Benjamin C. Esty
Roy and Elizabeth Simmons Professor of Business Administration
Benjamin Esty is the Roy and Elizabeth Simmons Professor of Business Administration. He served as Head of the Finance Unit (department) at Harvard Business School from 2009-2014. Before that, 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 served as the faculty chairman for the Summer Venture in Management Program for 14 years (SVMP is a management training program for college students designed to promote educational diversity and opportunity--see the article describing the program). Professor Esty has received the Student Association Award for teaching excellence multiple times, 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 (twice).
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 one hundred case studies, technical notes, and teaching notes on project finance, financial strategy, mergers and acquisitions, leadership, and valuation issues. Collectively, HBS Publishing has sold more than a 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). 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). He was also an editor of the on-line journal called Financial Educator: Courses, Cases, & Teaching Abstracts (part of the SSRN) which publicizes the newest ideas in teaching materials, approaches, and methods.
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 ocurred with firms or organizations on six different continents. In addition, he serves as an expert witness and consultant for litigation involving project finance, corporate finance, and complex valuation issues; was an independent trustee for the Eaton Vance family of mutual funds; and was a director of the Harvard University Employees Credit Union (HUECU). He currently serves as a director and member of the Audit & Risk Committee for Raymond James Financial, Inc. (NYSE: RJF), a diversified financial services holding company.
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.
Best-selling and New Cases by Ben Esty
Best-selling (most popular) Cases:
1) Airbus A3XX (HBS #201028)
> Strategy and finance, Strategic commitments, DCF valuation
2) Dividend Policy at FPL Group (HBS #201028)
> Payout policy, Financial strategy, Capital structure
3) Consolidated Rail Corp. (Conrail A&B, HBS #298006, #298095)
> Use of multiples, Bidding strategies, Takeover defenses, Game theory
4) Petrolera Zuata, Petrozuata--Venezuela (HBS #299012)
> Project finance, Valuation, Risk management
5) Dow's Bid for Rohm & Haas (HBS #211020)
> Legal aspects of M&A, DCF valuation, Financial crisis, Synergies
1) Thomas Cook Group on the Brink--United Kingdom (HBS #215008)
> Leadership, Change management, Financial strategy, Turnaround
2) Molycorp A: Financing Rare Earth Minerals (HBS #214054)
> Financial strategy, Financing growth, DCF valuation, Convertible debt
3) Molycorp B: Issuing the "Happy Meal" Securities (HBS #214062)
> Hedging convertible debt, Fascilitating short sales, Raising capital
4) Molycorp C: Morgan Brothers Reverse Conv. Notes (HBS #215002)
> Structured products, equity-linked notes, replication, valuation
5) The TELUS Share Conversion Proposal--Canada (HBS #214001)
> Hedge fund strategies, Short selling, Corp. governance, Empty voting
6) Project & Infrastructure Finance Note-2014 Update (HBS #214083)
> History & structure of project finance; Data on usage over 20 years
7) Buffett's Bid for Media General's Newspapers (HBS #213727)
> Valuation in a declining industry, TV growth rates, Financial distress
8) Kashagan Oil Sharing Agreement--Kazakhstan (HBS #213082)
> Expropriation risk, LT contracting, Negotiation tactics, Complex projects
9) The IPO of Slater & Gordon--Australia (HBS #213019)
> IPO mechanics; roll-up strategy/consolidation, DCF valuation
10) Compass Maritime Services (HBS #211014)
> Valuation by multiples, Regression analysis, Bidding strategy
11) VHSS: Valuing Ships--Germany (HBS #210058)
> DCF vs. multiples valuation, Financial crisis, Banking, Mkt Liquidity
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.
Thomas Cook on the Brink
Harriett Green faced a daunting set of business and financial challenges as the newly appointed CEO of Thomas Cook Group, the 171-year old UK travel services company. The company had lost almost £600 million in the last three quarters and its stock price had fallen from 230 pence to a low of 8.8p in the past two years. In just a few weeks, the United Kingdom’s Civil Aviation Authority (CAA) would review the company’s license to operate, competitors were publicly questioning the company’s viability in advertisements, and seasonal demands for working capital were about to peak. With the company’s survival at stake, Green had to devise a turnaround plan that would not only return the company to financial health and stability but also ensure long term sustainability. The turnaround plan had to address the company’s high cost structure, raise substantial new capital, fix the over-leveraged balance sheet, create a profitable growth strategy, and build a more effective organization and culture. But achieving these financial and strategic objectives within the short time available was going to be a major challenge. The turnaround challenge is to figure out what to do and in what order.
Molycorp A: Financing the Production of Rare Earth Minerals
Molycorp, the western hemisphere's only producer of rare earth minerals, was in the middle of a $1 billion capital expenditure project in its effort to become a vertically integrated supplier of rare earth minerals, oxides, and metals. Yet it had just reported lower than expected revenues and earnings for the second quarter of 2012. In response to the announcement, its stock price fell 29% (its stock price had fallen from $77 to $11 in the past 18 months). The weakening financial performance was due in large part to falling prices for rare earth minerals. With less internally-generated cash flow available to fund the project, a falling stock price, and a low credit rating, management had to decide: how much capital to raise, what kind to raise, and when to raise it. These decisions would determine its capital structure, at least in the short term, as well as its ability to implement its business strategy.
An Overview of Project Finance and Infrastructure Finance--2014 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 2009 to 2013. Examples of project-financed investments include the Kashagan oil field development in Kazakhstan (1997), the $1 billion Port of Miami Tunnel (2007), the $54 billion Gorgon liquefied natural gas (LNG) project in Australia (2009), and the $6 billion Oyu Tolgoi copper mine expansion in Mongolia (2014). Globally, firms financed a record $415 billion of capital expenditures using project finance in 2013, and the use of project financed-investment has grown at a compound rate of 8% over the past 15 years despite several macroeconomic crises.
This note focuses primarily on private sector investment in industrial and infrastructure projects and 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 2000s, and most recently to infrastructure finance in the 2010s. The third section provides a statistical overview of project-financed investment over the last five years (2009 to 2013) 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.
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.
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.
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.