ROSETTA STONE: pricing the 2009 IPO

timer Asked: Oct 15th, 2017
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ROSETTA STONE: PRICING THE 2009 IPO We are changing the way the world learns languages. —Tom Adams Introduction In April 2009 Rosetta Stone management was considering an initial public offering of Rosetta Stone stock during one of the most difficult periods in market and capital-raising history. Rosetta Stone provides an unique language-learning strategy and was a pioneer in developing a whole new market in language-learning. Their strong financial performance allowed them to consider going public during a difficult financial period. At the time of this case, managers are in the process of valuing the stock using various corporate valuation strategies, and making the decision on whether to go public. Purpose In development of this case, students will review the institutional aspects of the equity issuance transaction, explore the costs and benefits associated with initial public share offerings, develop an appreciation for the challenges of valuing unseasoned firms, develop corporate valuation skills, specifically using market multiples, and evaluate related the financial anomaly of IPO underpricing. Case It was mid-April 2009. Tom Adams, president and CEO of Rosetta Stone, Inc. (Rosetta Stone), the language learning software company, reached for his iPhone to contact Phil Clough of private equity fund ABS Capital. Adams and Clough had been discussing plans to take Rosetta Stone public for some time. The wait was finally over. In the wake of the 2008 financial crisis, the market for initial public offerings (IPOs) evaporated. By early spring the market was showing its first encouraging signs. Just a week prior, Chinese online videogame developer had listed on the NASDAQ at a price to EBITDA of 6.5 times followed by a one-day jump of 25%, and the online college Bridgeport Education was currently circulating its plans to go public at a range of 10 to 12 times EBITDA. Having received preliminary approval of its registration filings with the U.S. Securities and Exchange Commission (SEC), Rosetta Stone was authorized to sell 6.25 million shares, a 30% stake in the company. Exhibits 1 and 2 provide financial statements from Rosetta Stone’s IPO prospectus, required by the SEC to inform investors about the details of the equity offering. Half of the shares were to be new shares and the other half were shares to be sold by existing shareholders. Rosetta Stone management had circulated an estimated price range of $15 to $17 per 1 share, representing a price to EBITDA of about 8 times. Demand for the shares was strong, and some analysts believed that Rosetta Stone was leaving money on the table. Yet with world financial and product markets still in turmoil, there was a strong case to be made for prudence. Economic Conditions The previous year had been a dramatic one for the world economy. Prices on global credit and equity markets had been in free fall. The U.S. equity market was down over 50% from its peak in October 2007 (see Exhibit 3 for details of the recent price history of U.S. equity market returns in total and for select industries). The collapse of world financial markets had preceded deterioration in economic activity worldwide, including dramatic shifts in real estate values, unemployment levels, and discretionary consumer spending. The severity of economic conditions had prompted massive intervention by world governments with dramatic policy changes, particularly by the U.S. federal government. The economic and political conditions were frequently compared with those of the Great Depression of the 1930s. In February and March of 2009, there had been some evidence of improvement in financial and economic conditions. Wholesale inventories were in decline. New-home sales were beginning to rise. The equity market had experienced a rally of over 20% in recent weeks. Yet many money managers and analysts worried that such economic green shoots were only a temporary rally in a longer-running bear market. There was strong concern that the magnitude of government spending would spur inflation in the U.S. dollar. GDP growth was still negative, corporate bankruptcy rates and unemployment were at historic highs, and many believed the economic void was just too big for a quick recovery to be feasible. A Wall Street Journal survey of U.S. economists suggested that the economy was expected to generate positive growth in the last half of 2009.1 In contrast, a survey of U.S. corporate executives stated that less than a third of respondents expected to see an economic upturn in 2009.2 The debate regarding the economic future of the world economy raged on. Rosetta Stone In the 1980s, Allen Stoltzfus, an economics professor, real estate agent, and history buff, was frustrated with his slow progress in mastering the Russian language. He was enrolled in a conventional classroom Russian course but found it much less effective than the process he had used to learn German while living in Germany years before. Seeking to produce a more natural language learning method, Stoltzfus envisioned using computer technology to simulate the way people learn their native language—with pictures and sounds in context. Rather than learning the language by translating one language to another, his approach would be to use electronic technology to encourage people to think in the target language from the beginning. He sought the aid of his brother-in-law, John Fairfield, who had received graduate training in computer science. Together they explored the concept of how a computer could be made to facilitate language 1 2 Phil Izzo, “Obama, Geithner Get Low Grades From Economists,” Wall Street Journal, March 11, 2009. “Economic Conditions Snapshot, March 2009: McKinsey Global Survey Results,” McKinsey Quarterly, March 2009. 2 learning. Stoltzfus and Fairfield founded Fairfield Language Technologies in Harrisonburg, Virginia, in 1992. The emergence of CD-ROM technology in the 1990s made the project feasible. The company released its first retail language training software product in 1999 under the name Rosetta Stone.3 The Rosetta Stone series of CD-ROMs provided users an effective way of learning new languages. The software utilized a combination of images, text, and sound to teach various vocabulary terms and grammatical functions intuitively by matching images with the spoken word. Following the way children learn their first language, the company called this method of teaching languages the Dynamic Immersion method: “dynamic” because digital technology and the teaching method powerfully engaged the learner in an interactive learning process, and “immersion” because learners anywhere, from any language background, started at the very beginning and studied exclusively in the target language. A recent research study provided scientific evidence that the language test scores of students that completed 55 hours of Rosetta Stone training performed comparably to those who had completed an entire semester of a good quality college language course.4 Rosetta Stone users were broadly satisfied with the experience and regularly recommended the software to others. After focusing initially on school and government sales, the company began aggressively pursuing the retail market in 2001. Following the death of Stoltzfus in 2002, the company hired an outsider, 31-year-old Tom Adams, as chief executive. Adams brought an international dimension to the small-town, rural company: A native of Sweden who had grown up in England and France, he was fluent in Swedish, English, and French. He had studied history at Bristol University in the United Kingdom and had earned an MBA from INSEAD in France. Prior to arriving in Harrisonburg, Adams had been a commodity merchant in Europe and China. Adams got right to work by entering new markets and scaling up the current business; from 2004 to 2005, the revenues of the company nearly doubled. Acknowledging the need for capital and professional support as the company expanded, Adams solicited a capital infusion from the private equity market. In 2006, two firms, ABS Capital Partners and Norwest Equity Partners, made major equity investments in the company. As part of the recapitalization, the name of the company was changed from Fairfield Language Technologies to Rosetta Stone, Inc., to match the signature product. Over the ensuing two years, revenue continued to expand aggressively, more than doubling from 2006 through 2008. Since Adams’s arrival, the compound annual growth rates of Rosetta Stone’s revenue and operating profit were at 70% and 98%, respectively, and the company employed over 1,200 people. By early 2009, Rosetta Stone was the most recognized language learning software brand in the world. Millions of language learners in more than 150 countries were using the Rosetta Stone software. The company offered self-study language The name Rosetta Stone referred to a black basalt tablet discovered in 1799 by a French engineer in Napoleon’s army near the Egyptian town of Rosetta. The tablet contained an inscription of a single text in three languages—two Egyptian scripts (hieroglyphic and demotic) and ancient Greek—thus enabling 19th century scholars to decipher Egyptian scripts conclusively for the first time. 4 Roumen Vesselinov, “Measuring the effectiveness of Rosetta Stone,” working paper, City University of New York, January 2009. 3 3 learning solutions in 31 languages to its customers. (Exhibit 4 lists the language training software currently offered by the company.) In 2008, approximately 80% of Rosetta Stone revenue was accounted for by retail consumers, 20% by institutions. Institutional customers included educational institutions, government and military institutions, commercial institutions, and notfor-profit institutions. In a few short years, Rosetta Stone had successfully developed a strong brand; its kiosks with bright yellow boxes had become an institution in U.S. airports, and its print advertising in travel publications included a popular print ad of a young farm boy holding a Rosetta Stone box, the copy reading, “He was a hardworking farm boy. She was an Italian supermodel. He knew he would have just one chance to impress her.” The unaided awareness of the Rosetta Stone brand was over seven times that of any other language learning company in the United States. Leveraging a strong brand, steady customer base, and diverse retail network, Rosetta Stone had maintained positive profitability in 2008 despite the severe economic downturn and, in both average orders of bundled products and services and in units sold, even had experienced increases. The company expanded its product line by increasing the number of languages and levels offered and broadened the language learning experience by introducing Rosetta Studio and Rosetta World. Rosetta Studio allowed each Rosetta Stone learner to schedule time to chat with other learners and with a native-speaking coach to facilitate language practice, motivation, and confidence. Rosetta World connected a virtual community of language learners to practice their skills through a collection of games and other dynamic conversation opportunities. Adams envisioned a substantial growth trajectory for the company with a multitude of ways to leverage its novel learning technology and expand its geographic reach. With a fixed development cost, Adams expected the strategy to continue to increase company operating margins and expand revenue, but he recognized that, as the company continued to show strong profit and growth, the incentive for competition to attempt to gain market share would intensify. Exhibit 5 provides three video excerpts of an interview with Adams in which he describes the future of Rosetta Stone. Industry Overview The worldwide language learning industry was valued at more than $83 billion, of which more than $32 billion was for self-study learning, according to a Nielsen survey. The U.S. market, from which Rosetta Stone generated 95% of its revenue, was estimated to be more than $5 billion for total language learning and $2 billion for self-study learning. The total language learning market was expected to expand as proficiency in multiple languages was becoming increasingly important due to trends in globalization and immigration. The self-study market, particularly through electronic delivery, was expected to dominate the industry expansion given that self-study was increasingly accepted by language learning and travel enthusiasts. The language learning industry had historically been dominated by specialized language schools that taught languages through conventional classroom methods. The largest player in the market was privately held Berlitz International. Berlitz taught languages in its classrooms using 4 the Berlitz Method of Language Instruction, which advocated immersion in the target language, among other things, and according to company literature, offered programs and services through more than 470 centers in over 70 countries. Auralog, a French company, was another important competitor in the industry. Both Berlitz and Auralog offered electronic software packages that provided quality language training software. As had the Rosetta World product, businesses such as LiveMocha, Babalah, and Palabea had also adopted a social media approach, connecting language learners through the Internet, but these sites tended to be secondary enrichment sources for language learners. Major software companies with deep pockets represented the most important potential threat. Although the novelty of Rosetta Stone’s approach shielded it from many of the existing players in the industry, the entry of a company such as Apple or Microsoft into the language learning market had the potential to thwart Rosetta Stone’s aspiration of dominating global language learning. Pricing the Rosetta Stone IPO Adams had a preference for a strong balance sheet and cash position for the company. As a private company, corporate investment was limited by the amount of capital the company could borrow from private sources. With constrained resources, Adams was concerned that Rosetta Stone was an attractive takeover target for a company with the needed resources. Led by Phil Clough at ABS Capital, the private equity investors were anxious to recognize the gains achieved through the Rosetta Stone investment. In March, the board had discussed the matter and yielded the IPO decision to Adams. Despite the uncertainty of taking a relatively young company public in the most volatile markets in decades, Adams was inclined to move forward with the deal. The fourth quarter financials continued to show impressive performance, with a 53% expansion in revenue despite the global economic contraction. (Exhibit 6 details the historical financial performance of the company along with historical internally generated values of Rosetta Stone shares.) Advisors at Morgan Stanley had shared their view that Rosetta Stone was one of only a handful of companies that currently had a shot at a successful IPO. Senior management had been preparing the systems and organization of the company for public company status for years. Adams saw the IPO event as significant opportunity to establish business credibility and build the Rosetta Stone brand in a global marketplace. His decision was to launch. Over the following week or two, senior management and bankers visited prospective investors on the east and west coasts of the United States and in Europe. The investor response was highly enthusiastic, with investors commonly asking to “max out” their allocation in the deal. By the end of the road show, Morgan Stanley reported that the book was more than 25 times oversubscribed, meaning that the underwriters maintained orders for 25 shares for every Rosetta Stone share being offered in the deal. 5 Adams was delighted that many investors appeared to share his vision of Rosetta Stone’s unique capacity to play a substantial role in the global language learning market. Such a trajectory implied revenue growth rates of 20% to 35% for some time. Other analysts were more skeptical, predicting revenue growth of around 15% for the next five years and then tapering down to a longterm growth rate of 3% to 4%. Adams believed that the operating leverage in the organization allowed margins to continue to improve for some time; others believed that competitive pressure would soon drive margins down. (Exhibit 7 provides one view of how the financials were expected to play out in the years to come.) In the debt market, Rosetta Stone faced a prevailing borrowing rate of about 7.5%. The marginal corporate tax rate for the company was 38%. Exhibit 8 details the current ownership structure of the company and details the new shares to be sold in the offering, which would grow the total number of shares outstanding from 17.2 million to 20.3 million.5 Comparable multiples played an important role in the valuation of IPO firms. Exhibit 9 provides financial data on a broad set of industry comparable firms. Adams liked K12 Inc. as a comparable match, but acknowledged that no other firm perfectly matched Rosetta Stone’s business strategy, skill set, risk profile, or growth potential. Still, there was some debate regarding whether Rosetta Stone would be positioned as a technology company or an educational company. See Exhibit 5 for a link to video excerpts of Adams and Clough discussing this topic. Please address the following discussion questions and submit your answers to Canvas by 11:59pm on October 15th. Be sure to include names of all the group members in your file and each group only needs to submit one copy. 1. What are the advantages and disadvantages of Rosetta Stone going public? 2. What are the steps of an initial public offering? 3. What is a roadshow? What is book-building? 4. Compute a valuation of Rosetta Stone using the market-multiples approach. Please use the financial data in year 2008 and compute the price per share for Rosetta Stone based on the Price/EPS of K12 Inc, the average Price/EPS of For-profit Education industry, the average Price/EPS of Internet industry, and the average Price/EPS of Software industry, respectively. (The market-multiples for comparable firms are listed in Table 9) 5. Discuss the pros and cons of the market-multiples approach. 5 To avoid the dilution of the value of securities of pre-IPO investors, it was appropriate in pricing IPO shares to divide the total premoney equity value of the firm by the premoney shares outstanding. In the case of Rosetta Stone, the number of premoney shares outstanding was 17.19 million. Since the pre-IPO investors held claim on the ongoing business, a valuation based on the ongoing business represented a premoney valuation. Valuations based on postmoney shares required adding the value of the new IPO shares to the ongoing business valuation prior to dividing by the postmoney shares. 6 6. Discuss, and justify your recommended offer price for the Rosetta Stone IPO. That is, recommend an offer price for this firm and try to justify your recommendation based on your calculations in #4, the firm's current and expected performance, the market condition, and/or any other factors that you think are important to IPO pricing. Grading Rubrics: Excellent performance Good performance Acceptable performance Poor performance Application of theoretical concepts (25%) Team members demonstrated a thorough understanding of key concepts and were able to apply them all correctly Team members demonstrated a fairly thorough understanding of key concepts and were able to apply most of them correctly Team members' understanding of key concepts was uneven or incomplete, so several key concepts were not applied correctly Team members lacked an understanding of key concepts and were unable to apply them correctly Interpretation of financial data and documents (25%) Team members clearly understood the meaning and significance of the financial documents and used the data correctly Team members understood the meaning and significance of the financial documents fairly well and used the data correctly, for the most part Team members' understanding of the meaning and significance of the financial documents was uneven or incomplete, so the data was not used entirely correctly Team members lacked an understanding of the meaning and significance of the financial documents and were unable to use the data effectively Accuracy of financial calculations (25%) All financial calculations were completely correct Most financial calculations were correct Roughly half of the team's financial calculations were incorrect Most of the team's financial calculations were incorrect Team members' answers reflected a fairly thorough understanding of the issues; most team members were able to explain and defend their team's recommendations Collectively, team members were unable to demonstrate a clear and consistent understanding of the issues; overall, team members were able to explain and defend their team's recommendations Collectively, team members lacked a clear and consistent understanding of the issues so they were unable to provide any appropriate, meaningful recommendations All team members' answers reflected a thorough Quality of understanding of the recommendations issues; all team (25%) members were able to explain and defend their team's recommendations 7 Exhibit 1 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Income Statement (in thousands of dollars)6 2004 Revenue 2005 $25,373 $48,402 Cost of revenue 2006 2007 2008 $91,570 $137,321 $209,380 3,968 8,242 12,744 20,687 28,676 21,405 40,160 78,826 116,634 180,704 11,303 22,432 46,549 65,437 93,384 1,833 2,819 8,158 12,893 18,387 0 0 12,597 0 0 6,484 8,157 16,732 29,786 39,577 Lease abandonment 0 0 0 0 1,831 Transaction-related expenses 0 0 10,315 0 0 Total operating expenses 19,620 33,408 94,351 108,116 153,179 Income from operations 1,785 6,752 –15,525 8,518 27,525 Interest income 84 38 613 673 454 Interest expense 0 0 –1,560 –1,331 –891 120 134 63 154 239 204 172 –884 –504 –198 1,989 6,924 –16,409 8,014 27,327 66 143 –1,240 5,435 13,435 1,923 6,781 –15,169 2,579 13,892 0 0 –159 –80 0 $6,781 –$15,328 $2,499 $13,892 Gross profit Operating expenses: Sales and marketing Research and development Acquired in-process research and development General and administrative Other income and expense: Other income Interest and other income (expense), net Income before income taxes Income tax expense (benefit) Net income Preferred stock accretion Net income attributable to common stockholders $1,923 Data source: Rosetta Stone preliminary prospectus (Form S-1/A, filed March 17, 2009), U.S. SEC. 6 Depreciation and amortization expense was reported as $6.5, $7.8, and $7.1 million, respectively, for 2006, 2007, and 2008. 8 Exhibit 2 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Balance Sheet (in thousands of dollars) As of December 31 Assets 2007 2008 Cash and cash equivalents $22,084 $30,660 Accounts receivable 11,852 26,497 Inventory, net 3,861 4,912 Prepaid expenses and other current assets 3,872 6,598 Deferred income taxes 848 2,282 Total current assets 42,517 70,949 Property and equipment, net 13,445 15,727 Goodwill 34,199 34,199 Intangible assets, net 13,661 10,645 Deferred income taxes 6,085 6,828 Other assets 469 470 Total assets 110,376 138,818 Liabilities and stockholders’ equity Accounts payable 4,636 3,207 Accrued compensation 4,940 8,570 Other current liabilities 11,421 21,353 Deferred revenue 12,045 14,382 Current maturities of long-term debt 3,400 4,250 Total current liabilities 36,442 51,762 Long-term debt 9,909 5,660 Deferred revenue 894 1,362 Other long-term liabilities 6 963 Total liabilities 47,251 59,747 Commitments and contingencies 5,000 0 Common stock outstanding 51,038 56,038 Additional paid-in capital 8,613 10,814 Accumulated income (loss) –1,470 12,422 Accumulated other comprehensive loss –56 –203 Total stockholders’ equity 58,125 79,071 Total liabilities and stockholders’ equity $110,376 $138,818 Data source: Rosetta Stone prospectus. 9 Exhibit 3 ROSETTA STONE: PRICING THE 2009 IPO Value of $1 invested in January 1998 Source: Created by case writer with data from Morningstar. 10 Exhibit 4 ROSETTA STONE: PRICING THE 2009 IPO Language Coverage of Rosetta Stone Products (2008) Instructional software Level 1 Level 2 Level 3 Arabic Chinese (Mandarin) Danish Dutch English (UK) English (U.S.) Farsi (Persian) French German Greek Hebrew Hindi Indonesian Irish Italian Japanese Korean Latin Pashto Polish Portuguese (Brazil) Russian Spanish (Latin America) Spanish (Spain) Swahili Swedish Tagalog Thai Turkish Vietnamese Welsh • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Audio companion Version 1 Version 2 Version 3 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Data source: Rosetta Stone prospectus. 11 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Exhibit 5 ROSETTA STONE: PRICING THE 2009 IPO Video Exhibit Links Video Exhibit 1. What is the future for Rosetta Stone? Interview with Tom Adams, CEO, Rosetta Stone, Inc. ( Video Exhibit 2. What does it take to go public? Interview with Tom Adams, CEO, Rosetta Stone, Inc. ( Video Exhibit 3. What kind of business is Rosetta Stone? Interview with Tom Adams, CEO, Rosetta Stone, Inc. and Phil Clough, Managing General Partner, ABS Capital Partners ( 12 Exhibit 6 ROSETTA STONE: PRICING THE 2009 IPO Rosetta Stone Historical Financial Performance, 2006 to 2008 (in thousands of dollars except percent and share value) 2006 Revenue Revenue growth 2008 91,570 137,321 209,380 89% 50% 52% 1,290 16,318 34,625 1.4% 11.9% 16.5% Total debt 13,309 9,910 Total equity 58,125 79,071 71,434 88,981 1.92 2.24 11.9% 30.9% $11.19 $17.49 EBITDA EBITDA margin Total capital Capital turnover Return on capital Estimated share value1 1 2007 $6.08 Estimated by Rosetta Stone board of directors based on multiple of EBITDA for industry comparables. 13 -14- UVA-F-1613 Exhibit 7 ROSETTA STONE: PRICING THE 2009 IPO Financial Forecast for Rosetta Stone (in millions of dollars) Revenue growth Gross margin SGA exp / revenue R&D exp / revenue Capital expenditures NPPE turnover NWC turnover Revenue Gross profit SGA expense R&D expense EBIT Net working capital Net PPE 2008A 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 52.5% 86.3% 63.5% 8.8% 35.0% 86.0% 63.5% 9.0% 35.0% 86.0% 63.5% 9.0% 30.0% 85.0% 63.0% 8.5% 25.0% 84.0% 63.0% 8.5% 23.0% 83.0% 62.5% 8.5% 21.0% 82.0% 62.5% 8.5% 18.0% 81.0% 62.5% 8.0% 13.0% 80.0% 62.5% 8.0% 10.0% 79.0% 62.5% 8.0% 5.0% 78.0% 62.5% 8.0% 7.0 13.5 8.9 5.0 15.0 9.0 8.0 15.2 9.0 9.0 15.4 9.0 9.5 15.6 8.5 10.0 15.8 8.5 11.0 16.0 8.0 11.0 16.2 8.0 9.0 16.4 8.0 8.0 16.8 8.0 5.0 17.3 8.0 209.4 180.7 133.0 18.4 29.4 282.7 243.1 179.5 25.4 38.2 381.6 328.2 242.3 34.3 51.5 496.1 421.7 312.5 42.2 67.0 620.1 520.9 390.7 52.7 77.5 762.7 633.1 476.7 64.8 91.5 922.9 756.8 576.8 78.4 101.5 1,089.0 882.1 680.6 87.1 114.3 1,230.6 984.5 769.1 98.4 116.9 1,353.6 1,069.4 846.0 108.3 115.1 1,421.3 1,108.6 888.3 113.7 106.6 23.4 15.7 31.4 18.8 42.4 25.1 55.1 32.2 73.0 39.7 89.7 48.3 115.4 57.7 136.1 67.2 153.8 75.0 169.2 80.6 177.7 82.2 SGA exp: Selling, General and Administrative Expenses. Source: Case writer analysis. UVA-F-1613-15Exhibit 8 ROSETTA STONE: PRICING THE 2009 IPO Principal and Selling Stockholders (in thousands except percent) Shares owned Name of beneficial owner prior to offering Entities affiliated with ABS Capital Partners 7,556.1 44.0% Norwest Equity Partners VIII 4,940.0 28.7% Tom Adams (President, CEO) 743.7 4.3% Eric Eichmann (COO) 146.3 0.9% Brian Helman (CFO) 91.0 0.5% Greogory Long (CPO) 106.2 0.6% Michael Wu (General Counsel) 45.5 0.3% Patrick Gross (Director) 20.7 0.1% John Coleman (Director) 16.2 0.1% Laurence Franklin (Director) 16.2 0.1% Other owners 3,507.6 20.4% New IPO shares Total shares 17,189.5 Source: Rosetta Stone prospectus. 15 Shares offered in IPO 1,889.6 1,235.4 3,125.0 6,250.0 UVA-F-1613-16Exhibit 9 ROSETTA STONE: PRICING THE 2009 IPO Financial Data for Industry Comparables1 Recent Price For-profit education Apollo Group, Inc. American Public Education Inc. Corinthian Colleges, Inc. Career Education Corp. Capella Education Strayer Education DeVry Inc. ITT Educational Services Inc. K12 Inc. Grand Canyon Education, Inc. New Oriental Ed. & Tech. Group, Inc. 63.81 37.56 16.88 21.05 50.34 168.01 42.47 101.6 15.29 14.72 50.33 Number of shares (in millions) 160.15 18.06 86.45 90.09 16.69 13.88 71.64 38.56 28.86 45.47 149.19 Debt (in millions) Beta Revenue growth 0.0 0.0 31.9 1.7 0.0 0.0 20.0 150.0 13.7 32.1 0.0 0.60 NA 0.75 0.70 0.55 0.55 0.55 0.60 NA NA 1.20 15% 55% 16% –2% 20% 25% 17% 17% 61% 62% 43% Income growth 491% 54% 78% 9% 32% 24% 33% 45% 44% 126% –3% Price/EPS 2008 2009 19.2 14.5 42.4 29.3 28.7 18.1 19.5 20.0 31.5 23.4 33.2 25.8 23.2 17.5 19.0 13.6 18.3 35.4 NA 24.3 32.9 24.5 EV/EBITDA 2008 2009 9.7 7.2 20.5 13.8 11.6 7.8 6.8 6.8 13.4 10.3 17.8 14.1 12.5 9.6 10.1 7.4 13.4 8.7 30.2 11.5 23.8 17.2 EV/EBITDA is enterprise value/EBITDA. Data source: SEC filings, Value Line Investment Survey, and other analyst reports. 1 The reported multiples are based on the same valuation numerator but with 2008 actual profits or 2009 expected profits, respectively. UVA-F-1613-17Exhibit 9 (continued) Financial Data for Industry Comparables Internet Activision Blizzard, Inc., Inc. Dice Holdings Inc., Inc. eBay Google GSI Commerce TechTarget Inc. WebMD Health Corp. Electronic Arts Inc. Yahoo! Inc. Software Adobe Systems ArcSight Inc. Intuit Microsoft Omniture Symantec McAfee Inc. Vmware Inc. Recent Price Number of shares (in millions) Debt (in millions) Beta Revenue growth Income growth $10.03 74.71 3.2 1.3 14.32 379.5 14.93 2.38 25.58 19.16 14.02 1,359 429 62.21 97.36 1,287.81 315.25 47.93 41.75 57.58 322 1,393.35 $0.0 74.0 60.2 2.1 0.0 0.0 195.9 0.0 0.0 0.0 0.0 NA 1.10 NA 1.65 1.15 0.90 1.15 1.45 0.85 0.90 1.00 124% 29% 9% 8% 11% 31% 29% 20% 15% 15% 3% 340% 24% 2% 63% –22% 9% –2% –117% 114% 55% –78% Price/EPS 2008 2009 18.5 17.2 53.8 47.9 12.3 25.7 NA NA 12.8 17.1 23.6 20.7 NA NA NA NA 45.8 46.0 NA 24.1 32.6 37.3 23.64 14.15 25.35 18.83 13.54 37.36 16.47 34.49 29.6 524.27 31.5 320.53 8891 75.05 122.43 819.92 153.72 389.86 350.0 0.0 998.1 0.0 13.2 0.0 1,766.0 0.0 450.0 1.20 NA 0.90 0.80 1.30 1.20 0.90 1.00 NA 13% 34% 15% 18% 107% 44% 5% 22% 42% –41% 509% 9% –32% 37% 93% –234% 77% 62% 14.9 NA 19.5 10.2 NA NA 9.4 26.1 27.1 Data source: SEC filings, Value Line Investment Survey, and other analyst reports. 22.9 52.8 16.2 12.0 NA 57.7 9.5 24.1 33.9 EV/EBITDA 2008 2009 6.9 6.9 27.1 23.6 4.5 6.9 NA 91.1 7.0 8.1 13.2 11.3 12.2 10.6 8.8 11.3 18.1 16.4 NA 11.5 10.2 10.3 8.6 39.2 9.2 5.9 16.4 35.0 4.7 12.3 21.0 12.6 21.8 7.9 6.8 9.6 20.7 4.9 10.1 23.8 UVA-F-1613-18Exhibit 9 (continued) Financial Data for Industry Comparables For-Profit Education Apollo Group, Inc. Education programs for working adults at the high school, undergraduate, and graduate levels, online and on-campus through subsidiaries. American Public Education Inc. Online postsecondary education degree programs and certificate programs including national security, military studies, intelligence, homeland security, criminal justice, technology, business administration and liberal arts; primarily serves military and public service communities. Corinthian Colleges, Inc. Private, for-profit postsecondary education degree programs in healthcare, electronics, and business. Career Education Corporation North American private, for-profit postsecondary education in information technologies, visual communication and design technologies, business studies, and culinary arts. Capella Education Company Online postsecondary education services company; doctoral, master’s and bachelor’s programs through their subsidiary. Strayer Education, Inc. Holding company of Strayer University, which offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, and public administration to working adults. DeVry, Inc. North American higher education programs, offering associate, bachelor’s and master’s degree programs in technology; healthcare technology; business, and management; also offers online secondary education to school districts and medical education. ITT Educational Services, Inc. Technology-based postsecondary degree programs in the United States. K12 Inc. Technology-based education company; proprietary curriculum, software and educational services created for online delivery to students in kindergarten through 12th grade. Grand Canyon Education, Inc. Online undergraduate and graduate degree programs in education, business, and healthcare. New Oriental Education & Foreign language training and test preparation courses in the United States and the Technology Group, Inc. People’s Republic of China; development and distribution of primary and secondary educational content and technology. Data source: Adapted from company sources. 18 UVA-F-1613-19Exhibit 9 (continued) Financial Data for Industry Comparables Internet Activision Blizzard, Inc. Interactive entertainment software and peripheral products., Inc. Diversified online retailer with emphasis on books. Dice Holdings Inc. Career services and recruiting., Inc. Online drugstore. eBay Inc. Online trading community. Google Inc. Web-based search engine and global technology company. GSI Commerce, Inc. E-commerce business developer/operator. TechTarget Industry-specific portal operator. WebMD Health Corp. Health information services for consumers, physicians, healthcare professionals, employers, and health plans. Electronic Arts Inc. Interactive entertainment software and peripheral products. Yahoo! Inc. Internet media company providing Web navigation, aggregated information content, communication services, and commerce. Software Adobe Systems Incorporated Computer software products and technologies. ArcSight, Inc. Security and compliance management solutions. Intuit Inc. Business and financial management software solutions. Microsoft Corporation Operating system software, server application software, business and consumer applications software, software development tools, and Internet/intranet software; also video game consoles and digital music entertainment devices. Omniture, Inc. Online business optimization software., Inc. Application services that permit sharing of on-demand customer information . Symantec Corporation Security, storage, and systems management solutions. McAfee Inc. Computer security solutions. VMware Inc. Virtual infrastructure solutions. Data source: Adapted from company sources. 19

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ROSETTA STONE: Pricing the 2009 IPO
ROSETTA STONE: Pricing the 2009 IPO


ROSETTA STONE: Pricing the 2009 IPO
Question 1 Answer
The advantages of Rosetta going public include; the concerned process is capable of
allowing the firm to do an expansion of the business through using capital since the companies
sell equity so as to make profits. Such kind of expansion is also quite important for a business to
get into the new markets so as to internalize and build the brand. It could also benefit from
enhancing its reputation and corporate image. As for the disadvantages, it takes a three months
minimum, making young firms to be at risks of profit and loss. The process is also expensive and
legally is made up of printing and accounting costs, which have to be paid regardless of failures
or success of the entire process (Dempsey 21).
Question 2 Answer
The steps of an initial public offering include; having a reliable and trusted management
team; being ready with the financial systems for reporting; choosing the investment bankers;
writing the story of the company; registering with SEC; Starting the roadshow; pricing the IPO
and finally getting ready to be a company that is publicly owned.
Question 3 Answer
A road show is a process through which a company meets its prospective investors through
traveling and attending many press conferences, meeting and vi...

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