Sky Air, Inc Case Study Essay
summarize the case, the main actors, and the problem of the case. Then you need to provide a solution to the problem
Harvard Business School 9-297-110
Rev. November 24, 1998
Professor Paul Gompers prepared this case as the basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation.
Copyright 1997 by the President and Fellows of Harvard College. To order copies or request permission to
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permission of Harvard Business School.
1
Sky Air, Inc.
Samuel Kaplan stared at the proposal sitting on his desk from Thyestean Ventures outlining
their proposed investment in Sky Air, a small, regional airline. Kaplan was somewhat disappointed
in Thyesteans terms. The offering price, $6 million for a 30% equity stake in the company, seemed to
be far too low. Kaplan knew that Sky Air had huge promise. After all, he had built the company up
from scratch over the past ten years. The investment from Thyestean Ventures was expected to allow
Kaplan to diversify his wealth at a time when his family was beginning to grow. (Sarah Kaplan,
Samuels wife, was pregnant with triplets.)
As Samuel sat in his office in downtown Idaho Falls, he wondered how to respond to
Thyesteans offer. Should he reject the offer outright? If he decided to negotiate, how could he
improve his bargaining position? Finally, how could he maximize the value that Thyestean Ventures
was willing to pay for their 30% equity stake? Today was February 4, 1997 and he had less than two
weeks to come up with a counter proposal.
Sky Air
Sky Air was founded by Samuel Kaplan in the summer of 1986 shortly after he was
discharged from the Air Force. Samuel had trained as a mechanical engineer at the Air Force
Academy and had served for ten years in the Tactical Air Command. In addition, Kaplan was a
talented golfer, having won the U.S. Amateur Championship when he was only twenty years old.
During the past ten years, Kaplan had had little opportunity to play golf, although the completion of
a PGA quality course in Idaho Falls seemed to offer hope of increasing his playing time.
Kaplan, who grew up in Idaho Falls, believed that a regional airline based there would be
highly profitable. Idaho Falls was a market that was then only served by Vixenne Air. Vixenne had a
dismal track record for safety violations and on-time service. Kaplan felt his military experience
would allow him to run an efficient, safe airline.
Kaplan began service in August 1986. Sky Air’s initial schedule provided convenient service
to ten cities in the Northwest and upper Midwest. Sky Air was an immediate success. Its aircraft
continued to run at capacity, and Kaplan worked hard to expand service. By leasing and buying used
aircraft, Kaplan increased Sky Airs seating capacity and expanded service to over 75 domestic and
international destinations over the next ten years.
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This document is authorized for educator review use only by Daniel Perez, UNIVERSITY OF ST. THOMAS until March 2016. Copying or posting is an infringement of copyright.
[emailprotected] or 617.783.7860
297-110 Sky Air, Inc.
2
February 1997
By February 1997, Sky Air was showing consistent profits, albeit not stellar results. The
company was run exclusively by Samuel Kaplan who served as Chairman of the Board, CEO, CFO,
and Controller. The board consisted of Kaplan, his wife, and his cousin Bob. In addition to his salary
of $400,000 per year, Kaplan also had a company car and a company apartment. With the expected
additions to the family, Kaplan was in the market to purchase a second company car and a larger
company apartment, although these decisions would wait until after the investment by Thyestean
Ventures was completed. He simply had no time right now to shop for them.
Sky Airlines had been consistently in the black since its incorporation. Profitability growth
had slowed recently, and even declined slightly in the last year, but Kaplan explained this as a
temporary slowing of revenue growth, and was confident that cash flow would continue to grow at
its historical rate in the future.
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Sales $2,250 $4,500 $9,000 $15,000 $22,500 $30,000 $36,000 $42,200 $48,600 $53,000
Operating Expense $1,750 $3,500 $7,000 $12,250 $17,500 $22,750 $28,875 $33,250 $38,500 $43,750
EBIT $500 $1,000 $2,000 $2,750 $5,000 $7,250 $7,125 $8,950 $10,100 $9,250
(in thousands)
The Offer
Because of the approaching birth of his triplets, Kaplan thought it was time to pull some
money off of the table. He contacted Thyestean Ventures, a local venture capital firm that was
known to invest in family-owned businesses. Thyestean Ventures had an excellent track record and
managed almost $500 million in assets.
Kaplan had wanted to retain control of the company and therefore offered to sell 30% of his
company to Thyestean Ventures, but they would not get board representation. He was certain that
given the illustrious ten year history the 30% stake was worth well over twenty million dollars.
After their due diligence, however, Stacy Simms, Thyesteans managing general partner,
informed Kaplan that Thyestean would pay no more than $6 million for the 30% equity stake. Kaplan
was distraught. He was certain that his company was worth more, but he did not know how to
respond to Thyestean.
As Kaplan got up from his desk and walked through the door on the way to his car, he
pondered his options. He could walk away and continue to manage the firm as he had for the past
ten years. His second option was to come up with a new proposal for Thyestean that might generate
a higher offer. He did not have much time to decide.
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This document is authorized for educator review use only by Daniel Perez, UNIVERSITY OF ST. THOMAS until March 2016. Copying or posting is an infringement of copyright.
[emailprotected] or 617.783.7860
