Parenting

Module III

Case: Parenting

Ark (Aike) Huang

1. Analyze the term sheet on pp. 21-24. Assume for this analysis that the “market value” of the firm as set in the buyout clause on P.23 is $35 million. Is the proposed deal with Time reasonable? From whose perspective? What changes, if any, should be made to the deal?

Before Wolaner accept Time’s deal, she owned 67.5% of the interest of Parenting. Details are showed as following:

Since the market value of the company would be 10 times normalized pre-tax income. And basically Times would exercise the option only if Parenting does a good job. According to their projection, the revenue in 1989 would around 13 Million (Exhibit 6). Then the fair value of Parenting would be 130 Million. Compares to the price Time offered, which is 35 Million, that was way low than the fair value.

Wolaner

If there’s no option of buyout, as of 1990， Wolaner will get

130 Million * 51% = 66.3 Million

With a cap included, Wolaner, on the other hand, will get

35 Million * 51% = 17.85 Million

So from Wolaner’s perspective, without a cap, Wolaner’s profit would be 3.7 times higher than with a cap.

Time

If there’s no option of buyout, Time would spend 66.3 Million to buyout Parenting; And with a option, they just need to spend 17.85 Million. However, this is only an option, which means if Parenting is not doing good, Time can just simply not buying. So Time is being at a position with little risk.

Investor Group

For the investor group, though Time would offer a price three times as their investment, they still loss money if the market value of Parenting reaches that point. However, they don’t need to bear the risks in Parenting’s future operation.

Without Cap: 130 * 34.5% = 44.85 Million

With Cap: $ 525,000