Admitted Student Welcome Weekend

Finance Class Professor Lee Pinkowitz

Learning Goal: A Brief Introduction to Finance and Case Analysis
READINGS
Case: Cort Business Services
Set in summer 1999, the case presents a prospective buyout of Cort Business Services, a furniture rental
company. Preston Athey, portfolio manager for T. Rowe Prices Small-Cap Value Fund needs to
determine what he should do with his funds holdings of Cort.

In reading the case, be prepared to discuss the following question:

What should Preston Athey do regarding his shares of Cort?
Note: You do not need to formally write up any analysis, but you should be prepared to discuss your
opinion about what action(s) Preston should take, as well as provide support (either qualitative or
quantitative) as to WHY.
Questions which may help you address the above issue
1. Have the companys operations been performing well over the last few years? How do you
know? What about the companys stock? Are the two related? How?
2. Who are the major players involved in this case? Which are in favor of the takeover bid? Which
are against it? Why?
3. Is the takeover bid in shareholders best interests? Is the offer price reasonable?
a. What value did management put on the preferred stock components of its bid(s)? Do you
think the market agreed with their assessment?
4. What is the job of the Board of Directors of a corporation? What is the job of management in a
corporation?
a. Do you believe that Cort management acted appropriately in this case? Do you believe
the Board of Directors acted appropriately?
b. What sort of problems, if any, does this case shed on the relationship between
management and shareholders? How might these be resolved in other companies?
c. What sort of problems, if any, does this case shed on the composition of the Board of
Directors? How might these be resolved in other companies?

Cort Business Services - August 19991

Preston Athey, CFA, manager of T. Rowe Prices Small-Cap Value Fund (PRSVX), needed to
decide how to vote his funds holdings of Cort Business Services Corp (Cort) (NYSE:CBZ).2 A
management backed group had offered to buy all of the publicly outstanding shares for $25 in cash
plus preferred stock with a par value of $3.00. The fund owned 1,366,000 shares of the stock, which
was over five percent of the shares outstanding. Other T. Rowe Price funds also owned smaller but
not insignificant stakes in Cort Business Services, bringing T. Rowe Prices total holdings to 10.4%
of the shares outstanding. However, the other funds would be expected to vote as Preston
determined.
The stock, which had traded as high as $45 in the past year, seemed to be out of favor during the
current market focus on internet growth stocks. The stock had plunged after Smith Barney, the
investment bank which had taken the firm public at $12 per share in 1995, had dropped its research
coverage of the stock in October 1998. Cort, which did not pay any dividends, had recently traded
for as low as $15 per share. Exhibit 1 depicts the performance of Cort and the general stock market
over the past few years.
The T. Rowe Price Small-Cap Value Fund
The T. Rowe Price Small-Cap Value Fund was one of the dozens of mutual funds offered by T.
Rowe Price (NASDAQ:TROW), a large Baltimore-based financial services company best known for
its mutual funds. T. Rowe Price also provided a wide variety of other asset management services to
both wealthy individuals and institutions such as university endowments and pension funds. The
fund, started in 1988, focused on companies with a small market capitalization under a billion
dollars that were selling at low prices relative to their sales and earnings. This type of fund was
appealing to value investors who thought that superior investment returns could be achieved by
buying companies with proven operations at low prices, as opposed to growth strategies that
sought to invest in the next big thing. The fund had over a billion dollars under management.
Under the leadership of Preston, a Stanford MBA who had been at T. Rowe Price for over 20 years,
it had performed well during the early 1990s. The fund had outperformed the Russell 2000 index of
small-cap stocks, a common benchmark for the performance of small-cap investors. However, the
technology boom of 1999 left out many small companies, whose share prices lagged behind the
technology stocks that were racking up huge gains during this period. This meant that the
performance gap between the fund and its benchmark was narrowing, leading to pressure on the
funds management to increase performance.
1 This case was prepared by Professors James J. Angel, CFA, Sandeep Dahiya, and Lee Pinkowitz of Georgetown
University with assistance from David Carter. The case has some fictionalized content and was written as the basis for
class discussion rather than effective or ineffective handling of an administrative situation. Copyright 2008.
2 CFA stands for Chartered Financial Analyst, which is awarded by the Association of Investment Management and
Research (AIMR). Holders of the CFA charter have accumulated three years of professional work experience in the
investment industry, exhibited a high degree of ethical and professional conduct and passed a series of three rigorous
examinations. For more information see [Link].

The T. Rowe Price Small-Cap Value Fund was a no-load fund, which means that there was no direct
sales charge associated with investing. However, the fund charged a 1.0% redemption fee to
investors who redeemed their shares in less than one year. This fee was payable to the fund, and
served to compensate the long-term investors for the transactions costs imposed by the buying and
selling of short-term investors. The fund did not charge a 12b-1 fee.3
The fund was marketed to investors through four primary channels:
1) Many investors purchased the fund directly from T. Rowe Price, using the mail, telephone,
or on-line web site.
2) Another large block of investors purchased the fund through the mutual fund supermarkets
of brokers such as Charles Schwab and Company. Brokerage firms typically expected
mutual funds to pay approximately 1% of the daily net assets invested in the funds by the
mutual fund customers.
3) Other investors purchased the funds through employer sponsored retirement plans such as
401-k plans.
4) T. Rowe Price also offered an advisor class for the fund. The advisor class was also a noload fund that had no initial sales charge, but that charged a higher management fee. This
additional fee was paid to investment advisors who placed their customers in the fund.

Cort Business Services and the Industry

Cort Business Services, based in Fairfax, Virginia, was the nations largest office and residential
furniture rental company. The company had 119 rental showrooms, 836 furniture clearance centers
and 75 warehouses across 32 states and the District of Columbia. The firm rented furniture to
individuals as well as large corporations and was formed out of the merger of several regional rental
companies. An overview and history of the company is provided in Exhibit 2.
Corts revenues had been increasing rapidly, and its 1998 revenues of $319 million ranked the
company 49th on the Washington Posts Top 200 Companies - which examined firms headquartered
in the Washington, D.C. metropolitan area. Financial information for Cort is provided in Exhibit 3
and Exhibit 4.
The furniture rental industry was quite fragmented with hundreds of small regional companies
serving the market. Cort focused on the rent-to-rent segment of the market. As described in
Corts most recent Annual Report:
The "rent-to-rent" segment of the furniture rental industry serves both corporate and individual
customers who generally have immediate, temporary needs for office or residential merchandise
but who typically do not seek to own such merchandise. Office product customers range from
large corporations who desire flexibility to meet their temporary and transitional needs, to small
businesses and professionals who require office furnishings but seek to conserve capital.
Residential product customers include corporations seeking to provide furnishings for corporate
3 Some mutual funds charge a 12b-1 fee in addition to the usual management fee. The stated intent of the 12b-1 is to
pay for the marketing of the fund.

employees who have been relocated or who are on temporary assignment, apartment community
managers seeking to provide furnished apartments and individual residents seeking to rent
furnishings for their own homes and apartments.
The "rent-to-rent" business is differentiated from the "rent-to-own" business primarily by the
terms of the rental arrangements and the type of customer served. "Rent-to-rent" customers
generally desire high quality furniture to meet temporary needs, have established credit, and pay
on a monthly basis. Typically, these customers do not seek to acquire the property rented. In the
typical "rent-to-rent" transaction, the customer agrees to rent merchandise for three to six months,
subject to extension by the customer on a month-to-month basis. By contrast, "rent-to-own"
arrangements are generally made by customers without established credit whose objective is to
acquire ownership of the property. "Rent-to-own" arrangements are typically entered into on a
month-to-month basis and require weekly rental payments.

The rent-to-rent segment of the market was highly competitive. The primary competitors for Cort
are Aaron Rents, Globe Business Resources and Brook Furniture Rental.
The Buyout Offer
Corts management was attempting to take the firm private in a leveraged buyout transaction backed
by the firm of Bruckman, Rosser, Sherrill & Co. (BRS) and by the venture capital division of
Citigroup, Citicorp Venture Capital, Ltd. (CVC). In a leveraged buyout, the buyer borrows the
majority of the purchase price to buy all of the publicly held stock in the company. The assets of the
purchased company serve as security for the loan. This is similar to the process of purchasing a
home in which the purchased asset the home -- is collateral for the loan used to make the purchase.
In this case, the existing management would increase their stake from 6.6% to about 16.5%, while
the buyout partners would own the rest of the equity. Citicorp already owned 44% of the common
equity.
At first glance, the offer looked great to the shareholders. The purchasers claimed to be offering $28
per share for the company through a combination of $25 in cash and a share of preferred stock with a
par value of $3.00 per share.4 This was almost 50% more than the recent market price and
represented an increase from managements first offer. Details of both management offers are
shown in Exhibit 5.

4 Preferred stock is a special class of common stock that generally pays a fixed dividend that does not increase or
decrease over time. The shares are called preferred because the preferred dividend must be paid before the common
shareholders receive any dividends. Preferred shares typically carry no voting rights as long as the promised dividends
are being paid. Preferred shares are a type of hybrid security that is in between debt and equity. In times of financial
hardship, firms can suspend payment on their preferred shares without running into the same type of legal trouble that
would happen if the firm stops payment on its debt securities.
For common shares, the par value usually has no economic relevance. However, for preferred shares, the par value is the
base upon which the dividends are calculated on a percentage basis, as well as the price the company would have to pay
to retire the stock if it wanted to do so. Furthermore, the par value for a preferred stock reflects the payment that
preferred shareholders would receive in a liquidation after all other debts have been paid. In a liquidation, common
shareholders receive what is left, if anything, after all of the other claimants, including preferred shareholders, have been
paid in full. If there are insufficient funds, the preferred shareholders may receive less than the par value of the shares.

However, upon further examination there were some questionable aspects to the deal. Institutional
Shareholder Services (ISS) had come out against the deal.5 Although the preferred shares promised
a dividend of $0.30, the stock would not be listed on any exchange. As such, it would be difficult
for investors to buy or sell the preferred shares, lowering their value.
In a typical management buyout situation, the board of directors of the firm appoints a fairness
committee to independently value the company to make sure that the shareholders receive full
value. Cort appointed two of its own directors Keith Alessi and Gregory Maffei to be on that
committee. Neither Alessi nor Maffei worked for Cort and were considered to be outside
directors. Exhibit 6 shows Corts Board of Directors. Messrs. Alessi and Maffei retained
SunTrust Equitable Securities (STES) to examine the proposed buyout and issue a fairness
opinion regarding its price. As part of their analysis, STES examined what the value of Cort would
be at varying offer prices. STES also conducted similar analyses relative to the current market
values of several comparable firms. Some of that analysis is shown in Exhibit 7.
In addition, the compensation committee of the board of directors had just issued large golden
parachutes to the management team that would pay management $3.5 million if and only if the firm
was purchased. There were concerns that this arrangement created a financial incentive for
management to complete the deal, even if the deal were not in the best interests of the shareholders.
BRS was guiding management through the complicated merger process and had helped secure $225
million in financing from NationsBanc to pay for the merger. For their help with the process,
management and CVC would pay BRS a $3.4 million fee when the buyout was completed as well as
give BRS a management contract worth $1 million annually.
To make matters even more complicated, one of Corts primary competitors, Brook Furniture
Rental, had entered the picture with backing from the buyout firm of Fremont Partners. Brook was
offering $28 in cash. Nevertheless, the Cort board was still recommending that Cort shareholders
accept the management proposal.

5 Institutional Shareholder Services, Inc., is an independent company which analyzes proxies and issues voting
recommendations for its clients. This helps institutional investors decide how to vote.

T. Rowe Prices Shares

Cort shareholders were about to vote on whether to accept or reject the management offer, and
Preston had to decide what to do with his shares. He could take the money and run by selling the
funds shares directly on the open market now. Institutional investors often did this when takeovers
were announced so that they did not incur the risk of a major loss if the deal fell apart, which
sometimes happened. However, after discussing the situation with Andy Brooks, the famous head of
equity trading at T. Rowe Price, he realized that in order to sell such a large block, the fund would
have to accept a modest discount from the current market price of $25.00.
The thought of selling the shares was a bit unsettling though. Preston had been buying Cort stock
heavily over the last year precisely because he believed the company provided exceptional value. If
he did not sell, he could vote either for or against the management offer. Management refused to put
the Brook Furniture offer to a shareholder vote, claiming that Brook did not have credible financing.
Fortunately, Cort Business Services was incorporated in the state of Delaware, as are many
corporations. Delaware corporate law required such transactions to be approved by a majority of the
shareholders who were unaffiliated with the buyout. Thus, the large blockholdings by Citigroup and
management, who together controlled over 50% of the stock, could not be voted in favor of the deal.
Furthermore, Preston wondered whether he should lobby other shareholders of the firm. The large
block held by T. Rowe Price, together with the shares of other large outside investors, could be
enough to block the deal. However, such communications were risky because they could
inadvertently violate the extremely complex U.S. securities laws. If he did contact other
shareholders, he would undoubtedly have to check with T. Rowe Prices legal department first.
Mutual funds rarely intervened in the affairs of the corporations whose shares they owned, and
generally voted with management in most shareholder elections. Institutions usually preferred to
vote with their feet by selling shares when they were unhappy with corporate actions. However,
the large size of the funds stake meant that perhaps he should consider another course of action.
If he voted against the offer, Preston had to decide before the vote whether to exercise the
shareholders appraisal rights under Delaware law. If the merger went through, a dissenting
shareholder who voted against the merger and who demanded an appraisal could elect to receive the
cash value of the shares as determined by a Delaware court instead of the offered cash/stock payout.
This appraisal amount could be higher or lower than the payment offered by the buyout team.

Exhibit 1

Cort Business Services

Recent Stock Performance

Cort Stock Price

General Stock Market

50

40

30

1st Mgt Offer

10

0
01 Jan 97

01 Jul 97

01 Jan 98

01 Jul 98
date

01 Jan 99

2nd Mgt Offer

20

01 Jul 99

Exhibit 2

Cort Business Services

Business Description and Corporate History
BUSINESS DESCRIPTION:
Cort Business Services Corp. provides rental furniture, accessories and related services in the
growing and fragmented "rent-to-rent" segment of the furniture rental industry.
The Company serves corporate customers by offering office and residential furniture and related
accessories through a direct sales force. Cort sells its previously rented merchandise through a
network of company-operated clearance centers, thereby enabling it to regularly update its inventory
with new styles and new merchandise.
The Company also provides trade show furnishings that serve trade show contractors and corporate
exhibitors nationwide, providing specialty rental furniture for use at conventions and trade shows.
The Company maintains Relocation Central, a website that provides information about cities such as
apartment finders, school systems, movers and local recreation for relocating individuals. Relocation
Central provides the Company with an additional marketing tool while also providing valuable
information to potential customers.
HISTORY:
1972 Cort Furniture Rental Corporation was formed in by Consolidated Furniture as a combination
of six separate businesses.
December 31, 1988 Cort Holdings Corp. acquired all the common stock of CFR.
June 1992 Cort Holdings was merged into CFR as a result of economic downturn, and
Westinghouse Credit Corporation agreed to forgive a portion of the debt for a controlling equity
interest in CFR.
March 29, 1993 Cort Business Services was incorporated for the purpose of obtaining the common
stock of CFR in a reorganization transaction.
March 31, 1993 - Cort acquired 100% of the outstanding common stock of CORT Furniture Rental
Corp. for $86.2 million.
September 1, 1993 - Cort acquired General Furniture Leasing Company for $28.9 million. General
Furniture was merged with and into Cort Furniture Rental Corp.
Nov. 17, 1995 - 3,076,923 shares of Cort Business Services, Inc. are offered at $12.00 per share
through Smith Barney Inc., Montgomery Securities, and their associates.
April 24, 1996 - Cort acquired Evans Rents for approximately $27,778,000.
7

Exhibit 2 - continued
August 5, 1996 - Cort acquired certain assets of AFRA Enterprises, Inc. and Apartment Furniture
Rental Associates for $9,384,000.
December 3, 1996 - Cort acquired the furniture rental contracts and certain other assets of Bel Style
Corporation. Bel Style, a privately owned company, had annual rental revenues of approximately
$2.5 million. Terms were not disclosed.
March 6, 1997 - Cort acquired the stock of each of Levitt Investment Company and McGregor
Enterprises, Inc. and certain assets of Alco Trade Show Services, Inc.
November 1997 Cort acquired the furniture rental contracts and certain other assets of Delta
Furniture Rentals Inc.
March 1, 1998 - Cort acquired the furniture rental contracts and certain other assets of IS Furniture
Rental Corp.
August 14, 1998 - Cort announced completion of the acquisition of Instant Interiors Corporation.
March 26, 1999 Cort announced plans to go private in a buyout backed by Citigroups venture
capital division and New York based Bruckman, Rosser, Sherrill & Co. Shareholders offered $24
cash plus $2.50 of preferred stock.
August 13, 1999 Cort announced it was raising its buyout offer. Shareholders offered $25 cash
plus $3.00 of preferred stock.

Sources: Reports published by The Investext Group and articles from the Washington Post

Exhibit 3

Cort Business Services

Historical Balance Sheets

Year ended December 31,

Assets:
Cash and equivalents
Accounts receivable
Prepaid expenses
Rental furniture, net
Property, plant and equipment, net
Investment
Other receivables, net
Goodwill
Liabilities:
Accounts payable
Rental security deposits
Accrued expenses
Deferred rental revenue
Long-term debt
Deferred income taxes

1995

1996

1997

1998

379
6,019
3,973
103,741
31,044
-3,814
24,752
$173,722

$ 123
11,011
4,224
147,161
35,667
-3,815
45,198
$247,199

$ -13,521
4,127
164,323
38,777
-3,183
53,910
$277,841

$ 703
14,585
5,918
189,059
43,861
3,000
3,048
72,722
$332,896

$ 3,597
5,761
19,096
5,425
53,800
10,622
98,301

$ 4,157
7,184
27,491
7,174
65,600
10,441
122,047

$ 5,551
7,978
27,936
9,239
63,132
14,673
128,509

$ 3,417
9,581
21,076
11,541
90,800
20,819
157,234

104
67,383
7,934
75,421
$173,722

127
101,155
23,870
125,152
$247,199

129
103,007
46,196
149,332
$277,841

131
105,940
69,591
175,662
$332,896

Stockholders Equity:
Common stock, voting, $.01 par value
Additional paid-in capital
Accumulated earnings
Total stockholders' equity

Exhibit 4

Cort Business Services

Historical Income Statements
Year ended December 31,
Revenue:
Furniture rental
Furniture sales
Total revenue

1995

1996

1997

1998

$141,988
37,321
179,309

$191,560
42,589
234,149

$237,212
50,006
287,218

$265,871
53,093
318,964

Operating costs:
Cost of furniture rental
Cost of furniture sales

27,950
22,203

36,958
25,207

45,634
30,257

47,863
32,354

Employee, delivery and advertising

72,379

95,204

114,674

128,710

Occupancy, utilities and non-rental depreciation

Amortization of goodwill
Other operating expenses
Total costs and expenses
Operating earnings
Interest expense, net
Income before income taxes and extraordinary
loss
Income tax expense
Income before extraordinary loss

16,724
662
12,670
152,588
26,721
15,917

22,722
961
17,649
198,701
35,448
8,251

27,747
1,546
21,052
240,910
46,308
8,374

32,496
1,935
22,959
266,317
52,647
7,837

10,804
4,586
6,218

27,197
11,261
15,936

37,934
15,608
22,326

44,810
18,907
25,903

Extraordinary loss on early retirement of debt

Net income
Earnings per common share before extraordinary
loss
Extraordinary loss per common share
Earnings per common share
Weighted average number of common shares
used in computation

4,143
$ 2,075

-$ 15,936

-$ 22,326

2,508
$ 23,395

$ 1.26
0.62
$ 0.64

$ 1.40
-$ 1.40

$ 1.74
-$ 1.74

$ 1.99
0.19
$ 1.80

6,688

11,416

12,804

13,019

$ 1.11

$ 1.31

$ 1.67

$ 1.92

0.55
$ 0.56

-$ 1.31

-$ 1.67

0.19
$ 1.73

7,578

12,144

13,378

13,491

Earnings per common share before extraordinary

loss--assuming dilution
Extraordinary loss per common share--assuming
dilution
Earnings per common share--assuming dilution
Weighted average number of common shares
used in computation-- assuming dilution
10

Exhibit 5

Cort Business Services

Summary of Management Takeover Offers
Management Buyout #1
Date:

March 26, 1999

Price per share:

$26.50: $24 cash + $2.50 referred share

Premium to stock one-day prior:

58.2%

Premium to stock one-month prior:

60.0%

Premium to 52-week low:

87.6%

Premium to 52-week high:

-44.8%

Market value of firm :

$302.82M

Management Buyout #2
Date:

August 13, 1999

Price per share:

$28.00: $25 cash + $3.00 preferred share

Premium to stock one-day prior:

17.9%

Premium to stock one-month prior:

17.9%

Premium to 52-week low:

98.2%

Premium to 52-week high:

-41.7%

Market value of firm*:

$328.24M

Market value from Research Insight

11

Exhibit 6

Cort Business Services

Board of Directors
Keith E. Alessi +

President, Chief Executive Officer and Chairman of the Board of

Directors of Telespectrum Worldwide, Inc.

Paul N. Arnold

President and Chief Executive Officer of CORT Business Services

Corp.

Bruce C. Bruckman *

Managing Director of Bruckman, Rosser, Sherrill & Co., Inc. and

former Vice President of Citicorp Venture Capital Ltd.

Michael A. Delaney *

Managing Director of Citicorp Venture Capital Ltd. and a former

Vice President of Citicorp Venture Capital Ltd.

Charles M. Egan

Chairman of CORT Business Services Corp. and former President

of CORT Furniture Rental Corp.

Gregory B. Maffei +

Chief Financial Officer of Microsoft Corp. and former Vice

President of Citicorp Venture Capital Ltd.

James A. Urry *

Vice President of Citibank, N.A. and a former Vice President of

Citicorp Venture Capital Ltd.

*
+

Member of the Compensation Committee

Member of the Fairness Committee

12

Exhibit 7

Cort Business Services

SunTrust Equitable Securities Valuation Analysis

Valuation analysis for Cort Business Services at varying offer prices

Possible Buyout Price per Share

24.50

25.50

26.50

27.50

28.50

Firm Value / Revenue

1.4*

1.4

1.5

1.5

1.6

Firm Value / EBITDA

7.1

7.4

7.6

7.9

8.1

Firm Value / EBIT

8.2

8.5

8.8

9.1

9.3

Stock Price / EPS

13.0

13.5

14.0

14.6

15.1

Stock Value / Book Value

2.0

2.1

2.1

2.2

2.3

Valuation analysis for comparable firms at current market prices

Globe
Comparable Firms to
Aaron
Rainbow
Business
Cort Business Services
Rents
Rentals
Resources

Rent-ACenter

Rent-AWay

Firm Value / Revenue

1.0

0.9

0.9

1.9

1.5

Firm Value / EBITDA

7.9

8.0

6.7

11.3

26.8

Firm Value / EBIT

9.6

10.7

8.4

14.6

33.6

Stock Price / EPS

14.9

13.6

13.9

21.7

21.5

Stock Value / Book Value

1.8

1.5

2.2

4.2

2.1

* The numbers in the tables represent multiples of the relevant characteristic. For instance, at an offer price of $24.50 per
share, the value of Cort would be roughly 1.4 times its revenues.

13