Arcadian Microarray Technologies, Inc
18 Pages Posted: 21 Oct 2008
In August 2005, an investment manager of a hedge fund is considering purchasing an equity interest in a start-up biotechnology firm, Arcadian Microarray Technologies, Inc. The asking price is $40 million for a 60 percent equity interest. Managers of the firm are optimistic about the firm's future performance; the investment manager is more conservative in his expectations. He calls on the help of an analyst with her firm to fashion a counterproposal to Arcadian's management. The tasks for the student are to apply the concept of terminal value, interpret completed analyses and data, and derive implications of different terminal-value assumptions in an effort to recommend a counterproposal. Very little numerical figure-work is required of the student.
ARCADIAN MICROARRAY TECHNOLOGIES, INC.
In August 2005, negotiations neared conclusion for a private equity investment by Sierra Capital Partners in Arcadian Microarray Technologies, Inc. The owners of Arcadian, who were also its senior managers, proposed to sell a 60% equity interest to Sierra Capital for $ 40 million. The proceeds of the equity sale would be used to finance the firm's growth. Sierra Capital's due diligence study of Arcadian had revealed a highly promising high-risk investment opportunity. It remained for Rodney Chu, a managing director with Sierra Capital, to negotiate the specific price and terms of investment. Chu aimed to base his negotiating strategy on an assessment of Arcadian's economic value and to structure the interests of Sierra Capital and the managers of Arcadian to create the best incentives for value creation.
Chu's analysis so far had focused on financial forecasting of equity cash flows. The final steps would be to estimate a terminal value for the company (also called “continuing value”) and to discount the cash flows and terminal value to the present. He also sought an assessment of forecast assumptions. In that regard, he requested help from Paige Simon, a new associate with Sierra Capital.
Sierra Capital Partners
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Keywords: terminal value, valuation, private equity, forecasting
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