Case 42 Essay

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Sierra Capital Partners is an investment company in Albuquerque, New Mexico. They were organized in 1974 as a hedge fund, and quickly grew over the years with great success in private equity investments. Sierra focused primarily on the life sciences sector. In the early 2000’s, Sierra was burned by many young firms’ new discoveries that failed to work out. Their new motto for evaluating investments became, “NRDO: no research, development only.” Arcadian Microarray Technologies was founded in 2003 by research scientists, some of whom were previously involved in a very successful project called the Human Genome Project. Those scientists helped find links between variations in a person’s genetic code and their predisposition
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Problem Statement What price should Sierra partners offer for a 60% equity stake in Microarray technologies, or what percentage of equity interest should they receive to be profitable if they pay $40 million?

Decision Criteria Chu is willing to invest cash on the basis of his expectations for the cash flows. Arcadian’s management believes they can grow at a rate of 7% to infinity, but Chu believes a lower rate is more likely. The price that Sierra offers to pay for the 60% equity interest in Arcadian must be pleasing to management of Arcadian while not involving too much risk on Sierra’s part. Our decision criterion for the case is that our solution must have a return no less than our WACC of 20%.

Alternative Solutions Arcadian’s management has used a very optimistic cash flow for their future sales through 2015, but Chu had a much more pessimistic view on their upcoming cash flows. For our solutions, we decided to look at the return that Sierra would receive on Arcadian using 3 different purchase prices. Instead of using the optimistic 7% rate that Arcadian had forecasted, we cut the growth rate back to 4% to allow for inflation and growth in a more conservative manner. Are three alternative solution are:
1) $40 million purchase price
2) $35 million purchase price
3) Pay the $40 million but receive 70% interest in the company
Data Analysis The
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