The purpose of the case is to provide the student with an opportunity to analyze a potential merger between Delta Air Lines (Delta) and Atlantic Southeast Airlines (ASA). Through the use of a marketing alliance, ASA had served primarily as a provider of customers for Delta rather than a competitor. The student is encourage to decide whether Delta should renegotiate its marketing alliance with ASA or purchase it. A secondary decision focus is whether ASA should agree to be bought out or attempt to survive without its long-term partner. The analysis of Delta’s decision demonstrates the impact of transactions costs on a firm’s decision to purse a merger. The analysis of ASA focuses on the choices a fringe firm faces when the dominant firm is determined to change the existing business relationship.

The case is based on library research and can be used for undergraduate economics courses in Industrial Organization, Managerial Economics, or Corporate Strategy. The teaching note, however, is appropriate only for an economics course in Industrial Organization.

The case describes the relationship that existed between Delta Airlines and one of its feeder carriers, Atlantic Southeast Airlines. ASA had been a Delta Connection carrier since 1984, but by 1997 Delta was unhappy with the alliance. Delta complained that ASA’s scheduling and deployment of their aircraft did not always result in a schedule that connected well with Delta’s system. In addition, Delta believed that it had learned a great deal about how to provide outstanding operational customer service that was not being matched by ASA. Finally, Delta though it had improved its revenue management techniques and wanted to put its practices in place at ASA to benefit both carriers, and Delta wanted ASA to bear more of the financial burden associated with their alliance.

ASA was attempting to meet Delta’s demand concerning service, but was unwilling to bear more of the cost of the alliance. ASA was interested in purchasing several new regional jets so it could expand its fleet and route structure as well as retire old turbo-prop aircraft.

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Contact Person: Mary Bumgarner, Department of Economics, Finance, and Quantitative Methods, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144. Voice: (770) 423-6341 FAX: (770) 499-3209 E-mail: cbumgarner@mindpring.com and mbumgarn@ksumail.kennesaw.edu

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The students are challenged to make a recommendation concerning the acquisition of a company that enhances a core competency of the acquiring company. This acquisition recommendation must include both a financial valuation of the company and a marketing or negotiating strategy to close the deal. The students take the role of the CFO who is in charge of making this recommendation to the CEO who wants to close the deal quickly. Yet the acquiring company is under severe pressure to make the quarterly earnings projections of the financial analysts, especially since the company recently went public with an IPO and has had huge swings in its stock price.

This case is intended for graduate and senior level courses in finance and managerial accounting. The case topics include the price-earnings and free cash flow methods of financial valuation of a company, comparable financial benchmarks, purchase and pooling accounting methods for an acquisition, and negotiating strategies for an acquisition.

Jason McCracken, Chief Executive Officer of CST, wants to buy Discovery Corp., a small, innovative firm that produces a variety of software tools for higher education, corporate training, and CD-ROM development. CST currently uses Discovery to provide in-house training of its telephone sales representatives. The two firms are in the initial stage of negotiations and have differing views about key aspects of the merger. First, the parties have a sharp disagreement over price. CST thinks that the value of Discovery is about 40% lower than does Discovery. Second, CST has been using stock-only deals in its recent acquisitions. CST has been missing its earnings projections lately and Jason does not want the acquisitions to dilute earnings, either because of choice of accounting method or because of purchase price. Bur price per share for CST has been falling steadily and a stock-only deal is risky for the sellers. The merger seems beneficial to both parties if a fair price and deal structure can be worked out.

The major decision problem is to make a recommendation for an acquisition price for Discovery Corp. and to support it with a negotiating or marketing strategy to close the deal. The CFO and the controller of CST are under pressure from the CEO and the departments of sales, training, and information technology to make the acquisition. Complicating the financial valuation of Discovery Corp. are the lack of directly comparable financial information from other companies, the very optimistic growth projections provided by Discovery, and the fact that CST is the major customer with 57% of Discovery’s total sales. Complicating the negotiating strategy to close this acquisition deal are potential financing deals from joint venture capitalists, a potential acquisition offer (completely in cash) from a minority owner of Discovery, and the lack of any cushion for CST to make the quarterly earnings projections of the financial analysts. Thus, the use of either purchase or pooling accounting is an important consideration for its impact on CST’s earnings and the acquisition negotiations.

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Contact Person: Hugh Grove, University of Denver, Denver, CO 80208
Mail: School of Accountancy, 2101 S. University Blvd., Denver, CO 80208
Voice: 303-871-2026; FAX: 303-871-2016; email: hgrove@du.edu

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PRYCA presents a challenging opportunity for students to test their understanding of working capital management. Students are asked first to analyze the financial structure of the firm and to identify its unique aspects, if any, and their causes. Also, students are asked to understand how the company has managed to finance its extra-ordinary growth with almost no external debt or equity issues. Once the principal source of financing (trade credit ) has been identified, the risk of basing a growth strategy on this source of financing must be assessed. Finally, students are invited to explore the impact of the new Trade Bill on the firm's growth strategy.

This case can be used in MBA programs as well as in Executive Courses, in the Corporate Financial Management course.

This case examines the growth strategy of a Spanish retail chain in the late 1980s and early 1990s as the firm led an industry consolidation. It explores the benefits of utilizing extreme leverage (generated in the form of a very high level of short-term trade debt) in facilitating rapid growth. Risks associated with such a financial and growth strategies as well as a proper policies for managing these risks are explored. It also examines the effect of a government regulation (in form of a new Trade Bill) on the financial structure, profitability, growth, and competitive position of the retail industry. The case suggests that given the proper competitive environment and operating strategy, super-leveraged need not generate supper-risk.

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Contact: Professor Ahmad Rahema, IESE, International Graduate School of Management, University of Navarra, 21 Avenida Pearson, 08034 Barcelona, Spain.  Phone: + 3493 253 42 00; Fax + 3493 253 43 43; E-mail: rahnema@iese.edu
 

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The case, set in late 1996, is about the development and financing of a $3.8 billion LNG (Liquefied Natural Gas) project in Qatar, in the Middle East. The focus is on the risks underlying a natural resource project, including political risk, legal risk, commodity price risk, project non-completion risk, foreign exchange rate risk and commercial (customer) risk. The case illustrates how project financing – medium-term non-recourse financing- together with equity, bank loans and export credits, is used to finance the project. The case provides sufficient financial data to permit students to analyze scenarios in deciding whether it would be a wise investment to lend to Ras Laffan by investing in its project finance bonds.

The cases can be used in MBA and in upper level undergraduate courses in International Management, International Financial Management, and, in a Global Strategy course, in a module featuring developing countries and infrastructure project. Developing countries have huge needs for infrastructure which represents an attractive business opportunity for private sector participation. Infrastructure is a neglected topic in international business and finance courses, and this case allows students to learn about the massive financial investments required in infrastructure projects, the risk and return profile of such projects, and how and why infrastructure projects can be financed using the project finance mode.

Ras Laffan is a $3.8 billion LNG project in Qatar, a joint venture between the majority owner, the state of Qatar, and a minority partner, Mobil Corp. The project relies on offshore natural gas owned by the state of Qatar, and has one customer, the Korean state-owned utility, Kogas. Ras Laffan needs to raise $1.2 billion through project finance non-recourse bonds; that is, the project finance bonds would rely solely on the project’s cash flow for debt servicing and amortization. The decision is presented from the viewpoint of an analyst at an institutional investor who must decide whether to invest in Ras Laffan bonds. He must analyze risks including exchange rate risk, since Ras Laffan will borrow in US dollars, receive LNG sales revenues in US dollars, but Kogas, its sole customer, derives its own revenues in Korean won, from selling energy to Korean business and residential customers. Another major risk is LNG price fluctuations, since Kogas would pay for LNG based on a fluctuating market price over the 25 year life of the contract. Other risks include risks created by Islamic sharia law, the political risk of operating in the Middle East, project completion risk, etc.

The case provides information on Ras Laffan economics, demand for LNG, Kogas’ position in the Korean economy, and bond indenture provisions designed to protect the bondholders against various risks. Ras Laffan’s cash flows are presented in two exhibits, one being a base case scenario, the other with a scenario of falling energy prices. The information can be handed out to students in a spreadsheet, allowing them to model and analyze different scenarios such as lower energy prices and a changing won/dollar exchange rate.

The teaching note provides a lecture outline on the concept of project financing, as well as slides to examine Ras Laffan project risks in detail. Additional information in the teaching note details the evolution of energy prices and of the Korean won over the period 1996-1998.

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Contact: Ravi Sarathy, College of Business, Northeastern University, Boston, MA. 02115
Phone: 617-373-4806; fax: 617-373-3166; email: rsarathy@cba.neu.edu

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This case demonstrates the ethical and marketing challenges associated with selling financial instruments. The account of how a former savings and loan undertook the sale of subordinated debt to its customers is a cautionary tale which also offers students insight into an important chapter of U.S. financial history, namely, the savings and loan debacle. The case would be suitable for use in a banking, financial institutions and markets, financial management, business policy, or business ethics course. Masters students are the most likely target for this case, but advanced undergraduates would also be appropriate.

In 1987 Germania Savings Bank undertook the sale of approximately $10 million subordinated capital notes. Nicknamed "Schnotes", to reflect the German heritage of the bank, these notes could be counted as regulatory capital and were sold as a means of augmenting the bank’s capital, thus helping the bank meet higher capital requirements that had been recently imposed on the industry. The marketing of these notes—largely to bank customers—proved to be more difficult than bank management initially expected.

A new, aggressive sales campaign was then begun in January 1988. This subsequent marketing effort was characterized by some as "high pressure" directed largely at older customers who had substantial sums on deposit. This more aggressive campaign resulted in the marketing of an additional $8 million over a period of about two months.

The case ends in February 1988 as Germania Bank is on the verge of meeting it’s year-end (December 31, 1987) reporting requirements. Substantial loan loss reserves must be set aside to cover expected loan losses. These increased reserves will result in a substantial loss to Germania for the calendar year ending December 31, 1987. Management must address key issues including a decision on whether the final $1 million in Schnotes should be sold or, indeed, whether the proceeds received thus far from sale of the notes should be refunded.

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Contact Person: James E. Fisher, Saint Louis University, St. Louis, Missouri 63108.
Mail: School of Business and Administration, 3674 Lindell Blvd., St. Louis, MO 63108
Voice (314) 977-3836; FAX (314) 977-1647; e-mail fisherje@slu.edu

This case illustrates alternative methods to hedge foreign currency risk. They include a forward contract, a money market hedge and a cross currency hedge in which the new currency in Europe, the Euro, is used as a proxy for the Swiss franc. The alternatives reflect increasing amounts of risk and profit. Consequently, the decision to choose the best alternative depends upon an evaluation of the classic risk and return tradeoff. Students also have an opportunity to learn about the new currency in Europe and how foreign currency traders use fundamental and technical analysis to forecast exchange rates.

The case can be used as part of the international component of financial management courses at the MBA level or upper level business finance courses at the undergraduate level. The case is rich enough so that it could also be used in international finance and management of financial institutions courses.

B.J. Andiamo, Senior Vice President of Capital Markets at Massachusetts Company/Carnegie Bank, has sold one of the bank’s business customers a six month, 50,000,000 Swiss franc forward contract, creating a short position for the bank in Swiss francs. The bank’s objective is to make money with this opportunity while limiting its downside risk.

One alternative is for the bank, in a matter of just a few minutes, to enter into a six month forward contract on more favorable terms than it offered its customer and earn $25,000-$30,000. Another more profitable alternative involves borrowing in the U.S. and creating a Swiss franc asset to offset the underlying risk. Although this alternative neutralizes the bank’s risk position, the bank’s CFO is concerned about placing low margin transactions on the bank’s balance sheet at a time when the bank is being scrutinized by credit rating agencies and security analysts. The third alternative of using the Euro as a proxy for the Swiss franc has substantially more profit potential with conjectural downside risk. The profit and risk of this alternative depend on B.J.’s ability to forecast the Euro/Swiss franc cross rate six months forward using fundamental and technical analysis.

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Contact person: Professor Jonathan B. Welch, Northeastern University.
Mail: 413 Hayden Hall, College of Business, Northeastern University, 360 Huntington Avenue, Boston, MA 02115
Voice: 617-373-4572; FAX: 617-373-8798; e-mail: jwelch136@aol.com

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This case presents students with a number of corporate decisions concerning a rapidly growing consumer products company "going public" in the late 1990’s. Timing of an IPO is critical, as is the pricing of the issue, if this financing choice is pursued by management. The case also provides information that students may use to explore the firm’s financing strategies, financial forecasting and the valuation of a private vs. a public company

The case and teaching note were written for graduate students in a capstone finance course in an MBA program. It would be assigned early in the semester, to give students at least four weeks to prepare for the classroom discussion.

The Beringer Wine Estates company has been expanding its market share in the premium segment of the wine industry in the 1990’s. after operating as a wholly subsidiary of the giant Nestlé Food Company for almost a quarter of a century, the firm was sold in 1996 to new owners, in a leveraged buyout.

For the next year and half, management and the new owners restructured the firm and expanded operations through internal growth and strategic acquisitions. The markets for its products (premium table wine) continued to grow, as did valuations of many publicity held firms. With a heavy debt load from the LBO, even in an environment of declining interest rates, it seemed prudent for management to consider a significant restructuring of its capital structure. By paying off a portion of its debt and expanding the equity account, the firm would achieve a greater degree of financial flexibility which could enhance its growth rate and business options. Finally, a publicly held common stock would provide management with another "currency" to be used for enhancing its growth rate and overall corporate valuation.

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Contact Person: Raymond H. Lopez, Pace University, White Plains, NY 10606.
Mail: 1 Martine Avenue, White Plains, NY 10606-1932 USA
Voice (914) 422-4165; FAX (914) 422-4184; e-mail: rlopez@fsmail.pace.edu

The year 1994 began with promise for both Hamlin Dewey, Inc. ("Hamlin") and Atlanta Park Medical Center ("Atlanta Park"). Hamlin's investment management subsidiary, Hamlin Asset Management, managed over $17 billion in mutual funds and private accounts. One of Hamlin's clients, Atlanta Park was a not-for-profit research and teaching hospital. Since its inception in 1954, the hospital had become a leader in research and clinical programs to combat cancer, asthma, and heart disease. One year later, each of these two venerable organizations was fighting for its own survival, and they were battling each other in litigation.

Hamlin's mutual fund and private accounts were heavily invested in mortgage derivatives. Over the course of 1994, these investments lost 36% of their value. Hamlin lost over $800 million of investors' money. Investors were stunned. Some investors brought individual lawsuits, while others banded together in a class action suit.

Based on a composite of actual events, this case explores fiduciary responsibility of portfolio managers, the responsibilities of managers and trustees of not-for-profit institutions, securities litigation, mortgage-backed securities, endowment portfolio management, and the historical events that shook the bond market in 1994. Just as the court was asked to do in the actual civil case, students are asked to measure damages and sort out who is responsible for the losses suffered by investors.
 

This case is designed to allow advanced students to analyze and evaluate a fixed income portfolio decision in a realistic investment management setting. Students are required to calculate and evaluate both duration and convexity. The case uses super-maturity bonds and Treasury STRIPSs to illustrate these concepts.

The case describes the organization of a money management firm and the organization and operation of a multi-billion dollar fixed income portfolio with multiple managers. It also includes a brief history of super-maturity bonds.

The case is most effective in a graduate portfolio management course, a second undergraduate investments course where the students have already had the opportunity to do extensive bond pricing and analysis, or a course in fixed income investments. Students should already be familiar with the concepts of duration and convexity. There is a companion technical note on this topic which can be used with the course especially for students who are not familiar with these concepts.

This case is based on extensive interviews with a fixed income portfolio manager at a well-known investment management subsidiary of a super-regional bank holding company and on library research.

Amy Grindlewald managed a large fixed-income portfolio for a major investment management firm. In November 1995 she purchased some original issue corporate bonds with 100-year maturities. Ms. Grindlewald compared these super-maturity bonds to Treasury STRIPS in terms of yield, duration, and convexity.

Shortly after Ms. Grindlewald purchased these bonds, the Treasury proposed to eliminate the interest payment tax deduction for all corporate bonds with original maturities of greater than 40 years. Her supervisor called to ask her some questions regarding these holdings. Presumably he was interested in asking her to explain her rationale for buying the bonds and her analysis of how the bonds would be affected by the Treasury proposals.

The primary objective of this case is to have students apply financial analysis to value a closely-held computer software company for an acquisition. The case requires students to identify and to value the key components of a company’s business and to consider several other factors including the effect of federal taxes, the risk of technological changes on a company, and non-financial factors that may impact a merger or acquisition. Students also gain some perspective about the dynamics involved in the acquisition of a small company and learn the importance of considering both tangible and non-tangible assets in the valuation of an information technology business.

The case is typically used in upper level undergraduate and graduate level finance courses, particularly units within courses in entrepreneurial finance, financial strategy, or business valuation. We usually assign an accompanying note, entitled, Note on Valuing Computer Software Companies, with the case if the students have not had prior work in valuation of companies that are not publicly traded, particularly information technology companies. This note describes the three basic valuation approaches (income, market, and asset). It also provides some general information about how to apply these three approaches to valuing software companies.

Bell Financial Software, a provider of software used by attorneys and accountants to prepare federal and state estate tax returns, is considering an acquisition proposal from Thomson Professional Publishing, a division of one of the world’s largest publishers. The founder and principal owner of company, Steven Bell, needs to determine the value of his company. He also needs to have financial data to support the valuation for the negotiations with Thomson. Although his company has been successful, Bell is concerned about changes in technology and the future. These concerns effect the negotiations and the structure of the transaction.

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Contact Person: Steven R. Kursh, College of Business Administration, 413 Hayden Hall, Northeastern University, Boston, MA 02115.
Voice: (617) 373-2197; FAX (617) 373-8798; e-mail: kursh@mediaone.net
 

The case introduces students to interest rate and currency swaps, their economic rationale and their use. It describes the functioning of a fixed exchange rate operating under stress, and how private and official liquidity provision in the clearing system contributes to interest rate determination. It requires students to assess the robustness of the exchange rate system and the effect of swaps on that robustness. In confronting these issues, students must consider the nature of efficient markets, speculation and market manipulation and the role of the government in developing financial markets.

This case was written for senior undergraduate and MBA international finance students. It should be used late in the course after exchange rate regimes, parity conditions, determination of exchange rates, yield curves, and swaps have been covered. With additional preparation, it may also be used in an international business course.

Joseph Yam, the head of the Hong Kong Monetary Authority, (Hong Kong’s central bank) must decide whether to take action against speculative activity in Hong Kong dollar swaps. Currency swaps are being used by speculators as a source of Hong Kong dollars. Currency speculation has recently undermined neighboring currencies in the Asian financial crisis. In Hong Kong, the speculators are making money from a "double play": taking short positions in the Hong Kong stock market, selling Hong Kong dollars, driving up interest rates and benefiting from the fall in the stock markets. Yam is answerable to the Financial Secretary, who has been making political points in his war with the speculators and sees the swap market as yet another front in that war. Yam, however, has to consider his long-term commitment to developing domestic fixed income markets. Low issuance and high demand for fixed-rate government paper has reduced secondary market liquidity of Hong Kong sovereign debt. The swap markets have been critical to attracting supranational borrowers such as the World Bank to Hong Kong. The financial crisis, however, has lowered their swapped costs of funding, increasing their issuance and the potential for speculators to obtain Hong Kong dollars. Hong Kong has a reputation as a free international financial center to preserve, but its small markets seem to attract destabilizing, manipulative speculators. Whatever action Yam takes, he must justify his decision to the government and the financial community.

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Contact Person: Hugh Thomas, McMaster University, Ontario, Canada
Mail: McMaster University, 1280 Main Street W., Hamilton, Ontario, Canada L8S 4M4
Phone: 905-525-9140 Fax: 905-521-8995 email: thomas@mcmaster.ca

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An increasing number of investment professionals abide by the Association of Investment Management and Research (AIMR) Performance Presentation Standards. These standards are ethical principles and guidelines that promote uniformity in reporting investment performance and allow investors to directly compare the performance of different investment managers. This case demonstrates the calculation of basic performance measures, calculation and interpretation of various measures of risk and risk adjusted return, and selection and construction of appropriate benchmarks in accordance with AIMR guidelines. The case includes all information necessary for students to calculate and report return and risk measures while allowing them some room for personalization in designing and presenting their reports. The instructor’s manual also includes specific questions the instructor can assign for a more directed approach.

This case is recommended for upper-level undergraduate or graduate level courses in investments or portfolio management.

This case evolved from a real world problem faced by student investment managers at a university located in the southwestern United States. A group of undergraduate finance majors are selected each semester to serve a one-year term on the Investment Roundtable. Members of the Roundtable manage actual portfolios for the university. As such, these students are expected to calculate and present their investment performance along with the other professional money managers at the clients’ annual board meetings. This case is a perfect link between textbook theory and real world reporting requirements. Portfolio information is taken from account statements from the group’s brokerage firm, and background information and instructions based on AIMR guidelines are given in the case.

Implementing reporting standards can be challenging even for experienced investment professionals, since returns can be measured using many different techniques. One of the highlights of this case involves an illustration of this problem. Student managers must reconcile the difference between time-weighted and dollar-weighted returns when presenting this data to one of their clients. The dollar value of the client’s portfolio increased, although performance standards indicate a negative return.

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Contact Person: Jan M. Serrano, Stephen F. Austin State University, Nacogdoches, TX 75962.
Mail: SFA Box 13009, Nacogdoches, TX 75962 USA
Phone: (409) 468-1505; Fax: (409) 468-1447; e-mail: jserrano@sfasu.edu