Metapath’s capital structure Essay

Questions1. Analyze Metapaths capital structure, in particular the various forms and bells of preferred transmit from the previous rounds of financing. How has this capital structure affected the scissure from Robertson & Stephens? How would RSCs fighting(a) preferred interact with the some other tranches of preferred stock?Up to the date in issue, Metapath has raised $9m in four rounds of financing, of which two occurred simultaneously in the beginning. The two participating investors, Bessemer and STI, which supplied the initial funds, determined redeemable preferred for the total amount of $1.6m, the trinity and fourth rounds brought in $1m and $7m respectively (in twain cases preferred convertible were issued), with the calculated price for common 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 divinatory to be paid out first, then the last but one, fin every(prenominal)y, the first two issues, on a pro rata basis.All of the issues had demand registration rights provision, however, the third and the fourth issues, had more leeway in the exercising of the rights (not only on request of 50%+ of all the issues, but also after-IPO or specific date (July 31, 1999), whichever is earlier), thus protecting the interests of the holders. That said, in fact the holders of the two first issues in many respects enjoyed the fix of debt holders, with a scheduled payment of principal and dividends.Given the structure and the fact the managers hadnt invested from their own pockets, RSC suggested investment in participating convertible preferred sh ares supposed to protect RSC from manageable early sale, which would enrich the management disproportionally and leave RSC abused. Through PCPT, RSC would be able to keep both liquidation preference (with the right to receive the first payment in the amount of invested capital and accrued, not unpaid dividend (8%), before any other security holders receive their part) and equity participation along with other investors (after payment of similar to its own liquidation preference), thus, staying in a highly beneficial position.2. How do you analyze the RSC offer? In particular, what is the order 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 possible to assess the reasonableness of the valuation? (The ten-year treasury rate in September 1997 was 6.21%).To esteem the participating feature, first, calculate the plectrons values for $11.75% and $87.75 million exercise prices. For calculation, assume ten-year option price 40% volatility (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 true asset value interest rate of 6 .21% (as suggested). Apply Black-Scholes model 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 irrelevant is $81.44*0.134/$49.44=22%, that is concession of 22% of the company without the participation feature will make Series E holders evenly happy, the corresponding price is 0.134/0.22*$6=$3.65 per share.Acceptance by the board of the RSCs offer will put Metapath shareholders will add a new senior holder to claim 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 interdict earnings and absence of predictabl e 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 one hundred thirty million could be used, which means the company might 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 view the Celltech stock? What are the risks for the Metapath shareholders if the board accepts the Celltech offer? While the Celltechs offers seems to be more reasonable in terms of price offered, the shareholder s whitethorn face additional risks, including the risk of Celltechs stock price.While possible liquidity 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 history and the view of insiders doesnt seem to strongly support Celltech). Furthermore, the fit of the Metapath and Celltechs businesses is questionable, with Metapath latent 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 repressing in many ways, it is more attractive for a team that will manage to perform. With a set of potential liquidity and financial risk questions, which may arise from Celltechs financing, Metapath board should not only consider the price, but also other term s (which eventually will incentivize the management in the semipermanent success and keep its interest in business). With this in mind Metapath board will be better off with the RSCs proposal, rather than Celltechs.