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Sample Case Study

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Submitted By jst2evl
Words 926
Pages 4
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).

Additionally, Sierra’s view is too conservative and they have understated Arcadian’s potential. This can be seen in Exhibit 2 where the total sales are 48% less than Arcadian’s forecast in the terminal year. Additionally, in the terminal year, Sierra’s forecast for net income and free cash flow is respectively 20% and 35% less than that of Arcadia’s. Sierra is still determining the

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