I. What are the advantages and disadvantages of Rosetta Stone going public?
II. Conduct your own analyses to estimate the value of Rosetta Stone. How do these values compare with the current range?
III. If you were part of the underwriting syndicate, what price would you recommend for the offering?
IV. Should Mark invest in the IPO?
V. What alternatives to the IPO might be available to the company?
I. Advantages & Disadvantages of Going Public
The main advantages of Rosetta Stone going public are that an IPO would allow them the capital to expand their business into new markets as well as build on the Rosetta Stone brand. The IPO would also help them establish business credibility as a public firm. As a public
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Using P/E analysis, our staff found a preliminary price of approximately $4-$7 per share. However, we are skeptical of this range due to the recent volatility in net income despite strong revenue growth. Various expenses, especially in operations, drive this volatility. With this in mind, our team found a range of approximately $21-$27 per share when using the EV/EBITDA multiple. This multiple is more pertinent to our analysis because EBITDA presents a more stripped down view of the company’s earnings than P/E ratios. Thus, EBITDA makes comparison to competitors more accurate. After our interns made these initial calculations, we had them create a weighted average of these multiples given both industry (80%) and K12 figures (20%). Then, we use the weighted average of these averages - 80% EV/EBITDA and 20% P/E - to find an initial stock price of $21.57. In our next staff meeting, we decided that Rosetta should be priced 10% higher than this figure due to incredible recent success, even during the recession, incredible investor demand as noted above, and a general caution not to set the price too high given the weak economy.
III. Price Recommendation
As an underwriting syndicate, we would recommend a price of $23.73 based on valuation procedures using comparable industry averages, and by also taking into account Rosetta Stone’s unique…