Rocky Mountain Advanced Genome Case Analysis

1979 words - 8 pages

Background:Rocky Mountain Advanced Genome (RMAG) is headquartered in Colorado Springs, Colorado and has recently been founded by seven research scientists who have taken a leave of absence from major universities and pharmaceutical companies to establish this firm. This company uses gene-sequencing techniques with a computer-driven search algorithm to identify genes in human DNA.In January 1996, negotiations were coming to the end for a private equity investment by Big Sur Capital Management to buy a 90 percent equity interest for $46 million in RMAG. The proceeds of the sale would be used to finance the growth of RMAG. Big Sur's saw a highly promising, but a highly risky investment opportunity. Kim McGraw, a managing director with Big Sur was put in the position to negotiate a price and terms of the investment. She based her negotiations on the assessment of RAMG's economic value.Big Sur Capital Management is located in San Francisco, California and has been organized as a hedge fund since 1968. Over the years it proved more successful in variety of "private equity" investments and had gradually shifted its activities to this area. The firm has $2 billion under management with 64 investments evenly split between venture capital investments and participations in leveraged buyouts.Importance of Terminal Value:Terminal value is the lump-sum of cash flows at the end of a stream of cash flows. It is important when trying to value a firm because that are present in the valuation of just about every asset and in the valuation of stocks and whole companies terminal value is usually a very big value driver. The importance of TV is showcased when comparing terminal value with market prices as it is important to remember that only 10-20% of value of stock is attributable to dividends, this results in 80-90% of the value of stock attributed to "other factors", namely terminal value.Terminal value is the continuing value determined for a company at the end of the forecast period. It is necessary to calculate this value when the company experiences abnormal growth during the first period of its life before reaching a stable, constant growth period. This can be supernormal growth early on, or in the case of RMAG, it can be the period when revenues will be low before their products are finally approved and reach the market. We felt we should use the 15-year forecast horizon that it typically takes to get their products "from the lab bench to the drugstore."Terminal value should garner considerable attention when calculating a firm's value. Despite the possibility being distant in the future, this value must be considered. Without accounting for terminal value you are ignoring the 'going concern' of the business and are calculating value determined only from the period of irregular cash flow growth, a value that does not properly reflect the firm's true intrinsic value.Determining Forecast Horizon:When determining the forecast horizon some key points to keep in...

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