Chapter 1, Introductory Cases Dublin Small Animal Clinic, Inc. 1 page; introductory
Chapter 6, Valuation 39.Knowles Electronics, Inc (A) 20 pages; advanced
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- Business acquisitions Valuation
- 18 pages; intermediate to advanced
Chapter 6, Valuation39.Knowles Electronics, Inc (A) 20 pages; advancedLeveraged buyouts/private equityCapital structureValuationFinancial projectionsLoan covenantsThe case describes how the founder built his firm into one of the world’s most exceptional manufacturing firms. Knowles Electronics had a nearly 100% market share of the market for hearing aid microphones and speakers (transducers). The firm also sold products off-the-shelf to NASA in the 1960s because its product quality, and all of its quality control systems, exceeded the requirements for NASA’s lunar program. This case then describes a private equity firm’s acquisition of Knowles Electronics, and the subsequent sale of Knowles to a publicly-traded corporation. The firm issued a new class of stock to the private equity firm and to management, issued mandatorily callable preferred stock to the private equity firm, and raised debt financing from several large banks. Knowles then used that cash to retire old equity securities from the founder’s heirs. That information is only available for private equity acquisitions if the acquired firm issues publicly-available financial statements. That is rarely the case but in this instance, the private equity firm expected to take Knowles Electronic public in a year at a very large gain, so it agreed to make the debt publicly tradable. When Knowles’ revenues declined, the private equity firm was unable to conduct an IPO, but did need to file financial statements with the SEC because the debt was publicly tradable. The teaching note includes Knowles Electronics (B), which covers the firm’s subsequent sale to a publicly-traded company, and how that company accounted for the Knowles acquisition. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
14 pages; intermediateBusiness acquisitionsValuationSegment reportingHidden valueAnheuser-Busch (A-B) had long been the world’s largest brewer but through a series of acquisitions, InBev managed to surpass A-B. On June 12, 2008, InBev made an unsolicited $65 per share bid for A-B that was subsequently accepted at $70 per share. This case presents information that can be used to consider whether the offer was too high. Among the reasons why the price might be too high were large pension obligations, significant outstanding employee stock options, and a price-to-EBITDA ratio of more than 12, even before adjusting for pension and employee stock option obligations. The case includes results from a German academic study showing that brewer acquisitions at an EBITDA multiple above 10 were rarely successful. Among the reasons why the price might be reasonable were that A-B had several investments InBev might be able to sell to help pay down the debt. They included the Bush Entertainment division (Busch Gardens and Sea World), plants that produced aluminum cans, and a 50% equity interest in Grupo Modelo, brewer of Corona beer. A-B also had a reputation of being run like a private company, with very attractive compensation and benefit packages for all employees. Executives enjoyed lavish offices and high salaries; workers enjoyed high wages; all employees received two cases of A-B products each year; the firm made generous charitable contributions throughout the U.S., and particularly generous contributions in the St. Louis area. The general tone of the case is that InBev may have overpaid for A-B. However, the case includes a number of disclosures that provide additional information about A-B’s potential value. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
Business acquisitionsIFRS reportingValuationCorporate restructuringsThis case lets students prepare a preliminary analysis of whether InBev’s A-B acquisition was successful. The case includes debt repayment schedules for 2008 and 2009, Selected A-B financial disclosures for 2007, selected InBev financial disclosures for 2007, and selected 2009 financial disclosures for the combined Anheuser-Bush InBev. The case also includes information on actions that reduced expenses and debt. A-B InBev almost immediately: dismissed many former A-B executives; converted lavish St. Louis executive offices to executive cubicles; substantially reduced charitable contributions, and; unilaterally informed suppliers that payment would be made in 120 days instead of 30 days. The firm also sold its canning operations and Busch Entertainment, a small U.S. brewer (Rolling Rock), and InBev Eastern European brewing operations. It used those funds to reduce its debt and substantially extend the payment schedule for the remaining debt. Shortly before its June 12, 2008 bid for A-B, InBev’s share price was in the €30.00 range. The acquisition closed on December 12, 2008. On November 24, 2008, InBev’s share price reached a low of €10.32, indicating that the market believed InBev substantially overpaid for A-B. However, InBev’s share price is currently €39.23, so A-B InBev substantially outperformed the market for the period beginning shortly before its A-B bid and ending in mid-2010. By almost any measure, the acquisition has been highly successful. If A-B InBev successfully overturns the three-tier distribution system throughout the U.S., the acquisition will probably become far more successful. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA Financial accounting Financial reporting Financial statement analysis Valuation
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