Apex Investment Partners was founded in 1987 by James A. Johnson and the First Analysis Corporation. In its eight-year life, the VC had raised three funds. The two first which are already closed had, together, a committed capital of around $70M. There were mainly concentrated in four areas: • • • • Telecommunication, information technology and software. Environmental and industrial productivity-related technologies. Consumer products and specialty retail. Health-care and related technologies.
Usually, Apex sought to be the leading investor whatever the stage in order to have one of its representatives join the board of the financed companies. Furthermore, Apex pursues to balance its investments between start-up and already generating positive cash flows investments. Now (April 1995) in the process of raising its third fund of $75M committed capital target, the VC fund seeks for new opportunities on the market. In this context, they recently approached a firm which seems to have huge potential for rapid growth: AccessLine Technologies. Based in Washington, AccessLine is an emerging telecommunication company that developed a high differentiation service called “One Person, One Number”. Basically, the concept is to assign one single number (an AccessLine number) which allows an individual to manage all of their different telecommunications. Realizing that it was less risky and far more costeffective to license their technology, the company extensively use strategic alliances with well-establish operators to commercialize its technology. To pursue its fast expansion, the firm undertook, in July 1994, a $15.5M private placement from five investors and welcomed to the board, as part of the transaction, a representative of the first financing round. To keep up with its ambitions and meet its growth expectations (subscribers increase by 200% per year between 1995 and 1999), AccessLine wish to obtain an additional financing of approximately $16M. Even though Apex is convince in the firms’ potential and have already built a trustful relationship, the two parties have still two contentious that need to be resolved before any deal could proceed: • • The valuation of the company The term sheet conditions
In order to give our own perspective on these contentious, we will construct, in this report, our own estimation of AccessLine value as well as the proposed deal for all claimants. Then, we will go through the eventual issues of the proposed term sheet on which Apex should focus its attention.
Enterprise Value of AccessLine
In the following section, we are going to value AccessLine conditional on a successful exit (here IPO). We chose to use the discounted cash method (absolute valuation) which consist in making projection of the cash flows of the firm from the year of exit until infinity and discount them to the present. The DCF approach is given by: = + + ⋯+ + !ℎ # = (1)
Notice that one could prefer to impute what the market’s opinion of the firm will be at exit date to obtain the searched value. This is the so-called comparable analysis (relative valuation). Table 1 shows the estimated input parameters used in our DCF analysis. It’s important to keep in mind that, according to Michael Roberts findings, entrepreneurial firms have very little leverage. Thus, we will suppose that AccessLine is an all equity entrepreneurial firm and consequently will avoid interest expenses as well as tax shield. Moreover, notice that we will assume no excess cash.
Table 1: Inputs parameters for the DCF Analysis
Exit(T) Year until Graduation (S-T) Expected Inflation Industry Growth (avg, nominal) Extra Growth Revenue ($M) Operating Margin Tax Rate Operating Assets ($M) Stable Growth (nominal) Stable Growth (real) Discount rate (nominal) Discount rate (real) R(old) R(new) Depreciation % of book value of operating Assets 2.0% 15.7% 0.0% 208.0 32.5% 30.6% 54.0 Graduation (S) 5 Incremental