Investing in Sponsor-Backed IPOs: The Case of Hertz

This case and its companion, UVA-F-1560, were awarded the 2012 Wachovia Award for Excellence in Teaching Materials - Innovative Case. In November 2006, Alec Berg, a successful hedge fund manager, must decide whether to invest in the initial public offering (IPO) of the Hertz Corporation. The IPO followed a leveraged buyout (LBO) of Hertz that was completed in December 2005 by three prominent private equity firms that had combined to purchase Hertz from the Ford Motor Company for $14.9 billion. The LBO sponsors had borrowed an additional $1 billion on top of the buyout financing to pay themselves a special dividend in June 2006. This loan would be repaid with the IPO proceeds and any remaining proceeds from the IPO would go to the sponsors. The IPO generated widespread criticism with respect to the speed with which the IPO was conducted and the payment of special dividends. In the face of this criticism, the demand for the Hertz IPO weakened, and the offer price was reduced from the initial file price range of $16–$18 to just $15. Berg must assess whether at $15 per share, Hertz offers an attractive investment for this fund. The case provides the necessary information for students to analyze the sponsors' returns on their investment in Hertz and the attractiveness of the $15 offer price to public shareholders. The case also offers an opportunity for students to discuss the controversy surrounding the payment of special dividends and the claim that private equity sponsors invest with a long-term perspective that creates value for the company.