Harvard Case - Board Director Dilemmas-Back the SPAC?
"Board Director Dilemmas-Back the SPAC?" Harvard business case study is written by Suraj Srinivasan, David G. Fubini, Amram Migdal. It deals with the challenges in the field of General Management. The case study is 2 page(s) long and it was first published on : Feb 22, 2021
At Fern Fort University, we recommend that the Board of Directors decline to invest in the SPAC. While the opportunity presents potential growth and diversification, the risks associated with the SPAC's current state and the lack of concrete information about the target company outweigh the potential benefits. The Board should prioritize a thorough due diligence process and seek more clarity on the target company's business model, financial performance, and management team before making any investment decisions.
2. Background
The case study focuses on the dilemma faced by the Board of Directors of Fern Fort University, a private university with a strong reputation and a focus on innovation. The Board is considering investing in a Special Purpose Acquisition Company (SPAC) led by a former university president with a track record of success in the education sector. However, the SPAC has not yet identified a target company for acquisition, and the Board is concerned about the lack of transparency and potential risks associated with such an investment.The main protagonists in the case are:
- The Board of Directors: Responsible for overseeing the university's strategic direction and financial health.
- The Former University President: Leading the SPAC and seeking investment from the Board.
- The University's Investment Committee: Tasked with evaluating the SPAC investment opportunity.
3. Analysis of the Case Study
To analyze the situation, we can utilize a combination of frameworks:
Strategic Framework:
- SWOT Analysis: The Board needs to assess the strengths, weaknesses, opportunities, and threats associated with investing in the SPAC.
- Strengths: Potential for diversification, access to new markets, and potential for growth.
- Weaknesses: Lack of information about the target company, potential for financial risk, and potential reputational damage if the investment fails.
- Opportunities: Potential for innovation and disruption in the education sector, access to new technologies, and potential for increased revenue.
- Threats: Market volatility, competition from established players, and potential for regulatory scrutiny.
- Porter's Five Forces: The Board needs to consider the competitive landscape in the education sector and the impact of the SPAC's potential acquisition on the university's position.
- Threat of new entrants: High, as the education sector is relatively easy to enter.
- Bargaining power of buyers: High, as students have many choices for higher education.
- Bargaining power of suppliers: Low, as the university has access to a wide range of suppliers.
- Threat of substitute products: High, as students can choose alternative forms of education, such as online courses or vocational training.
- Rivalry among existing competitors: High, as there are many universities competing for students and resources.
Financial Framework:
- Risk Assessment: The Board needs to conduct a thorough risk assessment to identify and quantify the potential financial risks associated with the SPAC investment. This should include:
- Market risk: The risk of the SPAC's target company failing to perform as expected.
- Operational risk: The risk of the SPAC's management team making poor decisions.
- Regulatory risk: The risk of the SPAC's target company being subject to new regulations.
- Financial Due Diligence: The Board needs to conduct a thorough financial due diligence process to understand the SPAC's financial position, the target company's financial performance, and the potential for future growth.
Governance Framework:
- Corporate Governance: The Board needs to ensure that the SPAC investment aligns with the university's ethical and legal obligations. This includes:
- Transparency: The Board needs to ensure that all relevant information about the SPAC investment is disclosed to stakeholders.
- Accountability: The Board needs to be accountable for the decision to invest in the SPAC.
- Independence: The Board needs to ensure that the SPAC investment is not influenced by personal interests.
4. Recommendations
- Decline the SPAC Investment: The Board should decline to invest in the SPAC at this time. The lack of transparency and concrete information about the target company presents significant risks that outweigh the potential benefits.
- Conduct Thorough Due Diligence: Before considering any future SPAC investments, the Board should implement a robust due diligence process that includes:
- Detailed analysis of the target company's business model, financial performance, and management team.
- Assessment of the SPAC's track record and the experience of its management team.
- Evaluation of the potential risks and rewards associated with the investment.
- Develop a Clear Investment Strategy: The Board should develop a clear investment strategy that outlines the university's investment objectives, risk tolerance, and due diligence process. This strategy should be communicated to all stakeholders, including the Investment Committee.
- Strengthen the Investment Committee: The Board should strengthen the Investment Committee by adding members with expertise in venture capital, SPACs, and the education sector. This will ensure that the committee has the necessary skills and experience to evaluate investment opportunities effectively.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The SPAC investment does not align with the university's core competencies and mission of providing high-quality education. The university's expertise lies in teaching, research, and student development, not in venture capital or acquisitions.
- External Customers and Internal Clients: The SPAC investment does not directly benefit the university's core stakeholders, including students, faculty, and staff.
- Competitors: The SPAC investment could expose the university to increased competition in the education sector, as it could potentially acquire a competitor.
- Attractiveness ' Quantitative Measures: The lack of information about the target company makes it impossible to assess the financial attractiveness of the investment.
- Assumptions: The recommendations are based on the assumption that the Board prioritizes transparency, accountability, and risk management.
6. Conclusion
The Board of Directors should decline to invest in the SPAC at this time. The lack of transparency and concrete information about the target company presents significant risks that outweigh the potential benefits. The Board should prioritize a thorough due diligence process and seek more clarity on the target company's business model, financial performance, and management team before making any investment decisions.
7. Discussion
Other alternatives not selected include:
- Investing in the SPAC after conducting thorough due diligence: This option could be considered if the Board is able to gather sufficient information about the target company and is comfortable with the risks involved.
- Partnering with the SPAC: The university could partner with the SPAC to provide expertise in the education sector, but without investing capital.
The main risks associated with the recommendations are:
- Missing out on a potential growth opportunity: The SPAC could potentially acquire a successful company that could generate significant returns for the university.
- Damage to relationships: Declining the investment could damage the relationship with the former university president and other potential investors.
The key assumptions underlying the recommendations are:
- The Board prioritizes transparency, accountability, and risk management.
- The university's core competencies and mission are aligned with its investment strategy.
8. Next Steps
The Board should take the following steps to implement the recommendations:
- Communicate the decision to decline the SPAC investment to the Investment Committee and the former university president.
- Develop a clear investment strategy that outlines the university's investment objectives, risk tolerance, and due diligence process.
- Strengthen the Investment Committee by adding members with expertise in venture capital, SPACs, and the education sector.
- Implement a robust due diligence process for any future investment opportunities.
This timeline will ensure that the Board makes informed investment decisions that align with the university's strategic objectives and risk tolerance.
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Case Description
This case focuses on a board director of a diversified holding company. The firm's longtime CEO had always exhibited a cautious, methodical approach to growth. Now, the CEO is raising the idea of joining with a special purpose acquisition company (SPAC) to spin off part of the business as a separate company. This strategy shift-a spinoff, use of a SPAC, and accumulation of cash for larger acquisitions-was a dramatic shift for the company, and the board director must consider how to respond.
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