Benjamin C. Esty
Roy and Elizabeth Simmons Professor of Business Administration
Unit Head, Finance
Benjamin Esty is the Roy and Elizabeth Simmons Professor of Business Administration and Head of the Finance Unit at Harvard Business School. Prior to becoming Unit (Department) Head in 2009, he was the founding faculty chairman of the General Management Program (GMP), a comprehensive leadership program designed to create outstanding business leaders. Professor Esty currently teaches the introductory finance course in the first year of the MBA program, but has taught a variety of elective courses including advanced corporate finance and project finance. The project finance course, called Large-Scale Investment (LSI), analyzed how firms structure, value, finance and negotiate large capital investments. He also teaches in a variety of executive education programs and serves as the faculty chairman for the Summer Venture in Management Program (a management training program for college students designed to promote educational diversity and opportunity--see the article describing the SVMP program). Professor Esty has received the Student Association Award for teaching excellence, the Charles M. Williams Award for contributions to student learning, the Apgar Award for teaching innovations, and the Greenhill Award for outstanding service to the school.
His current research focuses on corporate finance, project and infrastructure finance, and financial strategy. His articles have been published in a variety of academic and practitioner-oriented journals. In addition, he has written more than 100 case studies, technical notes, and teaching notes on project finance, financial strategy, mergers and acquisitions, emerging market investments, and valuation issues. Collectively, HBS Publishing has sold over one million copies of his cases, and nine of them are currently or have been classified as HBS "bestsellers" (most popular designation). The case studies and notes on project finance are contained in a book entitled Modern Project Finance: A Casebook (Wiley). Professor Esty is an editor of the SSRN on-line journal called Financial Educator: Courses, Cases, & Teaching Abstracts, which publicizes the newest ideas in teaching materials, approaches, and methods. Formerly, he was an associate editor of the Journal of Financial Economics (JFE), Journal of Money, Credit & Banking (JMCB), Emerging Markets Review (EMR), Financial Management (FM), Journal of Financial Services Research (JFSR), and Journal of Project Finance (JPF).
In addition to his academic research, Professor Esty has served as a consultant to and led training programs for investment banks, consulting firms, government agencies, and multi-national corporations on a broad range of investment, financing, valuation, and leadership issues. These activities have spanned the globe including work with firms or organizations on six different continents. In addition, he serves as an independent trustee and head of the Portfolio Management Committee for the Eaton Vance family of mutual funds; serves as an expert witness and consultant for litigation involving project finance, corporate finance, and complex valuation issues; and was a director of the Harvard University Employees Credit Union (HUECU).
Professor Esty received his Ph.D. in Business Economics with a concentration in finance from Harvard University; his MBA with high distinction (Baker Scholar) from Harvard Business School; and his BA degree in Economics with honors and distinction from Stanford University.
Buffett's Bid for Media General's Newspapers
On May 12, 2012, Warren Buffett’s Berkshire Hathaway announced an offer to buy Media General’s (MEG) newspaper division for $142 million in cash and, under a separate agreement, provide debt financing to the struggling firm. Reactions from investors and industry analysts varied greatly: one called it a “great surprise”, another wondered if Buffett was investing with his heart rather than his head (he was a paperboy as a child), and a third said it was a “feat of financial engineering.” Virtually all of them wondered what the “Oracle of Omaha” saw in the declining U.S. newspaper industry that others did not. The question facing Media General’s CEO Marshall Morton was whether to accept the offer or not. As the head of a highly leveraged company whose revenues had fallen 31% in the past four years, whose stock price was down more than 90% off its high, and whose falling profitability left it perilously close to violating key debt covenants, he had to move quickly.
The TELUS Share Conversion Proposal (new case)
On February 21, 2012, TELUS announced a proposal to convert its non-voting shares into voting shares on a one-to-one basis, thereby eliminating the firm’s dual class structure. Despite strong support from the board, Mason Capital, a hedge fund that owned 20% of the voting shares and had a large short position in the non-voting shares, opposed the proposal. With the success of a shareholder vote in doubt, the board had to decide whether to proceed with the vote as planned, temporarily postpone it, or cancel it for good? The board also had to decide what to do about Mason, which they viewed as an "empty voter" in this matter.
The case has four pedagogical objectives: 1) highlight the controversial practice of "empty voting"; 2) illustrate the economics of short selling; 3) raise fundamental questions about corporate governance and the value of voting rights; and 4) expose students to finance topics (e.g., liquidity and proxy contests) and institution details (e.g., the roles played by special committees and proxy advisors).
Dow's Bid for Rohm and Haas
This case analyzes Dow Chemical Company's proposed acquisition of Rohm and Haas in 2008. The $18.8 billion acquisition was part of Dow's strategic transformation from a slow-growth, low-margin, and cyclical producer of basic chemicals into a higher-growth, higher-margin, and more stable producer of performance chemicals. Simultaneously, Dow had signed a joint venture agreement with Petrochemical Industries Company (PIC) of Kuwait, a deal that would generate $7 billion in cash that could be used to finance the all-cash offer to buy Rohm and Haas. Dow and Rohm announced the Rohm merger on July 10, 2008, just before the financial crisis in September 2008. The focus of the case is on what happened after the financial crisis turned into a global economic crisis. Dow, like all chemical producers, suffered as the global economy fell into recession during the second half of 2008 and as financial markets froze. To make matters worse, PIC cancelled the joint venture with Dow in December 2008. As a result, Dow was hurt on three fronts: first, it lost an important funding source for the proposed acquisition; second, Dow's financial condition and internal cash flow deteriorated dramatically (its stock price was down more than 70% during 2008); and third, Rohm's forecast sales, earnings, and value declined precipitously thereby reducing its attractiveness as an acquisition target. Given this confluence of events, Dow sued to cancel the merger agreement with Rohm in January 2009. Rohm responded with its own lawsuit to force consummation of the deal. As of February 2009, Dow's board of directors and its CEO Andrew Liveris have to decide what to do first and foremost about the Rohm acquisition and the pending lawsuits, but also about the firm's declining financial performance and the PIC joint venture.
The Kashagan Production Sharing Agreement (PSA)
When discovered in the 1990s, the Kashagan oil field was the second largest oil field in the world. The project sponsors signed a 40-year production sharing agreement (PSA) with the Kazakh government in 1997, with the expectation the field would be developed at a total cost of $57 billion and would be pumping oil by 2005. Unlike most contracts in the energy industry, the Kashagan agreement was a “flexible PSA” meaning the contractual terms—the allocation of risks and returns—depended on ex post realizations of such things as capital costs and profitability. The project, however, was still not done in mid-2007. The sponsors, led by the Italian energy company ENI, announced the project would not be completed until 2010 and the total cost was likely to be $136 billion. Following this announcement, the Kazakh government indicated its desire to renegotiate key provisions of the contract. The sponsors had to decide whether to renegotiate the contract and, if so, which parts.
Modern Project Finance: A Casebook
Written as a guide to the dynamic and increasingly important field of project finance, this casebook provides detailed descriptions and analysis of 20 project-financed transactions. Other books describe what project finance is and how it works. In this book, Benjamin Esty, of the Harvard Business School, brings his expertise to a collection of cases and notes that analyze how firms structure, value, and finance large capital investments. Modern Project Finance not only serves as a valuable reference manual for experienced project finance professionals, it also provides an effective introduction to the practice of project finance for lawyers, bankers, government officials, and financial managers as well as students and educators.
Creating the First Public Law Firm: The IPO of Slater & Gordon Limited
Slater & Gordon (S&G), a midsized Australian law firm with a high-growth consolidation strategy, had an initial public offering (IPO) scheduled for May 2007. Due to a series of regulatory changes in Australia in recent years, the IPO provided an opportunity for S&G to become the first publicly-traded law firm in the world. The firm and its underwriters had just issued a prospectus and were now in the process of lining up investors for the offering. Gloria Rosen, a portfolio manager at Freemantle Securities, was trying to decide whether to buy the stock for her small-cap growth fund. With only a few days left to place an order for the offering, she had to decide whether to invest and, if so, how much to invest. To make her investment decision, Rosen had to understand the value implications of the firm's business model and its growth strategy, as well as the relevant risks.
Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V. (VHSS): Valuing Ships
After booming for more than five years, the global shipping (maritime) industry experienced a dramatic crash in late 2008 as the global financial system froze and the global economy slid into recession. Ship charter rates (revenue) fell by as much as 90% causing prices of used ships to fall by as much as 80%. As ship prices (values?) fell, ship owners began to default on loans and new purchase contracts while banks holding loans secured by ships faced the possibility of increasing defaults (violations of loan-to-value covenants), foreclosures, and write-offs. In the midst of this crisis, VHSS, the German Shipbroker's Association, introduced a proposal to value ships using discounted cash flow analysis (to determine a long-term asset value, LTAV) rather than market prices from comparable transactions. Thomas Rehder, the chairman of VHSS, argued this approach was necessary because market prices did not reflect fundamental values in the current environment. After announcing the alternative valuation methodology in September 2009, he must convince industry participants—ship owners, appraisers, and bankers—to adopt the new valuation methodology and bank regulators and auditing firms to approve its use.
An Overview of Project Finance and Infrastructure Finance--2009 Update
Provides an introduction to the fields of project finance and infrastructure finance, and gives a statistical overview of project-financed investments over the years from 2005 to 2009. Examples of project-financed investments include the $1.4 billion Mozal aluminum smelter in Mozambique, $4 billion Chad-Cameroon pipeline, €900 million A2 Toll Road in Poland, and the $20 billion Sakhalin II gas field in Russia. Globally, firms financed $240 billion of capital expenditures using project finance in 2009, down from $409 billion in 2008 as the financial crisis hit the Western markets. The use of project finance has grown at a compound rate of 12% annually over the past 15 years.
This note contains four sections. The first section defines project finance and contrasts it with other well-known financing mechanisms. The second section describes the evolution of project finance from its beginnings in the natural resources industry in the 1970s, to the U.S. power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s, and most recently to infrastructure finance in the 2000s. The third section provides a statistical overview of project-financed investment over the last five years (2005 to 2009), and looks at industry, project, and participant specific data. The third section also provides recent data on infrastructure investments and public-private partnerships. The final section discusses current and likely future trends.