ZANCO INVESTMENT PROPOSAL Harvard Case Solution & Analysis


Question 1

Briefly reflect on the implications of participating in an auction procedure and on the consequences of such a process on the price paid; furthermore try to highlight some relevant factors that could push Zanco's advisor to grant you a deal on an exclusivity basis.

In auction sales, there is an expectation of selling the underlying goods at aprice higher than its market value. This is achieved through the competition that arises among the bidders at the auction. Each one tries to win that auction and getstheirdesired good. Thus, participating in an auction procedure, since there few other bidders as well, will lead to anintense competition to be faced by the ABC private equity. Therefore,subsequently the price to be paid under this auction process would have been high due to competition involved. Every party or bidder involvedhasitsown valuation and information against the auctioned item,therefore each in the auction process will offer bid relevant to their valuation of the auctioned item. Each party wouldwant to secure the auctioned item and can also bid price more than the market value of that auctioned item. As a result, this makes the auction more favorable for the auctioneer and unfavorable for the bidders.

Factors that can make Zanco’s advisors to grant a deal on an exclusivity basis to ABC private equity could be:

Firstly, ABC private equity can providesurety to the advisors that it will buy Zanco regardlessthe value of the company that is achieved after proper due diligence.

Secondly, ABC private equity can offer Zancoto complete the deal in a short period of time, as compared to the auction process. Moreover, it would be able togive surety that ABC private equity will complete its all valuation of the company and will buy the company within a short period of time. However, this proposal might result in high risk for ABC, which will cause unrealistic valuation of Zenco due to lack of time.

ABC can also offer some incentives if exclusivity is given, such as to finance the acquiring process and etc.

Question 2

Which are the assumptions you would use to assess your evaluation? Do you think there is a difference between the concept of "price paid" and "fair market value"? How will your financing structure be affected in the three scenarios? Shall you use one “base case” BP or separate cases for your discussions with the management and the banks?

For evaluation purposes the assumptions that will be used are:

  • Turnover growth rate of 6%. The reason behind this assumption is that through the advisors’report, the company is more likely not to have a highly positive future prospect. The business plan is feasible as enumerated. However,the rate of 8% of growth in annual turnover as per the management’s case has probability of only 30%. Therefore, there is high uncertainty and 8% risk is involved. Hence, the fair rate that is more representative of the company’s future prospect is middle case, which is around 6%.
  • The Gross Profit rate of 45% as estimated by the management. The rationale behind using the management estimate of gross profit is that all the circum stances are favorable for future performance of the business. Moreover, the management will be providing incentive based commission, which will increase the employees’motivation. This will lead to the management striving to perform better and achieve efficiency in the business operations. As a result,this rate is assumed, which is justifiable assuming management’s efficiency and motivation.

The concept of "price paid" and "fair market value"

Fair market can be defined as a value of an item is cash or cash equivalent that can be received from the sale of that item in the market at current market condition............

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