The company has financed its operations using the initial investment, limited partnership, and five different private equity offerings. The initial investment was $2,000 put into the company by Jim Hornthal, its founder. The company also entered into a limited partnership that enabled it to raise $387,000 from wealthy individuals. It then raised money by issuing preferred shares (Series A shares) in a private equity offering. These funds were used to finance the Non-broadcast Program Development. Series A shares raised $98,000.
The firm’s Television Programming development phase was financed through 13 different private equity offerings. This involved issuing Series B shares in 9 separate closings and Series A shares in four closings. The company managed to raise a total $4.4 million from these offerings. Series B shares were offered at $2 while Series C shares were offered at $2.80 per share.
The company financed its third phase of development, Infomercials, and Diversification through notes and share warrants. It raised $2.8 million by issuing notes with warrants for Series C shares and notes with warrants for common stock. It financed the fourth phase of its development, Online Travel Services, by issuing both Series D and Series E shares.
Value of outstanding preferred and common stock after the issue
The preferred stocks issued are convertible into common stock hence, we can assume that the number of common stocks outstanding after the issue is equal to the number of preferred shares outstanding. The implied value of common stock can be determined by dividing the post-money total enterprise value by the number of shares outstanding. Post-money value of preferred shares = Pre-money valuation + Investment
Pre-money Valuation = Share price × Pre-money shares
Advantages and disadvantages of sources of finance
Angel investors
These are individuals who provide equity funding to small private firms. The angel investors, in some cases, provide entrepreneurs with the startup funds that are later converted to a percentage of equity funding upon the conceptualization of the business. The individuals who provide the funds in some cases are friends or acquaintances of the entrepreneurs.
The advantages of angel investors include: there is no need for collateral, increased access to the knowledge of the industry through the investor, no interest payment, and access to mentoring by the angel investor, increased discipline as a result of outside scrutiny, angel funding is flexible and readily available.
The disadvantages of angel funding include: it takes a long period to find a reliable angel investor; it requires the investor to give up ownership of their business and is not suitable for too little capital requirement or too much (Brigham, 2010). Besides, active involvement in the company by the angel investor can lead to problems; and high risks involved means less follow up by the angel investors
Venture capital firms
Venture capital is provided by private investors, mainly private equity firms, to small and medium start-up companies with a strong growth potential (Brigham, 2010). Venture capitalist provides necessary capital and expertise to grow the company and then sell their shareholding at a profit. It is beneficial to small and medium sized businesses since it does not require collateral. Venture capitalists provide financing so long the firm has a growth potential. Besides, the venture capitalist provides business expertise that is valuable in growing and turning around the company. This enhances the efficiency of the management of the enterprise.
The limitation of this financing is that it requires leads to the loss of stake in the firm. The venture capitalist demands a large stake in the company (Brigham, 2010). This implies that the owners will lose control and management of the company to the venture capitalist. Besides, they demand for changes in the management team.
Strategic investors
Strategic investors are companies that are operating and include competitors, suppliers or unrelated companies. They buy stakes in other firms either to diversify revenue bases or to reduce competition. The advantage is that they offer a higher price for the stock than venture capitalists (Brigham, 2010). The acquired company can also gain competitive advantage by exploiting the synergy created such as sharing resources, markets, and expertise, among others. They can also offer a long-term financing since they do not have immediate exit plans, unlike venture capitalists.
The challenge of strategic buyers is that they do not finance the whole purchase price through cash (Brigham, 2010). They usually offer their stocks as part of the acquisition price. Besides, they may also demand managerial changes in the acquired company.
Public Stock Offering
Public stock offering provides access to capital that does not have an obligation for repayment as well as interest. It also enables the founders and venture capitalist to cash in on their initial investment in the company (Brigham, 2010). It also increases public awareness of the company thus boosting its sales. However, it is costly to plan and executive a public stock offering. Floating cost for stocks is greater than that of other sources of financing. Besides, a public stock offering is a lengthy procedure that requires several documentations. The company will also lose confidentiality since it has to file returns, among other regulations.
QuadMedia’s offer
QuadMedia’s price = $4.50
Capital required = $7.5 million
Shares outstanding = 4,499,056
Fraction of QuadMedia = 166,667(166,667+4,499,056) = 3.572%
Equity that Hornthal and Orton were hoping to sell
Offer price = $10
Capital required = $7.5 million
Discounted cash flow model
QuadMedia’s offer = $4.5
Total valuation = 4.5 × 4,499,056 shares = $20,245,752
Hambrecht & Quist’s proposal
An IPO is a suitable way of raising capital to finance the company’s operational and expansion plans as well repaying debt (Brigham, 2010). It allows many investors to acquire the company’s stock thus raising more capital. Furthermore, an IPO can create liquidity to the founders and venture capitalists. They can use the IPO can cash in their initial investment in the company. For a venture capitalist, an IPO is a good exit strategy. It also enhances investors’ confidence in the financial stability of the company hence it increases its accessibility to debt facilities. Besides, it enhances the firm’s public image by increasing public awareness. This could translate into increased sales and market share.
The risks of an IPO include under-subscription. If the firm’s stocks are under-subscribed, it may not raise sufficient capital. However, Preview Travel can agree with the investment bank and other brokers to buy any unsubscribed shares (Brigham, 2010). An IPO is a lengthy procedure hence Preview Travel may experience delays in getting funds. It also leads to dilution of control in the company. The affairs of the firm will be run in accordance with regulations (such as SEC regulations), among others. The management of the company will be in the hands of the board of directors and not the founders only. The company will also confidentiality since it will have to file annual reports, among other required filings, with the relevant authorities.
Hambrech & Quist’s valuation
Based on Hambrech & Quist’s valuation, the company’s revenues will grow at a rate of 36% for 13 years.
Comparable trades approach
Value of equity (per share) = 83,600,000/4,499,056 = $18.58
The multiples for commerce services and content services were adjusted to get the blended multiple. In this case, the blended multiple is the average of the two. The blended multiple is determined since the firm operates in different sectors thus using a multiple for one of the two does not give an accurate reflection. Using the market value to total revenue ratio, we determine the market value of the firm. As shown above, the value of the company under this approach is higher than the value under discounted cash flow model.
Multiples are useful in equity valuation where several peers in the industry. The method is suitable when the companies are almost similar in terms of sizes. It is also useful when information on multiples of peers of the firm are available. They are also useful when one needs to determine the relative value of a firm.
Recommendation
Preview Travel should go for an IPO since its valuation would be higher. QuadMedia’s offer is lower than the real value of the company hence, Preview Travel should reject it. IPO comes with other advantages as discussed above.
References
Brigham, E. (2010). Financial management (7th ed.). Chicago: Dryden Press
