Evaluating a SWORD Repurchase Offer: The Case of Tocor II
George P. Tsetsekos
Drexel University - Department of Finance
SUBJECT AREAS: Share repurchases, two-tier transactions, warrant valuation, and R&D financing.
CASE SETTING: 1991, biotechnology industry.The case asks students to evaluate Centocor's tender offer in late 1993 to repurchase units of its research and development affiliate, Tocor II. Centocor had formed TocorII less than two years earlier to finance Centocor's R&D efforts. Centocor financed Tocor through an offering of SWORDS -- Stock offering with Warrant for financing Off-balance sheet Research and Development. Centocor's decision to tender for the units was based on the realization that its long-term prospects were highly dependent on there search and products of Tocor. In evaluating Centocor'stender offer and Tocor, students are asked to value the cash Tocor has on hand, the value of Tocor's technology, the value of a non-compete agreement, and the value of warrants that Tocor holds on Centocor.
The case allows instructors and students
(1) to discuss aninnovative financing structure -- SWORDS;
(2) to evaluate atender offer;
(3) to explore the valuation of technology, warrants and non-compete agreements; and
(4) to discuss the agency conflicts associated with these types of financial arrangements.
JEL Classification: G34, L69
Date posted: July 7, 1997