Hartcourt Case Study

The question is whether or not to take the $450MM offer from Maxwell, stay with current situation, or allow the owner to leverage the firm for expansion.

The base case:

If one looks at market cap, which in class we were told was roughly $200MM, then the offer would appear to be 2x this amount, which of course would make shareholders happy. However, in reviewing the balance sheet, Maxwell is offering 27% over the equity-net asset value in the base case. That is, he is offering $450, while the fair market value of the firm is $353. Looked at another way, including the present value of the cash flows, Maxwell is offering slightly less than the $453 NPV of the firm. The NI and operating cash flows are consistently rising over time from both publishing and sea world (although if inflation is above 2% they are losing money in real dollar terms). While it seems like Maxwell is offering a good price from a market cap perspective, a review of the balance sheet and fair market value finds the deal less attractive. In short, Maxwell is offering the current value of the firm without accounting for future growth or potential. The firm, were it to consider the offer, should ask for a higher price.

The leveraged case:

The management buyout case is a significantly more risky move. In looking at the balance sheet, The equity-net asset value is negative $650 to a base case of a positive $353. The fact that the company would be taking on significant debt is hidden in the management buyout offer at a premium of 56%. In addition, taking on debt would increase the risk, which would cause doubt in the marketplace causing the share price to drop, and contingently the market cap would shrink. So, while the NPV of cash flows is positive and greater than the base case at $769 these figures mask the debt and contingent risk that the firm has taken on. The balance sheet helps here to clarify that the added NPV value is coming from debt. The same is true of the inflated...