Metapath’s capital structure Essay

Questions1. Analyze Metapaths capital structure, in limited the various forms and prices of favorite(a) stock from the previous rounds of financing. How has this capital structure alter the offer from Robertson & Stephens? How would RSCs take part favourite(a) interact with the separate tranches of preferred stock?Up to the date in issue, Metapath has raised $9m in quad rounds of financing, of which two occurred simultaneously in the beginning. The two participating investors, Bessemer and STI, which supplied the initial funds, current redeemable preferred for the total sum up of $1.6m, the third and fourth rounds brought in $1m and $7m respectively (in two grimaces preferred convertible were issued), with the calculated price for vulgar being the same for the first three rounds ($1.05) and higher ($1.62) for the fourth round. In case of non-conversion, the last issue was supposed to be paid forth first, then the last but one, finally, the first two issues, on a pro rata basis.All of the issues had demand regist balancen rights provision, however, the third and the fourth issues, had much leeway in the exercising of the rights ( non alone on request of 50%+ of all the issues, but also after-IPO or specific date (July 31, 1999), whichever is earlier), olibanum protecting the sakes of the holders. That said, in fact the holders of the two first issues in many an(prenominal) respects enjoyed the position of debt holders, with a scheduled stipend of principal and dividends. precondition the structure and the fact the managers hadnt invested from their own pockets, RSC suggested investment in participating convertible preferred shares supposed to protect RSC from practical early sale, which would repair the management disproportionally and leave RSC abused. Through PCPT, RSC would be able to keep both liquidation preference (with the right to uplift the first payment in the amount of invested capital and accrued, not unpaid dividend (8%), befor e any other security holders receive their part) and equity society along with other investors (after payment of similar to its own liquidation preference), thus, staying in a highly advantageous position.2. How do you analyze the RSC offer? In particular, what is the value of theparticipating preferred feature of the RSC syndicate? What are the risks to the Metapath shareholders if the board accepts the RSC offer? Even though the company has only projected its activity one quarter forward, is it realizable to assess the reasonableness of the valuation? (The ten-year treasury rate in kinsfolk 1997 was 6.21%).To value the participating feature, first, calculate the options values for $11.75% and $87.75 million exercise prices. For calculation, fag out ten-year option price 40% excitableness (corresponding to the middle stock volatility range 20-40%) abovementioned exercise prices ($11.75% and $87.75 million) valuation of $87.75 million is reflective of a neat asset value inte rest rate of 6.21% (as suggested). Apply Black-Scholes homunculus to receive prices of $81.44 and $49.44 million for the two strikes respectively. For $11.75 is 13.4% of post-money $87.75, the price of the issue is $10.91 and $6.62 million respectively hence, the participation features value is c. $4.29 million. Therefore, the corresponding share of the company, which makes choice distant is $81.44*0.134/$49.44=22%, that is concession of 22% of the company without the participation feature leave make Series E holders equally happy, the corresponding price is 0.134/0.22*$6=$3.65 per share.Acceptance by the board of the RSCs offer will nonplus Metapath shareholders will add a new senior holder to say the proceeds, both in case of early liquidation and in case of successful exist. This offer will reduce shareholders wealth not only by capital dilution, but also by the absolute amount of investments of Series E holders even in the case of future success. With negatively charged ea rnings and absence of predictable cash flows, one can do the rough check on the basis of P/Sales ratio (given both companies (Metapath and Celltech) similar capital structure, the proxy seems reasonable).With the last quarterly figures as of June 1997, when numbers were available for both Celltech and Metapath, and considering the market cap of Celltech of approximately 260 million, the valuation of around 130 million could be used, which means the company superpower be worth more. The projections per se, however, dont tell the story as the two segments (system sales and services) are expected to demonstrate different dynamics, so further investigation is needed. A cautionary note on Black-Scholes model application should be made3. Is the Celltech offer reasonable? How should the Metapath board cerebration the Celltech stock? What are the risks for the Metapath shareholders if the board accepts the Celltech offer? spell the Celltechs offers seems to be more reasonable in terms of price offered, the shareholders whitethorn bet additional risks, including the risk of Celltechs stock price.While possible fluidity within near future (90 days plus other possible restrictions, which is considerably less than its own IPO in 1+ years) as well as lack of dilution appealed to the managers, the fluctuation in the price of Celltech may wipeout the fortune (the stock had only a short muniment and the view of insiders doesnt seem to strongly support Celltech). Furthermore, the fit of the Metapath and Celltechs businesses is questionable, with Metapath potential possibly higher than that of Celltech, which on the other hand may have a limited upside.4. If you were on the Metapath board, which option would you support?While the offer of RSC is restrictive in many ways, it is more attractive for a team that will manage to perform. With a set of potential fluidity and financial risk questions, which may arise from Celltechs financing, Metapath board should not only consid er the price, but also other terms (which eventually will incentivize the management in the long-term success and keep its interest in business). With this in mind Metapath board will be better off with the RSCs proposal, rather than Celltechs.