The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1

462 Making Key Strategic Decisions


THE BOARD OF DIRECTORS MEETING


The board of directors of Dough.com Inc. meets with its various advisers to
determine how to raise the necessary capital to promote the development of
Dough-Ware. Every possible solution has its advocates.
Some directors want to raise the money through a private placement of
securities from venture capital firms, believing that going public is too time
consuming, involves too much expense (upward of 10% of the proceeds typi-
cally will be absorbed in selling commission and out-of-pocket expenses), and
that the underwriters (the investment bankers who will sell the IPO to the
public investors) will attempt to value the shares at less than their true value so
that the public investors will see the price rise upon conclusion of the offering.
An investment banker on the board suggests that the shares could be pri-
vately placed by selling an additional 20% of the company’s common stock for
$40 million, effectively valuing the company as it sits today (a “pre-money” val-
uation) at $160 million.
The representative from Vulture Partners has yet another strategy. He
suggests that the company not raise the additional funds now, but push the cur-
rent version of their product out the door and work on building volume and
profitability for the next six months; then, the company can go public at a valu-
ation which is 30 times the company’s projected pretax earnings, which would
value the company at $300 million pre-money. In conjunction with the IPO,
Vulture Partners then would sell half of its own original shares, realizing a
multimillion dollar profit while still retaining a substantial equity position.
Dough and Manager do not want to wait to raise money; they see the most
important thing as capturing market share before competitors overtake the ad-
vantage that struggling Dough.com Inc. now enjoys. Company management
does not care whether Vulture Partners is able to sell any equity interest at this
time; they have been investors for only one year, and management does not feel
that Vulture’s rush to liquidity is appropriate. But some of the other early in-
vestors, the original group of five friends and the angel investors, also are
intrigued with the possibility of selling some of their shares.
The investment banker warns that in an IPO, it is sometimes a negative if
too many shares are sold by existing stockholders and not by the company itself;
new investors like to invest their money in the enterprise and help it grow, not
into the pockets of prior investors, and too many sales by previous investors in-
dicate a lack of confidence in the future.
Some of the management team wants the company acquired by Big Deal
Corporation Management, which is experienced in working with larger corpo-
rations, sees an acquisition by a strategic acquirer as increasing the value of
their existing stock options, and believes that through their existing close con-
tacts with Big Deal Corporation’s management they will be able to structure
attractive personal compensation packages. They point out that, whether capi-
tal is raised publicly or privately, there is far greater risk of failure if
Dough.com Inc. goes it alone, as compared to joining forces with an existing

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