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Horizon Communications

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Deal Summary Memorandum | |
| |Maria-Fe Arribas, Derek Bly, Carolina Ratto |
|Deal Team Members: | |
|Date: |4/09/12 |
|Company Name: |Horizon Communications |
|Description of Idea: |Provide local switched telecommunications services to targeted sectors of the market. These sectors include high margin |
| |corporate applications, custom internet access offerings and strategic alliances with value added resellers of its services.|
|Stage/Opportunity: |Start-Up Stage. Horizon has developed its network architecture and strategy but has yet to implement. |
|Business Description: |Invest in state-of-the-art-switching platform capable of providing services offered by the incumbent carriers. Horizon would|
| |design its switches to meet the needs of its specific target markets and engineer them to handle high volumes of traffic. |
| |Minimize capital expenditures by foregoing the construction of costly fiber optic transmission facilities; lease instead. |
| |The factors would ensure a capital investment structure per access line less than half of the incumbent local exchange |
| |carriers, while minimizing the risk of stranded investment. Functionally Equivalent, Technically Superior, Low Cost local |
| |telecommunications services. |
|Macro Industry Structure: | On February 8, 1996, the Telecommunications Act of 1996 (the Act) was signed into law, |
| |opening the door to competition in the local telecommunications market -- a market with close to |
| |$100 billion in annual revenues. The Act required existing carriers -- known as local exchange |
| |carriers (LECs) -- to: (1) sell interconnection to each part of their network at reasonable prices; |
| |(2) provide existing rights-of-way at reasonable prices; and (3) pay reciprocal compensation for |
| |calls to new competitors -- referred to as Competitive Local Exchange Carriers (CLECs). The |
| |Act, therefore, opened the local loop to competition, ending the last non-competitive remnant of |
| |the once vast monopolistic empire of AT&T. Previous changes to telecommunications law had |
| |spawned or expanded multi-billion dollar industries such as equipment manufacturing, long |
| |distance and wireless telecommunications services. |
| | |
| |The local loop is dominated by the networks of LECs. In a metropolitan area, the LECs |
| |would have a large number of wire centers (e.g. 130 in the Chicago area alone). The locations of |
| |these sites were dictated by the electrical properties of copper wire (which is still the |
| |predominant medium used in the local loop for switched services). Within any wire center, there |
| |might be several switches or "central offices" directly serving customers. Thus, the switch that |
| |served any given customer was predetermined by geography, rather than marketing potential. For |
| |a customer to be served by another switch (to change or avoid changing phone numbers, to |
| |reduce toll charges or for protection in case the customer's primary switch were to fail), a huge |
| |premium known as a foreign exchange charge is typically applied. |
| | |
| |There are over 150 million switched access lines in operation nationwide. Local |
| |exchange carriers generate over $80 billion per year in revenue from these lines. (They |
| |generated additional revenue of about $20 billion from private line services, yellow pages, and |
| |miscellaneous sources.) On average these carriers had EBITDA margins in excess of 43% and |
| |operating margins in excess of 23%. Switched access lines had grown at a compound annual |
| |growth rate of nearly 4% over the past three years, and usage (as measured by interstate minutes |
| |of use) had grown at over 8% per year over the same period. Exhibit 1 provides some |
| |information on the historical growth of LEC access lines. |
| |Another indicator of the growth of the industry was the |
|(O) Opportunity? |Large market potential and signing of Telecommunications Act opens the door for new venture and reduces barriers to entry. |
|A- | |
|(U) Uncertainty? |Leasing of access lines. Expecting 50% higher revenue per line from an imbedded capital investment less than half that of |
|B- |the incumbents. |
|(T) Team? |Strong proficiency in Telecommunications operations, but lack of entrepreneurship side, eg. Making money for investor, |
|B- |business start-up etc. |
| | |
| |Robert C. Taylor, Jr. - President and Chief Executive Officer |
| |Mr. Taylor most recent position was Vice President, Strategic Business Operations and the Chief Operating Office of the |
| |Mexican operations for MFS Telecom Companies. At the time, MFS was the largest CLEC in the U.S. In the first of these |
| |positions, he operated and managed the Global Services Group which included MFS' 50 largest customers. Responsibilities |
| |included developing marketing strategies, business analysis, budgeting, compensation plans, financial reporting, sales and |
| |revenue forecasting and contract management.. As head of the Mexican operations, Mr. Taylor managed the day-to-day |
| |operations, negotiated construction and vendor contracts, right-of-ways and building access agreements within Mexico City. |
| |Previously, he served as a regional director of development for MFS, as a vice president of marketing for McLeod |
| |Telecommunications Group (a successful Iowa-based CLEC), as a corporate development staff member for MCI, and as a director |
| |of new product development for Ameritech. Mr. Taylor has a BS in Mechanical Engineering from the University of Denver (1985)|
| |and an MBA in Management and Finance from the University of Chicago (1990) |
| |John R. Barnicle, Executive Vice President/Chief Operating Officer |
| |Mr. Barnicle was Vice President of Marketing for MFS. In that job, he was responsible for product management, product |
| |development, sales support and business analysis for the subsidiary of MFS Communications which provided services to large |
| |end users, long distance carriers and Internet service providers. Prior to this, from 1994 to 1995, he worked for Duff and |
| |Phelps as the analyst responsible for providing credit ratings on public bond issues of telecommunications firms. From 1992 |
| |to 1994, he was a director of product development for MFS Telecom. In that role, he developed MFS' |
| |collocation/interconnection business. His duties included development of company strategy, regulatory filings, and |
| |negotiations with ten major local exchange carriers. He also developed MFS Telephone, the subsidiary which sold switched |
| |services to large end users and wholesale customers. Before joining MFS, Mr. Barnicle held a variety of positions with |
| |Centel. Mr. Barnicle earned a BS in Electrical Engineering from the University of Illinois (1987) and an MBA in Finance from|
| |DePaul University (1995). |
| |Joseph Beatty - Executive Vice President/Chief Financial Officer |
| |Most recently, from 1994 to 1996, Mr. Beatty was an investment analyst at Nations Bank, responsible for investment research |
| |coverage of the telecommunications industry with a concentration in the CLEC segment. The duties of this position included |
| |providing support to trading and investment banking professionals, advising investors, and maintaining contact with |
| |management teams of companies in the telecommunications sector. From 1992 to 1994, he worked for Duff & Phelps as an analyst|
| |responsible for providing credit ratings on public bond issues of telecommunications firms. From 1989 to 1992, Mr. Beatty |
| |worked as a manager of sales engineering for Centel where he was responsible for providing engineering and sales support of |
| |business telephone services. From 1985 to 1989, he worked in technical planning for Centel. Mr. Beatty has BS Electrical |
| |Engineering from the University of Illinois (1985) and MBA from the University of Chicago (1989). |
| |Brian F. Addy - Executive Vice President |
| |From 1993 to 1996, Mr. Addy worked for Security Capital Group, a start-up Real Estate Investment Trust that focused on the |
| |acquisition, development and operation of bulk distribution facilities. As acquisitions officer, Mr. Addy analyzed and |
| |executed property acquisitions in Phoenix, Salt Lake City, Reno, Las Vegas, Albuquerque and Denver. From 1991 to 1993, he |
| |was the general manager of Centel Cellular Company of New Mexico, a start-up cellular telephone venture of Centel. In that |
| |position, he had complete profit/loss responsibility including engineering, customer service, sales, strategic alliances and|
| |capital program. From 1986 to 1991, Mr. Addy held various sales and operating positions with Centel. Mr. Addy has a BS in |
| |Electrical Engineering from Duke University (1986). |
|(S) Strategy and required IRR? |Highly focused, low cost strategy positioned Horizon to maximize cash flow opportunities presented by the Act. Although |
|A- |leasing fiber rather than building a network would lead to a higher operating cost per access line, Horizon’s customers were|
| |expected to generate 50% higher revenue per line from an imbedded capital investment less than half that of the incumbents |
| |leading to a superior return on capital. |
| | |
| |Horizon has identified nine primary target markets for its services: Chicago, New York, San Francisco, Washington DC, Los |
| |Angeles, Seattle, Detroit, Boston and Miami. These markets have been chosen based on market potential, regulatory climate |
| |(co-carrier agreements with reciprocal compensation terms already in place), presence of one or more alternate transport |
| |providers such as MFS and Teleport, and location (proximity to potential secondary expansion markets). The Chicago area had |
| |been chosen as the initial market for investment. After a successful launch in Chicago, Horizon would expand to the eight |
| |additional primary markets, Horizon Communications Corporation (A) 8 expansions which would require additional external |
| |financing. |
|(I) Investment? |Based on their financial projections in Exhibits 5A, 5B, and 6, the founders anticipate Horizon will need external equity |
|C |contributions of roughly $25 million over the first three years. |
| |The remaining external capital is expected to come in the form of secured financing from the vendors of its switches or |
| |other third parties. |
|(D) Deal? |Based on the ABC Term Proposal |
|B |$5mil |
| |Series A Preferred, Common Stock and Common Stock Options. |
| |Investors will purchase the number of shares which reflects a 75% ownership position. The founders will retain 25% ownership|
| |on a fully diluted basis represented by options vesting over five years. Additional options for up to 10% of the company |
| |will be set aside by the investors to help recruit a CEO and CFO for the company. All vesting will accelerate upon the sale |
| |of the company. |
|(E) Exit? |Take company public |
|A | |
| |
|(I) Idea / Industry? |Large customers often ask if MFS could provide additional local dialtone, i.e., alternative switched services. The customers|
|A |want an additional provider both to provide redundancy in case of a service disruption and to use as leverage in negotiating|
| |with their RBOC or other LEC. MFS, however, does not satisfy the demands of these customers. Before the passage of the Act |
| |and the requirement of reciprocal compensation, the economics of local switched services were substantially less attractive.|
| |With the passage of the Act, it is possible to imagine starting a company that could satisfy this customer demand. The |
| |previous juncture of telecommunications deregulation and new competitors had grown to become worth billions of dollars. |
|(M) Market/Valuation |Large market potential - close to $100 billion in annual revenues. |
|A |There are over 150 million switched access lines in operation nationwide. Local exchange carriers generated over $80 billion|
| |per year in revenue from these lines. (They generated additional revenue of about $20 billion from private line services, |
| |yellow pages, and miscellaneous sources.) On average these carriers had EBITDA margins in excess of 43% and operating |
| |margins in excess of 23%. Switched access lines had grown at a compound annual growth rate of nearly 4% over the past three |
| |years, and usage (as measured by interstate minutes of use) had grown at over 8% per year over the same period. Exhibit 1 |
| |provides some information on the historical growth of LEC access lines. |
| | |
| |Another indicator of the growth of the industry is the number of new area codes that have been introduced recently to |
| |accommodate the need for telecommunications-related services, including cellular, paging, fax services and Internet access. |
| |Area code splits were once relatively rare. During 1995 and 1996, however, forty-two new area codes were introduced or |
| |planned. These new area codes often result in customer confusion and animosity. In the Chicago area alone, the market had |
| |gone from one area code in 1989 to five area codes by 1997. |
| | |
| |About 30% of the above-mentioned switched access lines are multi-line business access lines. These lines generated revenue |
| |at nearly twice the rate per line as residential or single business lines. Thus, nearly 50% of the total switched local |
| |services revenue was concentrated in 30% of the market. In Chicago, there are over 1.2 million business lines provided by |
| |Ameritech and Sprint/Centel-IL. Based upon ARMIS data filed with the Federal Communications Commission, the annual revenue |
| |generated from these lines was over one billion dollars. |
|(P) Present Value? | |
|(A) Acceptance? |Strong customer desire for selection and non-monopolistic costing makes acceptance a high probability. |
|B+ | |
|(C) Competition? |While the Horizon team is confident of its analysis, they also realize that the Act will accelerate competition in the local|
|C- |loop, attracting many other new entrants. Several companies have already announced plans to enter the local market in major |
| |metropolitan areas targeted by Horizon. Exhibit 4 presents a detailed competitive analysis. |
| | |
| |This is an optimistic assumption by Horizon. Competition will be fast and fierce. |
| |Competition includes: CAPs, Cable TV Companies, Local Service Resellers, Wireless Local Service Providers, Electric |
| |Utilities, Local Telephone Companies and Private Networks. |
|(T) Timing? |Timing is positive. Moving quickly after the passing of the Telecommunications Act will help Horizon capture the market |
|A- |before others. |
|(S) Speed? |6 month turnaround time to be up and running in Chicago is beneficial as long as financing and estimates are accurate. |
|B+ | |
|Investment | |
|(Dollars invested) | |
|Unit Model: |The Chicago market. No proof of success yet. Fear of growing too quickly rather than focusing strongly on a few markets. |
|(Smallest unit of investment to test | |
|business theses) | |
|B | |
|Financing (Description): | |
|(Securities Purchased) | |
|Financials: | |
|(Company Case): | |
|(Partnership Case): | |
|Key Areas of Concern: |Ability of revenues to ramp up in year 4 from $99mil to $204mil in year 5. |
|Income Statement | |
|Revenue | |
|Cost Components (Specify) | |
|Key Areas of Concern: |Significant negative Cash and Marketable Securities through year 5. Significant ramp up of PPE to $128mil by year 5. |
|Balance Sheet |Negative cash and C/A through year 5 is biggest concern |
|Cash Burn | |
|A/P | |
|A/R-DSO | |
|Inventory (etc.) | |
|Returns: | |
|APV Table | |
|Discount Rate | |
|VC (Partnership) Table | |
|IRR / Cash-on-cash | |
|Positives: |Strong industry knowledge by key players. Leasing of PPE in early stages. Multiple markets for potential success. Corporate |
| |Customers. |
|Risks / Issues: |Developing market, post-monopoly. Lack of start-up experience by founders. Buy in by customers for new service. |
|Other Issues: | |
|Term Sheet Highlights: | |
|Recommendation(s): | |…...

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...Accounting Horizons Vol. 24, No. 3 2010 pp. 355–394 American Accounting Association DOI: 10.2308/acch.2010.24.3.355 Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and Economic Analysis Luzi Hail, Christian Leuz, and Peter Wysocki SYNOPSIS: This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance, and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We also discuss the compatibility of IFRS with the current U.S. regulatory and legal environment, as well as the possible macroeconomic effects of IFRS adoption. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit trade-off between ͑1͒ recurring, albeit modest, comparability benefits for investors; ͑2͒ recurring future cost savings that will largely accrue to multinational companies; and ͑3͒ one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. In Part II of the series ͑see Hail et al. 2010͒, we provide an......

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...“HORIZON” Role of HR in Fostering an Ethical Work Place by ANANDITA THAKUR SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES CONTACT DETAILS MOBILE: +91-9890074166 E Mail: Role of HR in Fostering an Ethical Work Place “Corporate leaders have a duty to build and foster a values-based culture that thrives on high ethical standards. Only by instilling these values in our respective organizations will we be able to bestow a promising future to the next generation.” Sharon L. Allen Chairman of the Board Deloitte & Touche USA LLP The number and significance of challenges facing organizations are unprecedented. Growing financial pressures, rising public and payor expectations, consolidations and mergers, quality improvement issues, have placed organizations under great stress—thus potentially intensifying ethics questions and issues. Indian managers experience a clash between the values acquired from their education and professional training and those drawn from Indian culture and society. Values drawn by Indian managers from their training emphasize on western instrumental rationality and rule following, whereas the values drawn from family and community emphasize affiliation and social obligation. Western management assumes a preference for the ethical puzzle stance. Accountants, for example, have been trained to work in a rule governed manner. Within their job roles, Indian managers may express Indian social......

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