Academic journal article Journal of the International Academy for Case Studies

Novaco: The Challenge of International Entrepreneurship of a New Firm

Academic journal article Journal of the International Academy for Case Studies

Novaco: The Challenge of International Entrepreneurship of a New Firm

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns the international public birth and development of a pioneering Internet firm with a short existence before its slow but positive growth in a market dominated by large multinational firms which also made it the prime target for takeover and purchase. The issue of valuation of the firm's initial public offering shares is the central focus for the case evaluator and student. How should the stock market value a firm whose major competitors are virtual giants in the Internet world and specifically, the multinational dot.com world? The case has a difficulty level of five, appropriate for first year graduate level. The case has both current and historical applicability for MBA students concentrating in corporate finance, international financial management, or multinational corporate entrepreneurial relations and serves as a pedagogically sound tool for applied valuation of shares for multinational high-tech firms. The case is designed to be taught in three class hours and is expected to require 6-8 hours of outside preparation by students.

CASE SYNOPSIS

This case affords students an opportunity--from both a strategic and financial point of view--to evaluate the decision made by Novaco to go public while simultaneously assisting the fledgling firm to decide from an international perspective the best alternative approach of market survival. The appraisal hinges on the analysis of two kinds of restructuring: 1) the restructuring of other major players in the industry (Microsoft, HP and others) and the forces that motivate it and 2) the restructuring of a single firm's residual-ownership interest or equity restructuring of a new firm in a potentially saturated industry whose primary product was simply known as the Internet which is widely known and accepted now. Of primary concern throughout is why firms go public domestically and internationally and how the offering price can be estimated and evaluated, especially when the forces of international markets are involved. Further, a peripheral issue is the impact of capital restructuring--the design of the firm's debt and equity claims with an emphasis on changes in and additions to its clientele and investors, the allocation and determination of its asset value, and the real potential for failure in new markets, especially international ones, by firms with limited operating history. All data elements and statements were derived from public Internet data and public financial data, and Novaco represents a fictitious firm, although its financials may resemble others in the industry. No private or insider information was provided or extracted from company files or other such cases.

INTRODUCTION

In August 2003, the Board of Directors of Novaco Incorporated faced the decision threshold concerning several issues facing the firm including: (1) a reasonable price to set for the firm's first public share offering; (2) which international market would best "fit" the mission of the firm; and more specifically (3) how does this firm survive in an international Internet service provider market when it is but a small dot on the industry horizon. The most immediate task facing the Board is that it has to arrive at a reasonable and fair estimate by issue day in order to satisfy the underwriting team of J. P. Morgan Chase, Inc. and Wachovia Securities, Inc., who would be handling the issue. According to Wall Street estimates and CNN News.com, the underwriters have agreed to fully underwrite 6,000,000 shares of Novaco's common stock which, if successful, would not enter the record books but would be considered one of the largest IPOs in this market for this period by a virtual unknown. The underwriters were also granted the option to purchase up to 750,000 additional shares from the company to cover any over-allotments. There were numerous risk factors to consider with respect to the IPO, including the company's limited operating history and its rapid emergence into this technological market, which traditionally has led to share price volatility, and a hearty "best offer" underwriting. …

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