn’t want me to come up with a final Go/No Go answer.

Correct.

Do you mind if I take a few seconds to think a bit about the problem?

Sure. Go right ahead. We’ll start when you’re ready.

I would present my methodology for evaluating as a series of very basic Yes/No questions. Of
course to answer each question we’d have to go into more details, but I’d like to first lay out the
broad framework.

OK. I think that’s an excellent way to go about it.

First, does this program actually work and can it be applied with similar success in other
hospitals. Second, what is the potential NPV of this opportunity? And third, are there other
opportunities available to your client that would create a greater return on their investment. If the
answer to any of these key questions is no, then the client should not pursue this opportunity.

Very good. So why don’t we go through each of the questions and what I’d like you to do is to
address the key issues you’d consider.
First of all, having had some experience with research on patients with cardiovascular disease, I
know that study results are not always straightforward. For instance, I would want to know
which parameters were improved—was quality of life improved, was overall survival rate
improved? Also, I would be concerned that the results from the study on patients from this one
hospital in W. Virginia could not be extrapolated to other patient populations in other settings.

So what would you recommend to the client based on these concerns?

Since the client is a pharmaceutical company, I would guess that they have a fair number of
scientists that could look more carefully at this one hospital’s results and decide if the program
could be successful if widely marketed.

That’s fair. How about the next question, evaluating the NPV.

Well, obviously we’d have to look at the cash flows each year. That’s going to require some
knowledge about the licensing agreement that would be place with the hospital. !"I don’t want to
get into details regarding the agreements, or even specific numbers for revenue. Let’s try to keep
this discussion as “high-level” as possible. What would be the major sources of revenue for your
client if they pursued this opportunity? The main source of revenue would be hospitals paying a
fee for the rights to use this program,
which conceivably could be on a subscription basis, per-patient, one-time… the possibilities are
endless.
Also, one thing I didn’t consider is that if the program calls for specific types of medications,
such as ACE-inhibitors, beta-blockers that the client makes, this might present a major “cross
selling” opportunity and boost market share for specific pharmaceuticals. On the down side, and
perhaps I’m being a bit too cynical about pharmaceutical companies—if the client is more
involved with drugs required during coronary by-pass surgery and this program was actually
successful and kept people from needing by-pass surgery then the client would, in a sense, be
cannibalizing its sales of coronary by-pass drug sales. !"That is very cynical, indeed! Your client
actually has some ACE-inhibitors on the market that very well could be incorporated into the
program. Again, staying at a very high level and looking at the costs—the licensing fee paid to
the W. Virginia hospital would be a major cost, and again, it could be structured in countless
ways. Beyond that, my client would incur costs to market the program to hospitals, so there
would be a marketing expense. However, if there is a core competency that Pharmaceuticals
have developed over the years it might actually be marketing so this would be right up the
client’s alley. In fact, if the client already has a strong hospital-based sales force they could very
easily be used to sell this program.

Anything else you want to add to the NPV question?

Yes—well two things really.

One, if the client were to get involved with a program like this that promotes health overall, I
think it could have a very positive effect on consumer perception. Right now the pharmaceutical
industry as a whole has been receiving very poor publicity for a variety of reasons, so any
positive publicity for this company would be worth something—it may be difficult to quantify,
but I think it would be significant enough to consider. On the other hand, if the program is
promoted and it turns out that patients begin doing much worse (for some reason that was over-
looked earlier) in the long-run, there is the possibility of materially damaging the client’s
reputation as a company that delivers safe health care products. If the complications resulting
from this program very serious, the client may have to consider the possibility of law suits and
damage payments.

Should we discuss the final major question—What other opportunities does the client have?

Sure. I think this is pretty straight forward. The client may have several other opportunities that it
is considering at the moment. Some of these projects might have better returns, carry less risk,
and perhaps fit better with the client’s core business of selling drugs.

OK. That’s fine.

 CASE 4: Golf Course
Question

A friend of yours has a money making opportunity and confers with you as to what to do. He wants to
clean the golf balls out of the lake at the local golf course’s infamous “13th hole”. He has done a bit of
research on the program and wants to know whether he should pursue this opportunity. Please advise.

Information to be given if asked

How many balls can he clean out of the lake? There are 20,000 balls in the lake. He can
conceivably get all the balls.

How many balls enter the lake per year? 1,000. You can assume that this is, has
been, and will be a constant amount.

For how much can he sell a recovered ball?
Good follow-up: How many of the balls can he sell
per year?
All balls that have been in the lake more
than 5 years are worthless. Balls in the
lake for less than that are worth $1 per
ball.

He can negotiate a contract with the

proshop to sell the balls. Their demand
for used balls is 50,000/year and you
would be their first supplier.

How much does it cost to recover a ball? He has a PADI certified scuba buddy who
will scour the lake collecting balls for him
for $10/hr. In one hour he can recover
100 balls.

Can the scuba guy separate the bad balls from the No. He’s got to collect them first and
good balls while he’s collecting them? then determine the age.

How can he separate bad balls (>5yrs in lake) from
good balls?
There is a mystical, magical machine he
could buy for $4,000 that will separate
good balls from bad balls. This is merely
a fixed cost don’t let them linger in this
black box.

Does he have any better options/opportunities with He’ll experience no opportunity cost.
his time/effort?

Does he have a discount rate he wants to use? Strangely enough, yes. He says a 10%
 return is appropriate.

Solution
Costs and Revenues
1st year:

 Costs = labor + sorting machine = $2,000+ $4,000= $6,000.

 Revenue = Good balls* price/good ball = 5,000* 1= $5,000.
 Profit = $-1,000
Successive Years

 costs = labor = $100

 Revenue = Good balls* price/good ball = 1,000* 1= 1,000
 Profit = $900

NPV Calculation

 Total profit = PV=-1,000 + PV(yr1) + PV(yr2)+…

 This last section could be evaluated as perpetuity in year 1 which would have to be discounted
to year 0. Thus, $900/.1=$9000 value in year 1. Thus, in year 0 this is worth $9,000/1.1 which is
$8,181 subtract the $-1,000 and get a positive NPV of $7,181

Risks

 What if someone sneaks in and takes the good balls after the bad balls are cleared out.
 What if the proshop closes and can’t sell the balls, etc.
 What if you get competition in the used golf ball market and the price you can get is decreased?

Final Recommendation

 Do it, sign contracts, and pray for the best.