Accuflow Case Analysis

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Contents

Assumptions:        2

Evaluate deal From HPC’s Perspective:        2

How attractive is the deal? Should HPC Finance?        2

How attractive is the transaction? How much money does HPC have to provide? What coupon should HPC charge? What fraction of the equity should HPC ask for?        2

What do you think the actual deal will look like?        3

What enterprise Value is the Company Worth to Cunnigham?        3

Will Cunnigham accept the deal?        3

What Should Greylock do?        3

Personal Analysis:        4

Excel:        4

AccuFlow Case Analysis

Assumptions:

I assumed AccuFlow would grow at 6% per year. A very aggressive rate for Y2Y growth for a company like this in their industry unless some R&D produced groundbreaking and patentable products or something of a similar nature. I also ran a scenario with a 3% and 1.5% growth rate.

I also assumed the company would be ready and sold for an Initial Public Offering by 2010 so I am working with 2010’s Terminal Value for my decisions even though the desired date may be many years sooner.

Evaluate deal From HPC’s Perspective:

        HPC is investing 35 Million to get a coupon rate of 14% with 10% cash returns and that is a very attractive and high profit deal but there is a lot of credit risk in the scenario. There is no guarantee the company will survive periods of high debt and strong competition. If I were HPC I would argue to allow me to buy future equity of the company at a rate lower than market value.

How attractive is the deal? Should HPC Finance?

        The deal is attractive considering the return (around 14%) however the cash is not so attractive (10%) for taking an investment risk amounting to $35 million. The extra compensation of payment is the attractive mean for HPC to invest into the company. Another attractive consideration is the equity participation. Another attractive aspect of the deal is the penalty amount of 4% that can be imposed on the payment delay option, therefore the extra amount can be receipted for delay in payment. The deal seems to be attractive for HPC for having such returns and an exit strategy in 7 to 10 years of tenure.

How attractive is the transaction? How much money does HPC have to provide? What coupon should HPC charge? What fraction of the equity should HPC ask for?

The cash compensation must be above 10%, 11% is more acceptable and 3% payment in kind can work for HPC. The internal rate of return must be 14% because the company is risky due to their debt and valuation. However, the compensation of 11% is to reduce the risk of any uncertainty related to payment in kind, at least HPC can get the required return in cash terms.

        The equity fraction it requires is around 45.5% or more that is the value of the company’s share of $35 million (Appendix). HPC must try to ask for a high amount however, it must not accept the equity fraction less.