Metapath Case Report Essay

1. PURPOSEThe purpose of this briefing note is to provide recommendations for Metapath software system Corp. (Metapath) on its support stands received in September 1997. These two offers came from 1) a fund consortium led by Robertson Stephens Omega Fund (RSC) and technology Crossover Ventures (TCV) and 2) CellTech Communications (CellTech), a vendor of radio technology which had deep gone IPO.2. EXECUTIVE SUMMARYMetapath has made honourable progress in developing its billet since its inception generating $6.4m revenue in the September hind end of 1997 with representation of three large nodes. yet, with the ambition to win a rock-steady chance of IPO within the next two years, more(prenominal) corking 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 consortium offered to buy $11.75 one thousand thousand of birth at a $76 million pre-money valuation (serial publication E favorite(a)). The proposed parenthood instrument was a participating redeemable stock (PCPT). This instrument functions the same as the convertible preferred stock in the topic of a qualified public offering whereas in the event of a sale, RSC and TCV consortium not only receives the face evaluate of the consideration, but 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 impart reduce the kernel of funds available to the other four tranches from previous investments. If the Metapath goes public, the percentage of self- exit for C & adenosine monophosphate D tranches will be merely dilut ed, by and by 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.Strategic/Business fit between CellTech and Metapath.4. ANALYSISComparing the border sheet of the offer from RSC and TCV consortium to that of CellTech, RSC and TCVs PCPT had a much more dilutive impact to Metapath upon exit.Under liquidation, the term sheet stipulates that the Series E investors is authorise to claim its initial investment of $10.75 million plus any accumulated but unpaid dividend. Any proceeds after this claim will then 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 repossess its initial investment of $5 millions, but also enjoys the convertible benefits.As a result, if the sale occurs before 2000, the profitability for A-D tranches will be negatively impacted by the prefe rred peculiar(prenominal) in the Series E. However if the sale occurs after 2000, A and B tranches will be little by little redeemed 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 significantly higher than the first three rounds 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 relieve the risks in the event of a sale/liquidation that would be of the founders interests and  apprise destroying.CellTechs valuation of $115 million was certainly attractive for a ships company like Metapath with a revenue run rate of $25.6 million. However, this represents or so 30% of the totally c apitalisation. The willingness from CellTech to sacrifice such a large measurement of capital indicates that either CellTech genuinely believed that Metapath would contribute significantly to the synergies to the NewCo or there could be asymmetric information hidden from the management. It signalled CellTechs underlying business might have limited upside. This issue needs to be further investigated if offer is accepted from CellTech.In addition, CellTechs balance sheet indicated on-going liquidity and financing risks. As we can see from the table below, the company continued to face liquidity pressure where its cash ratio and readily ratio deteriorated over the course from 1995 to 1997. CellTech had six consecutive quarters operational 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 cellular base stations, whereas Metapaths products generally consisted of software running on standard server platforms in the wireless switching office. The only benefit gauged regarding this point was that some of CellTechs engineers could probablely be useful 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 asymmetry issues and liquidity risk could harm the value of Metapath smudge acquisition. The limited strategic fit is also of our concern, which might constrain Metapaths process 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 Bs interests will be protected through their initial capital structures. Tranches C and Ds interests will be diluted however it enables Metapath to co ntinue its growth momentum with limited downside.