...FINANCIAL MANAGEMENT CASE STUDY: ARCADIAN MICROARRAY TECHNOLOGIES, INC. EXECUTIVE SUMMARY As an investment manager from Sierra Capital Partners, Rodney Chu is interested in purchasing a 60% equity interest of Arcadian Microarray Technologies, Inc., a biotechnology firm. The bid is currently at $40 million. The Arcadian’s managers have optimistic projections for their firms’ performance over the next 11 years. However, based on Sierra’s calculations, come up a much more conservative view. With the request of Mr. Chu, a fair bid price could be calculated along with any appropriate counterproposals. Appropriate steady state growth rates and terminal values would be included and explained. I. Objective The main objective of this paper is to exercise the terminal value of a firm. The other objectives are to acknowledge: 1. Concept of terminal value 2. Various terminal value estimators along with its advantages and disadvantages 3. The use of tax on terminal value 4. Assumption on liquidation 5. Forecast horizon for estimating terminal value 6. Constant-growth valuation model and its derivation 7. Fisher’s formula for estimating growth rate to infinity 8. Triangulation of a terminal value estimate. II. Analysis We could see in the case that the lessor was trying to understand the lessee’s point of view. Thereby, the lessee’s financing problem is the lessor’s investment problem. This perspective would be explained thoroughly...
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...Zach Duncan Mergers and Acquisitions Arcadian Microarray Technologies, Inc. Professor Singer FIN 439.001 11/17/2009 Executive Summary Rodney Chu, an investment manager from Sierra Capital Partners, is interested in purchasing a 60% equity interest of Arcadian Microarray Technologies, Inc., a biotechnology firm. Currently, the bid is at $40 million. The managers of Arcadian have optimistic projections for their firms’ performance over the next 11 years. However, Sierra has their own calculations, and they have come up with a much more conservative view. At the request of Mr. Chu, a fair bid price is to be calculated along with any appropriate counterproposals. Appropriate steady state growth rates and terminal values are to be included and explained. Problem The current forecast assumptions for Arcadian Microarray Technologies and Sierra Capital Partners represent a very optimistic scenario and a very conservative scenario respectively. First off, Arcadian management believes that the “DNA microarray technology [will] pay off dramatically and quickly; [and] that by the year 2013 the firm’s revenues would top $1 billion.” However, it seems to me that Arcadian is understating its risk and has assumed an astronomical steady state growth rate of 7%. Under these conditions, Arcadian would be assuming that they would be able to sustain a 6% business growth rate on top of a 2% inflation rate (given on pg. 599). ...
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...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 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 Arcadia. Analysis Terminal value is the...
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...| | |Methods of Valuation for Mergers and Acquisitions: Arcadian Microarray Technologies, Inc. | |Written Case Analysis | Methods of Valuation for Mergers and Acquisitions: Arcadian Microarray Technologies, Inc. Case Summary The case is about a private equity investment of Sierra Capital Partners in Arcadian Mircroarray Technologies, Inc. Arcadian Microarray Technologies is a company of the gene diagnostics industry. In August 2005, Arcadian proposed to sell a 60% interest to Sierra Capital for $40 million. Its business consisted of two segments, which are DNA microarrays and human therapeutics. Sierra capital has $2 billion under management and a portfolio consistent of 64 investments. The managing director of Sierra Capital, Rodney Chu, bases his negotiation strategy on the assessment of Arcadian's economic value and structures the interest of Sierra Capital and Arcadian to create high incentives for the value creation. Chu determines the value of the investment through the terminal value, which is the value of a company at a specified future valuation date. In assessing Arcadian's value, Chu looked toward the companies Affymetrix, Inc. and Illumina, Inc. Simon will assist in the final stages of preparing for the negotiations and...
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...Andrey Dyblenko Andrew Klaasen Jeremy Hutton Introduction In August 2005, the owners of Arcadian proposed to sell a 60% equity interest in their business to a private equity firm called Sierra Capital for $40 million. Arcadian provided a highly promising high risk investment for Sierra and Arcadian would look to use this money to finance the firm’s growth. Rodney Chu was assigned the job of negotiating a specific price and terms for the Arcadian investment for Sierra Capital. Arcadian Microarray Technologies is headquartered in Arcadia, California and operates in the Gene Diagnostics industry. Arcadians management had optimistic beliefs for its operations and projected firm revenues to top $1billion by 2013. However Rodney Chu, from Sierra Capital was less optimistic. Some analysis from the market supported Mr Chu view. Analysts were now cautious about the gene diagnostic industry as their market was being flooded by entrepreneurial research scientists. Also FDA approval was uncertain at best and this was key for Arcadian getting its products into the market. Importance of Terminal Value The final steps in Chu’s analysis were to estimate a terminal value for Arcadian. In order to evaluate the market price of a firm, one of the methods involves discounting future dividends at the cost of equity (dividend discount model). After discounting projected 5 year dividends for 19 randomly picked firms it was established that resulting prices were considerably lower...
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