Private Equity interview preparation

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1. 038An oil company loses $40 million of market cap because of litigation and sells an asset to pay for it. Is the stock price drop justified?ValuationHardsuperdaySilver LakeTechnology, Media and Telecom · San Francisco · 2022

   Say this

   It depends on two things: whether the expected liability is genuinely $40 million on a present-value basis, and whether the asset was sold at fair value. If both hold, the drop is justified. If the asset went at a discount, the drop should be larger.

   Then walk it

   1. First, size the liability properly. A $40 million settlement paid today is worth $40 million, but a $40 million liability payable over ten years is worth considerably less. The market should discount it.
   2. Then, is the litigation over? If the settlement establishes precedent for further claims, the true liability exceeds the headline number and the drop should be bigger.
   3. Second, the asset sale. If the asset was sold at fair value, the transaction is value-neutral: cash in, asset out, liability settled. The whole $40 million is the litigation cost.
   4. But a forced seller rarely gets fair value. If the asset was worth $50 million and went for $40 million, the company destroyed another $10 million and the drop should be $50 million.
   5. Then the operating consequence: does losing that asset reduce future cash flows? If it was producing, you have lost the associated EBITDA and the drop should reflect the capitalised value of that, not just the cash.
   6. So my answer would be: $40 million is the floor. The justified drop is $40 million plus any discount on the forced sale, plus the capitalised value of the lost earnings, less any tax benefit on the settlement.

   Where candidates lose it

   Treating it as a simple one-for-one. The examinable content is the forced-sale discount and the lost earnings from the disposed asset. Both make the justified drop larger than the headline number.

   Expect next

   • What if the asset was non-producing?
   • How would you value the litigation tail risk?
   • Is the settlement tax deductible, and does that change your answer?

   Reported by candidates at Silver Lake (Technology, Media and Telecom, San Francisco, 2022). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.