Note: Valuing a Business Acquisition Opportunity

William E. Fruhan Jr.

Background Note | HBS Case Collection | January 1989 (Revised October 1993)

Note: Valuing a Business Acquisition Opportunity

Abstract

Describes how to value an acquisition opportunity as a capital budgeting problem. Cash flows are discounted at the cost of capital and debt is deducted to value the equity capital of the target company. A key contribution of the note is the discussion of five methods for establishing a terminal value for future cash flows extending beyond the normal planning horizon.

Keywords: Valuation; Acquisition; Opportunities;

Language: English

Format: Print

8 pages

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Citation:

Fruhan, William E., Jr. "Note: Valuing a Business Acquisition Opportunity." Harvard Business School Background Note 289-039, January 1989. (Revised October 1993.)

Case | HBS Case Collection | June 2018

Burton Sensors, Inc.

William E. Fruhan and Wei Wang

Burton Sensors presents a realistic situation where a small, rapidly growing, and profitable temperature sensor original equipment manufacturer (OEM) reaches its debt capacity and seeks equity financing to sustain high growth. The president of the company must decide whether to purchase thermowell machines (a positive NPV project), whether to issue common stock to a private investor at depressed prices to alleviate financial pressure, and whether to acquire another sensor manufacturer in an all-stock deal. All three decisions are interrelated and require different techniques to assess. In particular, the acquisition decision must be analyzed as both an investment and a financing opportunity, as the acquisition could be used to resolve the financial constraint problem. This case thus shows students how corporate investment and financing decisions often interact. The case offers a comprehensive overview of key issues in a typical corporate finance or financial management course, including capital budgeting, debt capacity analysis, security issuance, and acquisitions. It can be used in a first-year MBA course in corporate finance or financial strategy or in an elective MBA course in mergers and acquisitions. It can also be used in upper-year undergraduate finance courses that cover capital budgeting, security issuance, and mergers and acquisitions. The case can also be used as a take-home final exam.

Keywords: Financing and Loans; Acquisition; Investment; Financial Strategy; Decision Choices and Conditions;

Citation:

Fruhan, William E., and Wei Wang. "Burton Sensors, Inc." Harvard Business School Brief Case 918-539, June 2018. View Details

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