Entrep Finance and Private Equity 7

This time we had a guest speaker on top of the excellent course, a lady who worked for William Blair (mid-sized investment bank here in Chicago). The theme of the class was the ways to exit a buyout deal. The focus was to contrast selling the company vs. doing an IPO. Unfortunately, the clear and important takeaways are becoming scarce…

The thing I have never thought about was that as a public company you will have to incur additional couple million of $ of extra expenses and this has to be factored into the valuation. I.e. an intelligent investor will add those expenses when preparing the valuation of you as a future public company!

The guest speaker mentioned about a dangerous situation that you can get yourself into after the IPO: slow growth and underperformance. Worst place you can be in: high added costs, signing your life on the financial statements, no access to capital even though public – no analyst covers you, and the cost of equity is high.

The first case discussed was that of the Grand Junction, a venture that invented the desktop switches in 1995. The question was whether to sell to Cisco or do an IPO. The best strategy in that situation was to take the company public and then auction it. The company was needed very much by the three major competitors in that market, and the shareholders in the auction would profit handsomely. However, Goldman didn’t do that, because it just might so happen that they wanted to do a favor to the most acquisitive company in the West Coast.

Talked again about the concept of the “blended” cost of capital. The word blended comes from the effort to preserve intact the concept of WACC, as the only difference between the blended cost of capital and WACC is that WACC implies some target, optimal capital structure, while blended rate is used to value the unlikely venture capital deal, in which there is some amount of debt.