Internet Securities, INC: Financing Growth Case Study

Summary of the Case

The Internet Securities Inc. (ISI) is a combined business firm of Garry Muller and his brother George Muller. Its head quarters is situated in Pittsburgh, PA. Their services offered cover Poland and, to a lesser extent, Russia.

“It delivers hard-to-get information on more than 80 emerging markets through its award-winning online Emerging Markets Information Service.” (Subscribe, 2009).

In the initial stage of the business the revenues of the firm grew by 600% from 1995 to 1996, by 330% from 1996 to 1997 and an estimated growth of 114% from 1997 to 1998. Their customer groups include blue chip financial and industrial companies such as Citibank, Deutsche Bank, Motorola and Siemens. The major financial source of ISI is investment bank Donaldson, Lufkin & Jenrette (DLJ). They assisted the firm to raise roughly $12.5 million dollars in new equity. Their business is mainly concentrated on internet- based emerging markets information services. They have wide operating area over 27 countries. Their core product is named as ISI Emerging Markets. Their services attracted several blue chip companies and who contributed over 88% of total business of ISI. In the information service industry ISI created loyal customer base. The stocks of ISI gained public confidence as a better financial investment option. In order to expand the business, professional management techniques including effective sales and marketing techniques were adopted by them.

In the information service industry many firms are facing serious downfall in their business after the initial rapid growth. Compared to such firms ISI established stable business growth through appropriate marketing techniques. Their efficiency in the information technology field together with advanced marketing tactics and financial control ensured continuous growth in the business.

Statement of the Problem

The financing adopted by ISI is capable of ensuring sufficient funding for the operations and the company is generating adequate positive cash flows. The investment bank Donaldson, Lufkin & Jenrette (DLJ) has placed a private placement memorandum before ISI. As per this plan a continuous net loss is forecast for the company until 2001. They identified several causes for the shortfall in the income. Thus the company was required to keep up confidence among the investors by focusing on better operational results. Among the potential investors of the company, there arises lack of confidence in the profitability of the business. Entrepreneurs are required to keep a balance of the different interests of the investors.

Many of the investors including individual and venture capitalists of the ISI were interested in getting liquidity for their investment. Many key ISI employees also had an ownership stake in the company and they also prefer liquidity over the investment. Mueller himself also wanted to realize some of the value of his 18.1% stake with the company. By the end of 1998, however, it became clear that the company did not expect to break even before 2001. In case of high growth internet companies the costs and revenues were difficult to forecast. The increasing cost of operation was the main problem. Most of the costs were underestimated. Thus the real gain from the operations is less than estimated revenue. The actual cost of operation has not been correctly estimated and thus the funding faces challenges. Emerging market crisis is another major problem.

Proposed Solution

ISI had to offer liquidity of their fund. The management has to keep future of the firm secure. Implementing financial controls and a budgeting process have to be fairly straightforward. The cost projections have to be carried out by considering all of the cost factors. In the emerging markets they have to keep hiring the right people and putting the right strategy in place to push sales forward more effectively. ISI was required to hire large number of software developers for assisting their growing business. Relocation strategy had to be adopted for getting broader employee pool.

Learning Application

Insisting on the traditional approaches and methods may affect the financial growth of the companies. Some changes should be implemented in the day to day management of the organization, especially in the financial management, as and when required. Otherwise survival will be difficult as competition is increasing day by day. (E- MGT 657 case analysis unit 1, (n.d.))

Case Study Unit 2

Topic – Leveraged Buy-out (LBO) of Ducati Motor Cycles.

Title: Ramifications of LBO of Ducati by Texas Pacific Group (TPG)

Summary of case

The main issues in this case could be summed up as follows:

1. The Castiglioni brothers are unwilling to forego majority control over their company. Thus, even in the event of a takeover, or LBO, they would sell only 49% stake and retain 51% majority with themselves.
2. Financial records which are needed to wrap up LBO are not available. This has been further complicated by the fact that records of Ducati and its subsidiary, Cagive are intertwined, thus rendering it difficult to project the right figures for determining asset values and profits for the proposed buyout.
3. Corporate laws in Italy are quite different from those existing in the US and the risks of Ducati turning bankrupt after the acquisition are real. Things have been further complicated by the fact that the buying Company, TPG need to provide due diligence in the LBO, which eventually they were able to do. (MGT 657 case studies in global entrepreneurship, (n.d.)).
4. Considering the present critical situation of Ducati, TPG faces a gigantic task of making the loss ravaged company turnaround which is also not very certain. Thus the very proprietory of the LBO is being questioned.

Problem Statement

Considering the various issues facing TPG in its apparent failed LBO of Ducati due to non-response from the selling party, Castiglioni Brothers

Its Ramifications: Motorcycles produced by Ducti are world class and have won laurels in the racing tracks. But, the company was almost broke, unable to pay suppliers for a long time, and was well on the road to bankruptcy. (MGT 657 case studies in global entrepreneurship, (n.d.)).

Proposing a Solution

49% of the stakes may be sold. Another 2% may be sold to an autonomous finance company to be held by them, till such time, Ducati is able to buy this share from them at later stage. In the event Ducati is not able to do so, TPG may acquire this and exercise majority interest over the Company.

Learning applications

LBO’s especially outside the US are not as easy or attractive as it sounds. Local governments’ regulations regarding acquisitions and bankruptcy aside, the sellers may play hard to get, or create obstacles for the buyers, or even renege on the letters of intent as is seen in this case. (MGT 657 case studies in global entrepreneurship, (n.d.)).

It is also seen that the buyer company would too be at risk in the event the LBO divestitured company turns bankrupt after acquition. Thus, it would be better that most LBO can be carried out within US, or even if this is not possible it would be safer to have assets quantified and assessed before a final decision is taken. One of the major aspects in Italy, for instance has been that there are no legal bars on having subsidiaries for privately owned companies, so much so that even privately owned companies having just lires 100 M could have as much as 50 subsidiaries from and to whom funds could be siphoned without legal recourse, being essentially of private nature.

Therefore, it would be best to invest or effect LBO with public limited companies, so as to make widest investment options, acquire good assets and business that have good products, but are stifled due to lack of entrepreneurial abilities, financial or marketing competence, and stage turnabouts that could bring returns on investment (ROI) to the tune of even 60%, or more.

LBO, especially in global business needs to consider a mass of facts and figures before being executed; otherwise eventually situations like Ducati Motors would follow.

Case Study Unit 3

Spotfire: Managing a multinational start up

Summary of the Case

Spotfire is a software developing company having operating unit in Sweden. Their research and development is mainly concentrated in the field of pharmaceutical technology. Their major customers are manufacturing, banking, telecommunications and a range of other industries. Their core products are Spotfire Pro and plug in programs.

In June 24, 1998 Spotfire had changed it temporary offices in Boston to a more modest and permanent location in Cambridge. Dual headquarters were established for the company. The European headquarters is set up at development centre in Goteborg, Sweden and US HQ is situated in Cambridge, Massachusetts. In USA, 8 companies were selected as customers. They had generated $ 100000 in revenues for Spotfire. Half of the total sales of the Spotfire were mainly derived from USA, and in long term outlook it will be the strength market of Spotfire.

Through adding professional management techniques in the marketing operations in USA they gained greater market position in USA within a short period of time. Vertical product marketing strategy was adopted by them. They concentrated specifically on pharmaceutical industry along with related yields of Chemistry and Biology.

Chris Ahlberg is the co founder and CEO of Spotfire. Gnatovich is the newly elected President of the Spotfire. Ahlberg, a young entrepreneur, is very efficient in dealing marketing operations and he is in charge of product development and linking customer feedback. Gnatovich is a well experienced person in management having strong views. He is in charge of development and implementation of sales strategy. Their combined effort made the company a successful business enterprise with high growth and profit potential. Huge potential revenues resulted from the development of new patentable drugs/compounds offered Spotfire a tremendous opportunity in Sweden.

Statement of the Problem

The research and development operations of Spotfire Technologies are carried out in Sweden. But due to limited market potential they concentrated on the US market for their product marketing. In US software markets they faced conventional competition from the existing firms. Along with this funding was another problem as the financial suppliers required Spotfire to build a relationship with US banks. Their interest rate is very high and additional personal guarantee is required for getting finance. In the international start up the lease financing and demonstrating commitment is the major challenge. Alternate demands on departmental budgets are another challenge. The international operations of Spotfire required to effectively co ordinate the development in Sweden and marketing in the United States. In order to achieve success in the software industry, significant tasks had to be planned on the basis of up to date information. For this information flow and getting best possible marketing feedback are required which is a challenge to Spotfire’s international strategy.

Proposing a Solution

For assisting the information flow within the R &D and marketing departments, regular meetings were conducted by them both in Goteborg and Cambridge. Ahlberg had divided his time between the two offices for providing direction and control in the most effective manner. Members of the development teams were rotated through the Cambridge office allowing them to spend time with customers and with the sales team. And this facilitated in getting better awareness among the R&D individuals about the existing market conditions. Despite the considerable expense and time investment Ahlberg felt that the Goteberg/ Cambridge division had its advantages as well.

Learning Application

The discussion on the international start up of Spotfire and their adopted strategies has provided better understanding of the requirements of the effective co ordination of the different functional departments of an international company. In case of Spotfire they adopted the research and development operations in Sweden due to the supportive manufacturing environment such as availability of skilled labor, economical production techniques and easy availability of finance. But due to limited market potential they adopted US markets for their product marketing and this strategy gained them huge growth potential and profitability. Effective and efficient coordination of the different functional departments situated in different countries is the critical success factor in international business.

“Brandenburger & Nalebuff (1993) mention that competitive success comes from a win-win strategy, not from the old win-lose (zero sun game) with other firms. This is a process firms can successfully use with its competitors and its suppliers.” (Jyotsna, 2009, p.1).

Case Study Unit 4

Topic – Case Study in venture capital markets

Title: Challenges confronting Japan American Ventures (JAV) Inc.

Summary of case

Barry Schiffman, newly appointed President and CIO of JAV is besieged with a series of issues that need to be tackled before he transforms the company as a leader in VC business in the US.

The main issues, interalia, are:

1. JAV’s flat managerial compensation package, in line with standard industry norms, to managers who did not provide independent capital – marked as 2.5% Management fees + 10-15% of the earned profits of the fund. (MGT 657 case studies in global entrepreneurship, (n.d.)).
2. Centralizing decision making at Japanese Head Quarters levels led to severe time lags in local investment decision making. While local VC firms took 2 weeks to decide on investment opportunities, at JAV, it took 8 weeks, thus robbing the firm of strategic competitive advantages.
3. High degree of employee attrition due to low pay packages, job dissatisfaction and non delegation of power and authority at local levels.
4. Late stage investments involve higher investments, but seed investments needs highly experienced and technically sound executives.
5. It is imperative for JAV to invest in burgeoning life science market for augmenting its bottom line and growth channels. This needs investments in new personnel in this area, which could possibly lead to divergences with existing personnel over sharing of control in this sphere of VC business. In the event of not finding equitable solutions, this could hamper VC final stage investment programs.

Problem Statement

Considering the various issues confronting Venture Capital in its present format, the degree to which the American Model could best serve venture capital companies in Japan.

Its Ramifications: Japan Associated Finance Co. Ltd. (JAFCO) is a parent company of JAV, (Japan American Ventures) operating in the United States.

Proposing a Solution

It is necessary that US subsidiaries of the Japanese firm need to provide direct contacts of high profit VC investments, and this needs to be quickly examined by investment committee headed by the President and CIO in the US. The small and localized investment committee enabled JAV to make decisions on very short notice, usually within 14 days. (MGT 657 case studies in global entrepreneurship, (n.d.)).

This offers ample opportunities for remaining competitive in VC business.

Learning Applications

In the case of VC, it is seen that the need for technically skilled, experienced and competent personnel is very important. The need for good compensation and participative management style is also necessary, as is the need to decentralize authority and responsibility. Again, gaining market knowledge through actual trading is also important, especially in volatile and unpredictable US VC markets, which may be different from Japanese markets. Thus, the main lesson that coud be learned is that it would not be judicious to apply Business Operating Models of one country on another, just as the JAV experience has proved.

It is necessary to make a thorough and comprehensive study of VC markets, including competition, economic and governmental influences, and investor’s preferences and reigning business climate, while considering VC investments, whether in terms of seed investments or late stage investments.

Case study Unit: 5

Topic: Infosys: Financing an Indian Software Start-Up

Summary of the case

N.R Narayana Murthy (CEO and Chairman) and Nandan Nilekani (President and Chief Operating Officer) are the successful leaders of Infosys Technologies Ltd, Bangalore, India that delivers information technology consulting services for international clients. After visiting US in 1999, they were thinking of listing in any U.S. exchange to make offering to public in United States. The infrastructure facilities in Bangalore mainly, the city traffic problems raised several questions in the minds of Murthy like: whether to go ahead with U.S offering, if yes, in which country , and what are the other alternatives. Currently Infosys’s stock price graph shows an upward trend as Infosys always maintains a moral obligation to its shareholders to give adequate return.

Statement of the Problem

The questions to be answered are as follows:

1. Whether to commence a stock offering in United States or not?
2. In case the company goes for US offering, in which stock exchange to list: New York Stock Exchange or NASDAQ.

Ramifications

Advantages of U.S offering:

1. Enhancing the brand is the way to realize the goal of increasing value chain. Advertising and traditional forms of marketing are the methods which other IT companies rely but which due to its size and niche market Infosys cannot. Word of mouth publicity will be suitable for Infosys to create a buzz in the home market by U.S. offering.
2. ADR (American Depository Rights) offering not only helps it to compare with competitors in U.S. but also helps in recruiting international employees. Flexibility and the image of Infosys could be enhanced among the U.S. employees.
3. Acquisitions in the U.S. and in any other country is possible with US listing
4. As majority of the Infosys investors are from United States and outside India, they can convert existing shares into ADRs by the government approval through US offering

First, viability of the US offering should be established. Another thing is that the company does not have a clear idea about the extra cash needed for an offering. More important was how the process of listing would be leveraged

Listing in NYSE and NASDAQ has both advantages and disadvantages. Listing cost of NYSE is high as compared to NASDAQ. In addition, NASDAQ is suitable for technology stocks.

Proposed Solution

By analyzing the outcome of US offering, it is suggested Infosys can commence the stock offering in US. NASDAQ can be chosen as the Stock exchange to list.

Learning Applications

“Indian software firms now possess strong capabilities in process maturity and management skills, which positively impacts on their international competitiveness (Tschang 2003). Thus, Indian software companies are attempting to move up the value-chain and establish presence in key countries around the world.” (Milelli, 2006, p.8). Comparing the GDP percentage real growth of India and US, it is seen that India’s percentage growth is 5.7% and that of US 2.5%. However, by comparing the GDP percentage of financial, business and other services, US have a higher GDP percentage of 35.6%. India has only 11.1%. The information and infrastructure of US also pave the way to US offering. Even though the political risk is high, by looking at the India’s software exports and domestic sales, during 1998-1999, the exports have increased to $2.65 billion from $128 million. In addition, as the customers of Infosys are located worldwide, the US offering is essential. Infosys “was the first Indian company to file a 10K and the first to perform a full audit according to U.S. generally accepted accounting principles (GAAP).” (MGT 657 case studies in global entrepreneurship, (n.d.).

Reference

E- MGT 657 case analysis unit 1. (n.d.). (Provided by the student).

Jyotsna, Mukherji. (2009). Competitive advantage and international business: Examining path dependencies in. All Business: A D& B Company. Web.

MGT 657 case studies in global entrepreneurship: Ducati & texas group- a “wild ride” leveraged buyout. (n.d.). (Provided by customer).

MGT 657 case studies in global entrepreneurship: Jafco america ventures, inc.: Building a venture capital firm: Case analysis unit 4. (n.d.). (Provided by customer).

MGT 657 case studies in global entrepreneurship: infosys: financing an indian software start-up. (n.d.). (Provided by customer).

Milelli, Christian. (2006). International expansion by Indian firms: What is European market entry: Indian software and IT service industry. Web.

Subscribe. (2009). Isi Emerging Markets: A Euromoney Institutional Investor Company. Web.