Metapath Case Report Essay

1. PURPOSEThe purpose of this briefing note is to provide recommendations for Metapath software program Corp. (Metapath) on its financial backing offers received in September 1997. These two offers came from 1) a fund pool led by Robertson Stephens Omega Fund (RSC) and engineering science Cross over Ventures (TCV) and 2) CellTech Communications (CellTech), a vendor of wireless technology which had tardily gone IPO.2. EXECUTIVE SUMMARYMetapath has made skinny progress in developing its business since its inception generating $6.4m revenue in the September cast of 1997 with representation of three large clients. However, with the rivalry to win a good chance of IPO within the next two years, more nifty needed to be raised to gain traction in customer acquisition and smooth out current quarter-to-quarter revenues. Metapath has received two offers as at September 1997 and they are discussed as follows RSC and TCV kitty offered to buy $11.75 one thousand million of sway at a $ 76 million pre-money rating (serial publication E Preferred). The proposed breed instrument was a participating cashable stock (PCPT). This instrument functions the same as the convertible preferred stock in the lawsuit of a qualified public offering whereas in the caseful of a sales agreement, RSC and TCV consortium not just receives the incline treasure of the consideration, provided also gets the equity participation. CellTech offered Metapaths shareholders to receive common stock at closing in CellTech at $115 million.3. STATEMENT OF THE PROBLEMSThe problems associated with the offers from RSC and TCV consortium are listed as follows Proposed stock instrument is extremely dilutive to the founders in the event of a sale where the liquidity preference give reducethe sum of money of funds available to the other four tranches from previous investments. If the Metapath goes public, the percentage of ownership for C & D tranches leave alone be further diluted, after RSC and TCV consortium exercises its liquidity preference. The problems associated with the offers from CellTech are listed as follows CellTechs liquidity and financing issues. strategical/Business look into between CellTech and Metapath.4. ANALYSISComparing the term flat solid of the offer from RSC and TCV consortium to that of CellTech, RSC and TCVs PCPT had a much more dilutive restore to Metapath upon exit.Under liquidation, the term sheet stipulates that the Series E investors is entitled to occupy its sign investment of $10.75 million plus any accrued but unpaid dividend. Any proceeds after this claim willing accordingly be distributed to all common and Series E Preferred shareholders on an as-converted pro-rata basis. This double dipping means that RSC will not only recover its initial investment of $5 millions, but also enjoys the convertible bene turmoils.As a result, if the sale occurs before 2000, the profitability for A-D tranches will be negatively wedge by the pref erred characteristic in the Series E. However if the sale occurs after 2000, A and B tranches will be gradually redeem on an annual basis, which will leave C and D tranches to be mostly impacted adversely by the preferred characteristic in the Series E stock.Under the circumstance of an IPO, tranches C, D and E will convert to common at their negotiated prices while A & B will be redeemed.However, on the flip side, the price offered by RSC and TCV consortium was $6, which was importantly higher than the first three tears of financing (tranches A,B and C) at $1.05 and final round (tranche D) at $1.62. PCPT instrument was created to enable the consortium to mitigate the risks in the event of a sale/liquidation that would be of the founders interests andvalue destroying.CellTechs valuation of $115 million was certainly attractive for a company bid Metapath with a revenue run rate of $25.6 million. However, this represents approximately 30% of the only capitalisation. The willingnes s from CellTech to sacrifice such a large amount of capital indicates that all CellTech genuinely believed that Metapath would contribute significantly to the synergies to the NewCo or there could be unsymmetrical information hidden from the management. It signalled CellTechs underlying business might endure expressage upside. This issue needs to be further investigated if offer is trustworthy from CellTech.In addition, CellTechs balance sheet indicated ongoing liquidity and financing risks. As we can see from the table below, the company continued to face liquidity pressure where its cash ratio and quick ratio deteriorated over the course from 1995 to 1997. CellTech had six consecutive quarters in operation(p) loss, which indicated that its unhealthy operating cash flow ratio.Doubts were raised whether CellTech was a good strategic fit to Metapaths business model. This is due to the fact that CellTechs products were mostly hardware-based and installed in the field with cellula r base stations, whereas Metapaths products largely consisted of software travel rapidly on standard server platforms in the wireless switching office. The only benefit gauged regarding this point was that some of CellTechs engineers could potentially be reusable to Metapaths development group.5. CONCLUSIONSThe recommendation for Metapath is to take the offer from RSC and TCV consortium. Even though CellTech has performed well since the IPO and bullish views from the stock analysts, its potential information unbalance issues and liquidity risk could harm the value of Metapath post acquisition. The limited strategic fit is also of our concern, which might constrain Metapaths growth potential. With our ambition to lead Metapath to IPO, we see RSC and TCV consortium as a better fit in this case. Tranches A and Bsinterests will be defend through their initial capital structures. Tranches C and Ds interests will be diluted however it enables Metapath to continue its growth momentum wi th limited downside.