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.

INSTRUCTORS' NOTES

PROBLEM STATEMENT

J. P. Morgan Chase Inc. and Wachovia Securities, Inc. are the underwriters for the IPO of Novaco Corporation, who want to issue 5,000,000 shares of common stock to finance its future growth and financial needs. The company has granted the underwriters the option of purchasing up to 750,000 additional shares from the firm to cover over-allotments, should they occur. In light of the foregoing, the case reviewer is being asked to assess the corporate value of Novaco and determine the appropriate offering price for the issue and also determine whether or not the firms and private investors should exercise the option to buy the shares offered. Finally, and more importantly, determine a clearing price for the firm's shares based on one of many IPO valuation methods, specifically from an international perspective, with consideration of the strategic and financial needs of a multinational firm.

ALTERNATIVE SOLUTIONS

Book Value Method

Determine the firm's book value and use that value as a basis for determination of a fair market (offering) price for the firm's initial shares.

Price-to-Earnings Method

Compute the firm' s estimated price-to-earnings rate times its estimated EPS and use the figure to determine the IPO price as an acceptable valuation method for price determination. …

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