Teegolf Company: To Exit or Not to Exit—Team 2

Abstract

Kris Alexander is a newly appointed partner at the private equity firm Kohlberg & Co. Alexander is preparing an exit proposal for one of Kohlberg's portfolio companies, the TeeGolf Company. Alexander believes that TeeGolf has a great opportunity of selling for a purchase price that would achieve a return equal to or greater than the firm's target IRR of 25%. However, Alexander was concerned about the viability of the sale. Specifically, he wondered: would strategic buyers, who would pay premiums to financial sponsors, actually be interested in this business? How would the firm negotiate amongst potential buyers if several submitted bids? What if there was only one buyer interested? Had Kohlberg's valuation accounted for a potential recession? How should he account for the investment banking adviser fees in his recommendation to sell? To answer these questions, students will be required to evaluate different exit strategies from multiple perspectives, understand how to work with a leveraged buyout analysis, a discounted cash flow, and how to add in the effects of synergies. A negotiation exercise between Kohlberg and two potential buyers, private equity firm Leonard Green Partners and a strategic buyer GoGolf, can support the learnings around asymmetric information, ZOPA, and BATNA.This case works well in a module covering firm valuations and financial negotiations. It would complement the HBS note on negotiations and cases such as Kelly Solar and Wrigley/Mars. Excerpt UVA-QA-0895 Rev. May 24, 2018 TeeGolf Company: To Exit or Not To Exit Team 2 As Kris Alexander, a newly appointed partner at the private equity (PE) firm Kohlberg & Co. (Kohlberg), walked out of the firm's Q4 2016 Investment Committee (IC) meeting, he pondered about which Kohlberg portfolio company would be best to sell in the upcoming year. The Kohlberg IC members were pleased with the performance of the acquisitions they had made over the last few years—many of which had two or more years remaining before the firm's planned exit. However, the IC agreed that there was a potential opportunity now to sell some of its investments as the markets were riding at historic highs and the US economy was nearing its longest recession-free streak. The IC had tasked Alexander with presenting an exit proposal for one of its portfolio companies. Specifically, the IC was seeking a company that: (1) had the most to gain in an inflated market (or the most to lose in a recession), (2) had already fully realized any strategic changes or synergies Kohlberg had planned, (3)could be sold in an expedited sales process, and (4) could garner quick interest from strategic and financial buyers. These were all required conditions in order to make an early exit from a portfolio company at this stage. Alexander and his team analyzed their current portfolio companies against the IC criteria and presented their choice, TeeGolf Company (TeeGolf). Alexander strongly believed that TeeGolf had the greatest probability of meeting all four conditions, although it would not be certain until initiating the sales process. . . .