1 . PURPOSE The purpose of this seance note should be to provide recommendations for Metapath Application Corp. (“Metapath”) on their financing gives received in September 1997. These two offers came from 1) a fund consortium led by Robertson Stephens Tissot Fund (“RSC”) and Technology Crossover Ventures (“TCV”) and 2) CellTech Communications (“CellTech”), a seller of wi-fi technology which will had recently gone GOING PUBLIC. 2 . EXECUTIVE SUMMARY Metapath has made great progress in developing the business since its inception – generating $6. 4m revenue in the Sept.
2010 quarter of 1997 with representation of three large customers. Nevertheless , with the ambition to succeed a good chance of IPO within the next two years, even more capital needed to be raised to achieve traction in customer acquisition and lessen current quarter-to-quarter revenues. Metapath has received two offers since at September 1997 and they are generally discussed as follows: RSC and TCV holding offered to buy $11.
75 million of stock by a $76 million pre-money valuation (“Series E Preferred”). The suggested stock instrument was a taking part convertible inventory (“PCPT”). This kind of instrument functions the same as the descapotable preferred stock in the event of a knowledgeable public giving whereas in the case of a sale, RSC and TCV consortium not simply receives the facial skin value in the consideration, but also provides the equity participation.
CellTech presented Metapath’s shareholders to receive common stock in closing in CellTech by $115 mil. 3. AFFIRMATION OF THE COMPLICATIONS The problems associated with the offers by RSC and TCV pool are outlined as follows: Suggested stock instrument is extremely dilutive to the creators in the event of a sale where the fluidity preference will reduce the volume of cash available to the other several tranches coming from previous purchases. If the Metapath goes open public, the percentage of ownership for C & D tranches will be additional diluted, after RSC and TCV consortium exercises the liquidity preference.
The problems linked to the offers via CellTech will be listed the following: CellTech’s liquidity and funding issues. Strategic/Business fit among CellTech and Metapath. 4. ANALYSIS Evaluating the term bed sheet of the provide from RSC and TCV consortium to that of CellTech, RSC and TCV’s PCPT had a considerably more dilutive effects to Metapath upon leave. Under liquidation, the term linen stipulates which the Series Electronic investors can be entitled to claim its primary investment of $10. seventy five million in addition any accrued but outstanding dividend.
Any kind of proceeds after this claim will then be distributed to all common and Series Elizabeth Preferred investors on an as-converted pro-rata basis. This dual dipping implies that RSC is not going to recover their initial expenditure of $5 millions, although also looks forward to the descapotable benefits. Because of this, if the sales occurs just before 2000, earnings for A-D tranches will be negatively impacted by the ‘preferred’ characteristic in the Series E. However in case the sale arises after 2k, A and B tranches will be slowly but surely redeemed on an annual basis, which will leave C and D tranches to be mainly impacted negatively by the recommended characteristic in the Series At the stock.
Within the circumstance of an IPO, tranches C, D and Electronic will come to be common by their agreed prices whilst A & B will probably be redeemed. Yet , on the flip side, the purchase price offered by RSC and TCV consortium was $6, that was significantly more than the initial three times of auto financing (tranches A, B and C) at $1. 05 and last round (tranche D) for $1. 62.
PCPT instrument was created to enable the range to reduce the risks in case of a sale/liquidation that would be from the founders’ passions and value wrecking. CellTech’s valuation of $115 million was certainly eye-catching for a company like Metapath with a revenue run price of $25. 6 million. However , this represents about 30% in the totally capitalisation. The readiness from CellTech to sacrifice such a lot of capital shows that possibly CellTech honestly believed that Metapath will contribute drastically to the synergies to the NewCo or there could be asymmetric information hidden from your management.
That signalled CellTech’s underlying organization might have limited upside. This problem needs to be further investigated in the event that offer can be accepted by CellTech. Additionally , CellTech’s balance sheet indicated constant liquidity and financing dangers. As we can easily see from the table below, the corporation continued to handle liquidity pressure where it is cash ratio and speedy ratio deteriorated over the program from 1995 to 97.
CellTech acquired six progressive, gradual quarters working loss, which in turn indicated that its detrimental operating cash flow ratio. Uncertainties were raised whether CellTech was a very good strategic fit to Metapath’s business model. The main reason for this is the fact that CellTech’s products were mostly hardware-based and installed in the field with cellular base stations, although Metapath’s items largely contained software operating on regular server programs in the wi-fi switching office. The only gain gauged concerning this point was that some of CellTech’s engineers could potentially be helpful to Metapath’s development group. a few.
CONCLUSIONS The recommendation intended for Metapath should be to take the present from RSC and TCV consortium. Despite the fact that CellTech provides performed very well since the GOING PUBLIC and high views through the stock experts, its potential information asymmetry issues and liquidity risk could damage the value of Metapath post obtain. The limited strategic match is also of our concern, that might constrain Metapath’s growth potential. With our aspirations to lead Metapath to GOING PUBLIC, we see RSC and TCV consortium like a better fit into this case. Tranches A and B’s interests will probably be protected through their initial capital constructions.
Tranches C and D’s interests will probably be diluted; nonetheless it enables Metapath to continue their growth momentum with limited downside.