Case studies

In January 2012, Ellen Kullman, CEO and chairman of DuPont, must decide whether to retain or sell the company's Performance Coatings (DPC) division. This is an introductory case on valuing a leveraged buyout. The case focuses on a publicly listed corporation's decision to divest a large division and asks students to compare the division's value if it remains under DuPont's control or is sold to an outside party. The transaction size of approximately $4 billion is too large for potential strategic buyers in the industry, making private equity (PE) firms the most likely bidders. The case provides a base-case adjusted present value (APV) model of DPC as a stand-alone company and gives students specific assignments to adjust it to reflect the division's potential value under PE ownership (e.g., EBITDA growth, multiple arbitrage, and increased leverage).

The case is designed to illustrate and discuss the differences between a public company's valuation based on unlevered free cash flows and a PE sponsor's valuation based on residual (levered) cash flows.

This case has been successfully taught in a second-year elective course covering entrepreneurial finance and private equity and in an advanced undergraduate course on corporate finance. It is appropriate for use in classes on private equity, advanced corporate finance, or deal valuation.

This case is used in Darden's Supply-Chain Operations elective. The field-based case gives supply-chain educators the ability to teach the newsvendor model with pricing under a capacity constraint using real-life decisions. By 2005, Eastman Chemical Company, based in Tennessee, had created a new specialty plastic, Tritan, which demonstrated heat resistance and durability properties that might allow Eastman to compete in the lucrative polycarbonate plastics market. Development of this product was a major breakthrough for both Eastman and the broader chemical industry. The Eastman specialty plastics team had to contend with numerous challenges, however, before producing Tritan at full scale. First, Eastman had to commercialize a completely new material that only had been produced in the lab; second, the team had to develop a supply chain to manufacture a new component (monomer) and a new product (polymer) simultaneously; and finally, it had to analyze market entrance options given capacity constraints. Thus, the specialty plastics team faced several dilemmas: who should the initial launch partners be, given Eastman's limited manufacturing capacity, and how aggressively should Eastman price Tritan, given that price would drive demand in the launch markets and in new markets?

This case examines a set of expansion options for a successful Internet luggage retailer, with a particular emphasis on the operational complexities.

In November 2003, John Fruehwirth, a principal at Allied Capital, was considering a $20 million mezzanine investment in growth capital for Elephant Bar, a California restaurant chain. Elephant Bar had had some initial success in California but now Allied's investment committee had to wrestle with the question of whether the restaurant concept was strong enough to travel and become a national brand or whether it was mainly a “California Concept.” And if the concept was strong enough to travel, would Allied Capital be able to meet its underwriting standards? Because Elephant Bar is a company with aggressive growth plans, it is significantly riskier than traditional mezzanine investments. The case can be used in courses on venture investing to illustrate another funding source available to young companies. Traditional mezzanine financing is often used to provide a portion of the funding for late-stage investments, such as leveraged buyouts. The case can also be used in courses on private equity to illustrate the perspective, risk mitigation strategies, and return expectations of mezzanine investors.

This case has a teaching note and a spreadsheet, which are available to registered faculty members.

This negotiation case is meant to be used in conjunction with “Hybritech, Incorporated (A)” (UVA-F-0792); half the class works from one case and half from the other. Lilly is considering acquiring Hybritech, but the genetic-engineering company's future cash flows are difficult to predict and value. Both companies want to effect the merger, but the cases, which provide essentially the same information in all other respects, provide widely divergent projected cash flows. The “Hybritech, Incorporated (B)” case (UVA-F-0793) is the follow-up case dealing with the payment structure of the acquisition.

In the mid-1980s, Emerson Electric looked at possible two-year debt issues in three countries: the United States, Switzerland, and New Zealand. The $65 million to be raised is earmarked for general corporate expenses. Emerson has subsidiaries in 27 countries, including the three candidate countries. In this case, students act as Emerson's CFO and must evaluate the U.S., Swiss, and New Zealand economies to determine in which currency to secure the needed debt issues.

The consumer-products division of a multinational company is facing a decision on the sourcing of product components: whether to stay in Taiwan or switch to Mexico. See also the supplement to this case, “Cost Analysis for Sourcing Alternatives for Emerson Electric Company ACP Division” (OM-0823).

This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI's storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI's CFO Martin Stewart must recommend EMI's dividend policy.

This case presents an opportunity for students to use flexible budgeting to perform a variance analysis on the operating results of EntertainmentNow.com. First, the company's original budget is flexed to account for changes in sales volume. Then, actual results are compared to the flexed budget and analyzed for product mix, price, cost of goods sold, efficiency, and other variances. In addition, the case requires a simple calculation to determine the breakeven level of sales given the company's current variable and fixed costs.

This case concerns the troubles that Euro Disney experienced from the start. Euro Disney claimed that the major cause of its poor financial performance was the European recession and the strong French franc. The timing of the park's opening could not have been more inopportune. If the recession had been the only cause of Euro Disney's problems, the financial restructuring would only need to carry the park forward to better economic times. Only when Europeans began spending freely again would investors learn the answers to some uncomfortable questions: Was the whole idea of Euro Disney misconceived? Were there other fundamental cultural problems that could inhibit the park's success? Would Euro Disney fail to recover even though other European companies did? And, if so, why was the Disney theme-park concept successful in Japan and not in France?