Case 42
Introduction
Sierra Capital Partners is an investment company in Albuquerque, New Mexico. They were organized in 1974 as a hedge fund, and quickly grew over the years with great success in private equity investments. Sierra focused primarily on the life sciences sector. In the early 2000’s, Sierra was burned by many young firms’ new discoveries that failed to work out. Their new motto for evaluating investments became, “NRDO: no research, development only.” Arcadian Microarray Technologies was founded in 2003 by research scientists, some of whom were previously involved in a very successful project called the Human Genome Project. Those scientists helped find links between variations in a person’s genetic code and their predisposition to disease. This was a major breakthrough in the Human DNA research area. Their business consisted of two segments DNA microarrays and Human Therapeutics. Arcadians’ management group believed that applications for their DNA microarray technology would be very demanding and would pay off quickly. By the year 2013, they believed their revenues would top $1 billion. Sierra Capital Partners were considering a deal in which they would purchase 60% equity interest in Arcadian for $40 million dollars. Arcadian had drawn up the details regarding the deal, and Sierra’s managing director Rodney Chu had to analyze the deal and conclude what terms would be the most profitable for $1 billion. Sierra Capital Partners were considering a deal in which they would purchase 60% equity interest in Arcadian for $40 million dollars. Arcadian had drawn up the details regarding the deal, and Sierra’s managing director Rodney Chu had to analyze the deal and conclude what terms would be the most profitable for Sierra. The money Arcadian received from Sierra would be used for further financing of the firm’s growth. Chu’s initial analysis involved financial forecasting of equity cash flows. His final steps would be to estimate the terminal value for the
Sierra Capital Partners is an investment company in Albuquerque, New Mexico. They were organized in 1974 as a hedge fund, and quickly grew over the years with great success in private equity investments. Sierra focused primarily on the life sciences sector. In the early 2000’s, Sierra was burned by many young firms’ new discoveries that failed to work out. Their new motto for evaluating investments became, “NRDO: no research, development only.” Arcadian Microarray Technologies was founded in 2003 by research scientists, some of whom were previously involved in a very successful project called the Human Genome Project. Those scientists helped find links between variations in a person’s genetic code and their predisposition to disease. This was a major breakthrough in the Human DNA research area. Their business consisted of two segments DNA microarrays and Human Therapeutics. Arcadians’ management group believed that applications for their DNA microarray technology would be very demanding and would pay off quickly. By the year 2013, they believed their revenues would top $1 billion. Sierra Capital Partners were considering a deal in which they would purchase 60% equity interest in Arcadian for $40 million dollars. Arcadian had drawn up the details regarding the deal, and Sierra’s managing director Rodney Chu had to analyze the deal and conclude what terms would be the most profitable for $1 billion. Sierra Capital Partners were considering a deal in which they would purchase 60% equity interest in Arcadian for $40 million dollars. Arcadian had drawn up the details regarding the deal, and Sierra’s managing director Rodney Chu had to analyze the deal and conclude what terms would be the most profitable for Sierra. The money Arcadian received from Sierra would be used for further financing of the firm’s growth. Chu’s initial analysis involved financial forecasting of equity cash flows. His final steps would be to estimate the terminal value for the
References: Bruner, R., Eades, K., & Schill, M. (2010). Case Studies in Finance: Managing for Corporate Value Creation. (6th ed., pp. 915-608). Boston: Mcgraw-Hill Irwin.