This case study puts students in the role of a private equity firm considering the acquisition of a portfolio firm, and later selling that same firm. Along the way, the case study introduces private equity and valuation techniques, which students need to apply in working through the case. The teaching guide for instructors can be downloaded from the Teaching Guide for Project Merchandise: An Introduction to Private Equity page.
Student Learning Outcomes
By the end of this case students will have an improved understanding of Private Equity, increased familiarity with valuation techniques, and (should students participate in an optional legal exercise) a deepened comprehension of purchase agreements. Specifically, after working through the case materials students should be able to:
1) describe what private equity is, and to summarize the cycle of a private equity transaction from entry to exit,
2) apply valuation concepts in a simplified model and to various entry and exit scenarios,
3) navigate an Excel-based model tracking how changes to input cells flow-through the model and affect valuation outputs,
4) evaluate and weigh both quantitative and qualitative factors when engaging in valuation exercise, and
5) (Optional) recognize key terms in a Purchase Agreement and understand typical Buyer and Seller side arguments while negotiating these terms.
The case uses a flipped classroom model. Students watch videos via links provided in the materials prior to coming to class. During class students engage in activities that require them to apply the concepts presented in the pre-class videos.
These materials were taught to Harvard Law School students in an elective corporate finance class. Before engaging with these materials, students need to be familiar with basic valuation techniques (particularly discounted cash flow and comparables analyses).
- Class #1 Entry Case Exercise: Students assume the role of a private equity buyer and use information about a target company presented in the Entry Case materials, concepts from the Private Equity Overview video, points from the deal evaluation framework, and the valuation model to develop a recommendation of whether and how to structure a bid for a target company. The entry case exercise exposes students to examples of uncertainties in enterprise valuation that need to be identified and valued when entering into a new acquisition.
- Class #2 Exit Case Exercise: Students assume the role of a private equity seller and evaluate five competing options to exit the investment. The exit case exercise challenges students to value different exit options not only quantitatively but also qualitatively when considering different deal structures, earn-outs, closing conditions, etc. By the end of these two classes, students will understand the basic issues in valuing an M&A deal from the perspective of a PE sponsor (which largely overlaps with the perspective of other M&A buyers and sellers).
- Class #3 (optional) Purchase Agreement Exercise: Students explore the purchase agreement - the main contract that memorializes a M&A transaction.
Instructors will need to download student materials and either distribute electronically or post in their institution’s Learning Management System (e.g. Canvas etc.). Videos do not need to be downloaded; the materials provide embedded links. (Please note that the Student Materials will appear as one item in your cart. After purchase you will receive a link to download a Zip file that contains the student materials, seven files in total.)
Class Sessions #1 & #2 (required materials)
- Project Merchandise - Student Guide: Provides learning outcomes, exercise overviews, and preparation materials including links to pre- and post-class videos
- Project Merchandise - Valuation Model: Provides student-ready Excel template to test assumptions
- Project Merchandise - Exit Case Exercise: Provides a summary of five competing exit alternatives students can reference while working through the Exit Case
Class Session #3 (additional materials included in the download but for optional class)
- Project Merchandise - Form Securities Purchase Agreement (SPA) (23 pages)
- Project Merchandise - Disclosure Schedule Sample (4 pages)
- Project Merchandise - Negotiation Issues List (2 pages)
- Project Merchandise - Market Outcomes Matrix (3 pages)