Finance Case Questions - Spatial technology Inc

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FINANCE CASE QUESTIONS
Table of ContentsINTRODUCTION...........................................................................................................................3MAIN BODY...................................................................................................................................3The success or other wise of Spatial's strategy to penetrate the market......................................5Impact of Spatial management team on IPO process is enumerated below................................7At what valuation share price would you recommend to potential investor as a fair price.........8Is Spatial a good investment deal or not....................................................................................11Summarizing Impact of Analysis..............................................................................................12CONCLUSION..............................................................................................................................12REFERENCE.................................................................................................................................14APPENDICES...............................................................................................................................16
INTRODUCTIONFinancial valuation implies for the process which in turn used for determining the presentvalue pertaining to expected future cash flow of assets. In this regard, discounted cash flow(DCF) model is highly significant which assists in estimating investment value referring futurecash flows (Antipin and Khoroshilova, 2016). It emphasizes on assessing expected future cashflow by taking into account discounting rate. Further, IPO (initial public offering) implies for theprocess where shares of the company are sold to institutional investors. Usually, IPO isunderwritten by one or more investment banks for funding purpose. The present report is basedon the case scenario of Spatial technology Inc. which involved in designing and offeringmodelling software as well as applications. In this, report will provide deeper insight about theaspects due to which latest and previous IPO failed to generate interest of investors. Besides this,report will also shed light on Spatial’s strategy in relation to penetrating the market. Report alsodepicts influence of Spatial management team on IPO process.MAIN BODYSince Spatial's inception, the main loan provider of the business was Nazem & Companythat used to receive its paybacks from the business in the form of Series B, C or D financing. InOctober 1987, machine tool industry declined due to stock market as Venture Capitalists (VCs)lost faith in investing with new technologies. In 1988, a 3D Modelling Engine was developedcalled ACIS. This product was facilitate other CAD/CAM Software developers who wouldfurther integrate this into a end-user applications software.Spatial Technology Inc. has undergone a lot of changes since its inception including itscore business model. The company aimed to design, develop and market 3D Modelling Softwarewith targeted Applications. This product was intended to serve the Machine Tool Industry of1986. In September 1986, with an initial capitalization of $1M, seven talented developers andtwo year long development process, the company officially started its operations. The companyalso had a strategic development partnership with Three Space Ltd. which was based in England.Over its initial years, the company carried out two IPOs (Initial Public Offering) which failed togarner much interest from the investors. Out of the two, the first one was held in 1992 whereasthe latest one was held in 1996 (BĂBUŢ, Moraru and DURA, 2015).
IPO 1992:Based on the success of this product, reluctance of investors to supply additional workingcapital, support of customers such as Hewlett Packard (HP) as well as growing industry presenceof Spatial, the company decided to go ahead with the1992 IPO (Baggen and et.al., 2017). Inaddition to this, object-oriented programming also took off in the market with a positive note thatled to ACIS' acceptance in universities and research institutions all around the world. This IPOaimed to generate revenues in three ways:Initial License Fees charged to the software companies;Royalty Fees for those organizations that come under the agreement of end-user softwareintegrating ACIS; andCustomer Support generated revenue for ACIS Users.The company had licensees, specifically in terms of technology with a differentperspective capable of remodelling the entire CAD/CAM Market. The company was unable togo ahead with the plan as:The investors were of the idea that the company had only used their funds to facilitateSpatial's interest in Low-end PC Markets (Burhop, Chambers and Cheffins, 2014).One of the main reason for this failure was that capitalists did not find the managementteam of Spatial Technology Inc. broad enough. The aggressive style of CEO was alsocriticized heavily that led to disagreement between the company and its customers as wellas investors.Customer complaints increased in regards to the stability of ACIS as a product that couldenable safe shipment of ACIS-based applications developed by organizations.After due diligence, the investors concluded that the company was not ready for an IPOyet, it needed a much more stable product that would be able to fulfil the requirements of Low-End PC Markets as well as the Customers or Investors of Spatial Technology effectively(Chemmanur and Fulghieri, 2013). Eventually, the IPO was withdrawn as revenue projectionswere not met on time or as expected.
IPO 1996:The failure of 1992 Initial Public offering had a lot of far-reaching consequences in thelater years of the business. The company was unable to accumulate necessary revenues in theform of Preferred Stock Series D that was only able to garner $1.2M. Left with due lawyerpayments and other outstanding bills added to the woes of the company. By 1995, the companyhad lost $419,000 as a compensation made to the CEO. However,by 1996the company'smanagementwas able toturnaroundmuch of company's situation from negative to positiveespecially from operations point of view. Financially, Spatial was still struggling to keep up withits competitors. The company wanted to continue investing in the new technologies.Spatial's ACIS Product garnered a lot of interest after its stabilization. As a result, thecompany decided to establish it as an industry standard for 3D Modelling. Pursuant of thisrationale, the company published the ACIS File Format known as SAT in Mid-1996 (Gregory,Tharyan and Christidis, 2013).Early 1996 IPO Market exhibited ideal situations for Spatial to consider an Initial PublicOffering as an alternative to solve its financial problems. Themain reasons for IPOalsoincluded:Growing enthusiasm among the banks for company's technology;Spatial's position in the CAD/CAM Market; andExpansion of 3D Markets.The success or other wise of Spatial's strategy to penetrate the marketDuringIPO of 1992, instability of ACIS as a product itself was one of the reasons thatled to withdrawal of IPO, altogether, from investors side as well as loss of huge customers suchas Autodesk from Spatial's business.Personal ACIS was one of the reasons why the customersand investors had become reluctant to invest any more in the company as it served as an enablerfor low-end PC Markets rather than the investors itself. This was in violation of the End-UserSoftware agreement signed by the big investors with Spatial in return for Royalty fees paid to theorganization on their part. Spatial failed miserably at this attempt as all the investors as well as
the customers accused the company for being motivated to encourage their own goals whileignoring their stakeholders as well as customer needs.One of thekey revenue streamfor the company were its Prepaid Revenues that hadbeen effective in the form of an unusual license agreement relating to ACIS signed by theorganization with its investors. This required the targeted customers to pay a one-time lump sumpayment which included a prepaid component along with heavily discounted royalty fees. By1996, this revenue stream also eroded and problems continued to arise as far as developmentprocess was concerned. Not only the company but also its customers such as Bentley Systemsand Autodesk were not able to bring in their ACIS-enabled end user applications to the market inthe stipulated time. This also contributed in receiving lower royalty fee payments from thecustomers.After three years of first IPO falling through, Spatial Technology decided to renewattempts pertaining toIPO in 1996so as to generate more revenues and penetrate into othermarket segments, Spatial Technology introduced another product known as 3D Building Blox.This product catered to the needs of visual programmers as well as developers, specifically,virtual reality, animation, architecture, entertainment, film-making and Internet Applications.The 3D Building Blox would enable developers to create models using basic geometricconstructions as well as facilitate integration of other models generated by company's softwareACIS. The wide coverage from press as well as growing demand for this product established inthe minds of Spatial's management team that it had the capability to become an industrystandard. For achieving this goal, the company required new capital (Hudson , 2015).As far as penetration strategy is concerned, Spatial did not garner much interest neitherfrom the investors nor customers, firstly, because the product itself was unstable and secondlydue to the problems arising in customer relationships. This led to a delay in the applicability ofthe ACIS-based products itself as well as led to a slower penetration of its products in the end-user market as well. This also led to a failed market penetration strategy on the company's partas most of its products did not reach its end-users on time or were not usable due to theirinstability.
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