Metapath free essay sample

Metapath’s capital structure and rounds of financing Analyze Metapath’s capital structure, in particular the various forms and prices of preferred stock from the multiple rounds of financing. How has this capital structure affected the offer from Robertson Stephens? How would RSC’s participating preferred interact with other tranches of preferred stock? The RSC offer of $11. 75 million is more than Metapath has previously raised in all four rounds combined, so RSC is taking on more risk by offering this much funding. Because RSC will be putting up so much cash, RSC is going to want stricter terms to compensate  them for their risk. In addition, Metapath has a high leverage ratio, which adds on to the risk the equity holders are exposed to. Therefore, RSC is proposing a participating convertible preferred stock instrument which allows them to achieve higher payoffs in the upside while still eliminating their downside risk. Additionally, the latest ound of financing (Series D) received the best terms because of the amount of money that was raised. RSC knows that because they are raising even more money than Series D, they should be able to get even better terms than Series D as well. RSC’s participating preferred would not really have any effect on the other tranches of preferred stock except in the case of liquidation. Because RSC has liquidity preference in the event of a sale, if there is a sale then RSC (Series E) will get paid first. RSC will receive the face value and still have the right to participate in further considerations as if RSC had converted into ommon stock. Series A, B, C, and D will only receive their individual percentage of the value that remains after RSC’s liquidity preference has been paid out. Question 2. RSC offer How do you analyze the RSC offer? In particular, what is the value of the participating preferred feature to 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? In order to find the value of the participating preferred feature to the RSC syndicate, we sed the Black- ­? Scholes formula to find the value of the participating preferred option and the value of just a regular preferred convertible option. We then subtracted the value of the convertible option from the value of the participating preferred option. We believe that the value of the participating preferred feature to RSC is worth approximately $4. 29 million (See Appendix 1). One of the main risks of the financing proposed by RSC is that this deal would dilute Metapath’s original shares significantly if a sale occurs in the future. If Metapath Software accepts the RSC offer, one of the main risks to the other hareholders is that in the case of liquidation, RSC will have liquidation preference and receive the amount of money the put in as well as 13. 4% of the remaining value of Metapath. However, other shareholders will get less than they would if RSC did not have a participating preferred feature. Also if the RSC offer is accepted, RSC would essentially get to add another person to the Board of Directors. This allows RSC to have even more control beyond their equity stake. Regarding the reasonableness of RSCs valuation of Metapath, the numbers would be far more reasonable had they looked at more than one forecasted quarter. However, an accurate forecast for such a volatile small- ­? cap tech company is hard to come up with, for which the valuation would not be much more accurate had they forecasted more quarters. Given Metapaths high growth prospects it appears that the valuation is reasonable, but it is hard to confirm its accuracy with the small amount of information provided. 3. CellTech offer 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? CellTech is proposing a strategic merger between CellTech and Metapath nd offering essentially 32% of the merged company to Metapath. From Metapath’s point of view, this is a very attractive offer due to the short- ­? term liquidity that it would provide, as CellTech is valuing Metapath at 115 million, while RCS only valued them at 76 million. In other words, CellTech is valuing Metapath nearly $25 million more than RSC is valuing the software company. The Metapath board should understand that because CellTech went public only a couple of months ago, it will be even more difficult to determine how the stock of the merged company will perform in the future. Also, the board should take into ccount the one board member who was an investor in CellTech and has mixed opinions about the company. Even though analysts seem to be bullish on CellTech stock, the Metapath board members need to take the reports with a grain of salt. According to Hansen and his board, CellTech’s growth prospects are much lower and more uncertain than Metapath’s, so CellTech believing Metapath is only worth around 30% of their total capitalization should not seem justifiable to Hansen. If the board accepts CellTech’s offer, one of the biggest risks for the shareholders is that CellTech’s stock could tank and they could ultimately end p with stock that is worth basically nothing. Additionally, all of the CellTech’s stock would be worth the same. So the investors in Series D will probably be pretty angry that they have the same stock as Series A, B, and C. Lastly even though the CellTech deal itself will not dilute shareholders ownership, the Metapath shareholders will no longer be protected from dilution after the deal happens. CellTech could engage in other actions that would dilute shareholders ownership. Therefore, although the offer appears reasonable at first given how much short- ­? term liquidity it would provide, Metapath would be resigning ontrol of the company to CellTech and diminishing its long- ­? term growth prospects. Despite the $25 million more that Metapath would get now, it sacrifices too much by accepting it to deem it reasonable. However, the lack of information with which the valuation of the company was done makes it hard to assess the legitimacy of the quantitative back- ­? up. Question 4. Conclusion If you were on the Metapath board, which option would you support? If we were in the Metapath board we would support the RSC offer. As shown by the diagram depicted in the following page, the CellTech offer is riskier, which increases the downside or investors. On one hand, the CellTech offer would provide short- ­? term liquidity, something very attractive to Metapath at this point, as it is quickly utilizing all of its cash to grow. However, it takes away the control of the company, the large growth prospects, and exposes Metapath to the risk of the merged companys stock tanking. There is no guarantee that CellTechs stock will keep growing, and while the RSC offer provides less short- ­? term liquidity, it makes more sense long- ­? term. 2 CellTech Pros -Well-priced, short term liquidity (of 115M as opposed to the 76M offered by RSC). Operational benefits: CellTech already has established sales and marketing infrastructure. ] CellTechs engineers could be useful to Metapaths development group. AB investors would gain a higher return than CD investors because of the extra common stock shares of the initial investment terms (only if stock doesnt tank). CellTech Cons Cell Techs stock could tank after the merger. Metapath would no longer be an independent company, which would lower its growth potential. The seniority of the diferent financing rounds would disappear (AB hurt). Questionable prospects: weak past performance, as shown by their income tatement and short public record. Only offering 30% of total capitalization despite growth prospects. RSC Pros Metapath gets to remain an independent company, maintain growth prospects. Anti dillution clauses for A-D still intact in the event of an IPO.