432 Week 5 Objectives
FBE 432 - Class Objectives and Problem Assignments
J. K. Dietrich
Week 5 – September 23 and 25, 2002
Goals and Objectives
(1) Define venture capital and discuss the potential social and economic value of this type for financing of tart-up or other firms;
(2) Describe the structure of the venture-capital market in terms of the most common type of venture capital investors and funds and how the structure of deals can meet investors’ needs and concerns;
(3) Describe the types of venture capital deals in terms of instruments used (like classes of debt instruments and equity claims and warrants) and the way the deal structure determines payoffs and allocates risks of investments in firms;
(4) Define highly leveraged transactions (loans) and the role they can play in corporate restructuring;
(5) List and analyze the sources of value that underlie corporate restructuring.
Suggested Review Reading for next Week
RWJ, Chapters 21 and 23, sections 1 to 3.
Case Questions for Next Week (Term Sheets for Trendsetter Inc.)
This is a challenging case but very realistic and of particular importance to the many of you who have indicated that at some time in the future you may want to start your own business. As with all the cases, you will have a better appreciation of the issues after our class discussion, but your group can use the following questions as a starting point in considering issues relevant to the recommendation it makes:
(1) What are the main differences and similarities between the two term sheets?
(2) If you were an entrepreneur and could not negotiate any of the terms in either term sheet, which would you prefer and why?
(3) How would you seek to alter the terms in each term sheet during negotiations with each venture capital? Which terms would you seek to alter first?
(4) Does it make a difference to you answers whether you expect Trendsetter.com to grow fast or grow slowly?
(5) Does it make a difference to your expected future wealth whether you expect to realize you gains on Trendsetter through an IPO or a merger?
(6) What other aspects other than term sheets would you take into consideration when choosing among venture capital investors?
Important Vocabulary List from Class
VENTURE CAPITAL, VENTURE CAPITALIST
“ANGELS”, PRIVATE (LIMITED) PARTNERSHIPS, AFFILIATES OF FINANCIAL INSTITUTIONS
SEED MONEY, FIRST ROUND FINANCING, SECOND ROUND FINANCING, MEZZANINE FINANCING, BRIDGE FINANCING
DEAL STRUCTURE
LEVERAGED BUY-OUT (LBO)
GOING PRIVATE, TENDER OFFER, REVERSE STOCK SPLIT, STRIP FINANCING
JUNIOR AND SENIOR DEBT
MONITORING
Suggested Wall Street Journal (WSJ) or other Articles
September 16, 2002
“EADS Pushes for Satellite Tie-Up” (B4) – Example of restructuring discussed last week in satellite industry
“SEC to Consider Rule on Voting By Mutual Funds” (C1) – Institutional owners and corporate governance, a topic we discuss later in the semester
September 17, 2002
“Credit Report: Suddenly, Banks Are Acting a Lot Like Bond Markets” (A1) – Great article reviews risk pricing on business loans, developments in bank lending, and role of syndications on loan pricing
“Mortgage Mismatch: Home Financings Widen Fannie’s Risk” (C1) – Good discussion of interest rate risk (we discuss later) in context of government sponsored enterprise (GSE) FNMA
“Britain’s Big Food Group Held Buyout Talk with Equity Firms” (C5) – Example of venture capital/leverage buyout deal similar to John Case Case discussed later
September 18, 2002
“Vivendi May Retain U.S. Entertainment Assets” (A8) – Describes review issues in restructuring of French conglomerate’s business under new CEO
September 19, 2002
“US Airways Receives Rival Bid From Alabama Pension Fund” (A2) – Interesting discussion of private equity fund investments related to venture capital and leveraged buyout topics discussed in cases
“Nissan To Purchase 50% Stake In China’s No. 2 Auto Company” (A10)—International strategic acquisition involved automobiles and China
“Meltdown in Chocolatetown” including “Controlling Trust at Hershey Bows to Opposition to Sale; Company Faces Future Alone” and “Wrigley Must Chew On Its Next Move” (B1) and “Will Nestle Stick With Cadbury for Adams?” (B5) – Stories dealing with restructuring in candy business and interesting issues associated with politics of mergers and acquisitions
“Vivendi Taps $1.95 Billion in Loans” (B12) – Role of bank financing for distressed firm emphasizes the importance of cash
September 20, 2002
“Diller Deal Stymies Vivendi on Debt” (A3) – How contractual clauses can effect restructuring
“How Weyerhaeuser Won Over Willamette” (B4) – Restructuring firms after a hostile takeover illustrates problems caused in combining firms