- resources in finance

Case Study


Prof. Ian Giddy, New York University

Flexics, Inc., is a leading producer of plasma technology display devices in the USA. One of the company's latest innovations is a patented process that permits the rapid production of customized semiconductor wafers using plasma-based etching technology instead of quartz plates. Flexics, based in Seattle, started business in 1987 and now has production facilities in Vancouver and a research affiliate in Princeton, New Jersey. 

In mid 2003 Alex Pereira, the founder and CEO of Flexics, was considering options for realization of the value of his shareholding in Flexics. Pereira was seeking a method that would offer greater liquidity and diversification of his and his family's investment in the company. One option was to talk to investment bankers about an initial public offering (IPO). This would allow him to sell some or all of his shares in the market. But he was unhappy about the IPO market, which was weaker than in 2001 when bankers had talked about an IPO price in the $40-45 range. In the past year, public offerings of similar technology companies had brought price/earnings ratios of about 15. A recent private placement of Flexics shares with a venture capital investor had been done at an effective price of $24 per share. Another possibility was to sell his shares to Photronics, which was rumored to be interested in buying a stake in Flexics. Among the other options he was considering was a leveraged buy-out by management. Pereira liked the idea of giving key officers a greater stake and control, but he wanted to get a good price for his shares. He was willing to receive payment partly in cash, and partly in the form of a $30 million, 15% prepayable subordinated note.

Management had discussed the LBO possibility with Seattle Partners, a venture capital firm that was familiar with Flexics. The firm's advisors had calculated that of the minimum amount of $216 million needed for the LBO, $20 million would have to come from managment, as much as $120 million could be raised through a senior debt issuance led by Bank of America, and the remainder from a private equity group led by Seattle Partners. B of A indicated the rate would be 12% and that lenders would need a Net Operating Income/Interest Expense ratio of at lease 2x. At this time 35% of the 9 million shares outstanding were held by the founder and his family, and the remainder was held by venture capital and private equity groups. Net operating income was $30 million. Other key indicators are listed below.

Balance sheet
Other current assets
Long term assets, net
Total assets

Noninterest bearing short term debt
Short term debt (10%)
Senior long-term debt
Subordinated debt
Total Liabilities & Equity
($ millions)

Interest Coverage
Net Operating Income
Interest Expense
- Short term debt
- Senior long term debt
 - Subordinated debt

NOI/Interest expense
Effective tax rate



$20 million

Photronics, the global leader in photomask production, was considering making an offer for Flexics. The latter's shares were trading at a P/E of 10.6 on earnings of $2.26 per share, far below Photronics' estmated P/E of 18. Based on past performance the company was expected to generate free cash flows of $2.57 per share next year, an increase of 3.6%  from the current level of $2.48. If Photronics acquired Flexics, they estimated that the long-run EPS growth rate could be raised to 5.5%, but Photronics would incur upfront capital investments and other costs of $18 million. The Treasury bond yield was 4.5%, the company’s beta, based on comparable companies, was about 1.3 and the long run market return was 11.5%. Was the company worth buying at a P/E of 12? How much of a premium should Photronics be willing to pay?

Photomasks are high precision quartz plates that contain microscopic images of electronic circuits. A key element and enabling technology in the manufacture of semiconductors, photomasks are used to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits. They are produced in accordance with circuit designs provided by customers at strategically located manufacturing facilities in North America, Europe and Asia.


1. What is Flexics worth as a standalone company, assuming it can continue its present growth rate?

2. From the point of view of Photronics, consider making an offer. What would Flexics be worth to Photronics? How much of a premium should Photronics be willing to pay? How receptive do you think Flexics managers and owners would be to an offer from Photronics? What are their alternatives?

3. From the point of view of management and the venture capital firm, consider the possibility of a leveraged buy-out of Flexics. Would it be possible? In what way could this increase the value of the firm to shareholders? Develop a post-LBO plan, assuming senior debt pays 12% and subordinated debt pays 15%. The effective tax rate is 30% and depreciation is a constant $20 million per annum. Would the company be able to pay down its subordinated and senior debt? Assuming an IPO at 12 times NOI in 5 years, would the return be sufficient for Seattle Partners, who normally expect a rate of return of at least 25% per annum?

4. From the point of view of the founder Dr. Alex Pereira, does an IPO make sense? Can you suggest any other alternatives to increase value? How about a share repurchase, or an exchange of common stock for debt, or a special dividend? Which would be appropriate for this situation? | | | | contact
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