What's Wrong with Private Equity Firms: Ask Mervyns


Code :BSM0047

Year :

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note:Available

Structured Assignment :Available

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Abstract: The chief objective of this case study is to analyse the business model of Private Equity (PE) in the wake of the overwhelming number of PE-owned companies filing for bankruptcy. The case study also delves into the necessity for reexamining the working model of PE firms in the context of the current US financial crisis. Though the principles on which PE firms operate are known to be risky and are based on unrealistic assumptions, investors are attracted to them due to the lucrative returns that they promise. However, in recent times, the rate of failure of companies backed by PE firms has skyrocketed. In 2008, one such failure was that of Mervyns California (Mervyns), bought by a consortium of PE firms Cerberus Capital Management, Sun Capital and Lubert-Adler. Although the PE firms had assured the turnaround of Mervyns, they instead adopted strategies, which were beneficial to them alone and pushed the company to the brink of bankruptcy. The bankruptcy of Mervyns is just one of the several other failures that marked the year 2008. Were the strategies adopted by PE firms responsible for the decline of these companies? What does the future hold for these PE firms in the light of the current financial crisis, which might reduce their access to debt? Does the recent string of failures suggest that it is time for them to restructure their business model?

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Pedagogical Objectives:

  • To understand the evolution and growth of 'PE Investor' Industry
  • To understand and critically evaluate the business model and business dynamics of 'PE Investor' industry
  • To debate on the role of PE investors in failing to turnaround the companies taken over
  • To explore the various alternatives available for making PE business model more workable.

    Keywords : Private Equity, Business Model, LBOs, Institutional Investors, Divestments, Venture Capital, Mervyns, Cerberus Capital; Sun Capital, Lubert-Adler, Bankruptcy

    Contents :
    Evolution of Private Equity Firms
    Failures of PE Turnarounds: The Case of Mervyns Departmental Stores
    PE Industry: Time for a New Business Model?

    Case Introduction >>

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