Case Studies of Failed Project and Corporate Finance Investments

This page includes my opinions on selected case studies in project finance and corporate finance. The cases involve financial nightmares and attempts to understand common themes as to what went wrong. If there is a thread that runs through the cases it is that managers had inflated opinions of why they deserved to earn high returns without having any real monopoly power. To get there, maybe they thought they could sign contracts that did not make economic sense; maybe they dramatically overstated political risk;  maybe they did not see oversupply coming; maybe they are arrogant about their product ….

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Many case studies written by Harvard Business School (HBS) and at other universities are written to praise and worship managers of the businesses that are subject of the case. After all, students want to leave the university and earn high salaries at similar companies. The cases are often written by former students who have graduated and gone on to a company and want to demonstrate to former professors and prospective students their success.

After the case is used in a university course, the author may even return to his or her business school as a hero after students have discussed the insight and innovation of the management. A good example of this phenomena is the number of HBS case studies written about Enron and how the company was considered one of the most innovative companies in America.

Discussion of the case studies on this page takes a very different philosophy. The cases concentrate on analysis of mistakes that were made and what are some of the common themes of mistakes made in the financial analysis of the various investments. Cases are often relatively old so that you can see what went wrong and hopefully why things fell apart. Some of the cases such as Iridium, Petrozuata, Quezon and Dahbol use information from the HBS cases (the case write-ups are not included on the site because of copyright rules). However, financial models associated with some of the cases are included.

Draft Manuscript on Failed Case Studies and B.S. Taught at Business Schools

I have started and stopped writing a book that uses HBS and other case studies to demonstrate the BS that is taught at business schools about evaluating finance.  The idea is to take a case study written by HBS that praises management (e.g. Petrozuata, Dahbol, Freeport, First Solar) and then describe how the financial and economic principles that students are supposed to learn are complete crap. I thought it may be quite fun to then make a postscript on some of the selected case studies so that you could see what happened. Other failed cases are used where the failures are attributed wrongly to marketing when there is no possibility that the case could work (e.g. Iridium, Eurotunnel). Yet others are used (e.g. valuation of Disney and APV) to show how bad the is the thinking and teaching of corporate valuation.

I have put a version of the book that you can download on the link below. I have been bad about finishing the book and I would jump for joy if you give me any sort of feedback at all on what to do (e.g. if you say stop wasting your time, Harvard business school students will always fool themselves into believing they can get high returns for having a degree).

 Part 1 – Case Studies.pdf

 

Power Point Slides That Describe Selected Cases Studies in Electric Power Generation with Reasons for Failure

Links to Case Studies

I have run out of space for sub-menus to the right on my website, so I have put links to the case studies in buttons below.  I use the case studies in my courses You can find information about the various case studies by pressing the various buttons below. Please note that the manner in which I present the case studies is not consistent (I am working on it).  Some of the case (e.g. Dabhol) are written in a structured manner with specific questions to think about and detailed instructions on how to create models.  Other case studies have not yet been structured and for the moment there is just a compilation of materials.

 

Case Study of Dahbol Power Plant in India that was Sponsored by Enron and Incudes Philosophical Issues Regarding Contract Structure Versus Economic Analysis

 

Case Study of Petrozuata Deal of the Decade that Failed; Maybe Unpredictable Risk; Maybe Too High Expected IRR; Maybe Poor Risk Alocation of Oil Proceeds

 

Case Study of Housing and Financing in the U.S. that Lead to the Financial Crisis of 2008 with Illustrative Analysis of CDOs and Break Even Analysis

 

Case Study of First Solar Corporation Raising the Issue of Whether High Returns can be Earned in Solar Power where Things are Simple and Panels are a Commodity

 

Case Study of Merger Case with Tricky Structuring Issues and Difficult Evaluation of Potential Risks in the Competitive Air Freight Industry

 

Irdium Case Study

Following the Crowd and Not Understanding the Difference between Forecasts Founded on Real Historical Data Versus Vague Business Plans

Unlike other case studies that discuss management options and strategies, the Iridum case is an obvious disaster. In the case, various investment banks followed one another which with hindsight were absurd. The case demonstrates that when making forecasts, the importance of objective data rather than opinions of well dressed investment bankers.

 

One of the basic principles of project finance is that sponsors should be reputable. Even though project finance loans are non-recourse meaning that they cannot be paid from other projects in the portfolio of a company, the reputation of owners is very important. In general, owners get paid after or at a similar rate as lenders meaning that if owners get paid, then lenders will also get paid. Making loans on reputation has always been fundamental to banking. If owners believe there will be enough value in a project to generate a rate of return, then bankers will be paid. The problem with this philosophy is at least twofold. First, it means you are trusting potentially inept and/or corrupt management as to the value of the project. Second, if the project has high expected cash flows, but also a high volatility, the debt to capital ratio may not have enough buffer to withstand declines in value. This was the implicit basis of the Iridum project. In evaluation of the sources and uses for the project, the debt represented 50% of the project cost and the sponsor, Motorola was considered one of the best companies in the Telecommunication industry.

 

The project had some problems that were know to all of the investors. The phones were large, bulky and expensive to produce; the phones not work in buildings; if business travelers use the phone they would have to carry an additional business. Most importantly, the capacity of the satellites was limited. Quote from case.

 

Iridium Model

Iridum Case Study.xls

 

Eurotunnel

 This case is a good example of making every mistake in the book for Project Finance. Mistakes included horrible structuring of EPC contracts, crazy traffic studies, unconventional technology, no government support and poor analysis of contracts. The first file contains the Eurotunnel Offering Memo which is hard to find on the internet.

Video on Eurotunnel Finances

 

A2 Tollway — Modelling and Analysis of Public Private Partnership (Contrast to Eurotunnel)

 

Sutton Bridge — Project Finance and Merchant Electricity

 

Southport/Freeport — Project Finance, Cost of Capital and Options

Constellation Energy – Valuation

 

 

Quezon Coal Plant Case (Philippines)

 

Orascom Telecom — Corporate Finance

Merchant Electricity Plant — Cost of Capital

Renewable Case Studies Data

This case study, described in Chapter 1 of the book, includes analysis of valuation using multiples, earnings forecasts, financial statement analysis and acceptance of confusing statements made by management.

Real Options