EBay Case Study

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Section A: Problem/Issue Statement

Following a 220% increase in profits and 800% increase in revenues over six months, eBay Inc. is considering the following courses of action:

1.One being an IPO offering, requiring the sale of less than 9% of the company. This offering will be for 3.5 million shares, with an expected sale price at between $14 and $18 per share.

2.The other is to delay the offering for six months. This will cost eBay approximately $1 million in direct expenses; however eBay's additional losses will be far greater due to the delay of major investment initiatives.

In determining the appropriate course of action, the following topics were considered:

1. What are the costs and benefits of eBay going public?

*How do current market conditions affect the decision to go public?

*What are the advantages and disadvantages of delaying the IPO versus proceeding now?

2. What is the appropriate IPO price?

*What is the intrinsic value of eBay?

*What drives IPO price besides intrinsic value?

*How do the various "stakeholders" view pricing:

oShareholders (current and IPO purchasers)?

oCompany?

oManagement?

oEmployees?

oInvestment Bankers?

oCompetition?

Section B: Recommendation

We recommend that eBay should go ahead with the IPO offering.

*We feel that the company is in a good situation right now to offer the IPO.

oAlthough other companies have been reluctant to issue and IPO in the past weeks, we feel that eBay's situation is different.

oWe can be the IPO that will heat up the market again.

*The share price that we have decided at, we feel is a reasonable price for the potential value of the company.

oSince we valued our company and we can receive the price that we want right now there is really no reason why we should wait for six months.

After reviewing the plans to delay the IPO, we decided it was not in the best interest of eBay's stakeholders.

*The market may likely be worse off in six months, and in that case we will receive a price lower than what we can now.

*We will incur costs of over $1 million, which we feel is unnecessary because the market currently is relatively not performing too unfavorably.

Overall, we feel that going public right now is an appropriate time for eBay because eBay is a company that investors will be enthusiastic about the value in during a time when most investments appear to be high risk.

Section C: Case Background

In relating the IPO process to eBay's IPO situation, we made the following assumptions and observations:

1.The timing of an IPO can very well determine how much capital a company can raise. This timing relates both to market conditions and the current performance of the company.

*Investor enthusiasm for IPO's run in hot and cold cycles.

a.Favorable economic conditions positively impact the cash flows of both publicly traded and privately held firms.

b.Waves of IPO's occur when the cash flows of both the issuing firms and publicly traded companies are high.

i.IPO waves coincide with times of relatively high share prices.

ii.We currently do not observe any sign of an IPO wave, as there has only been one IPO issuing over the previous two straight weeks, the longest stretch in 7 years.

*Currently, the market is becoming increasingly volatile.

a.The issue price may be lower than if it were issued in a more stable market.

*Currently, eBay is showing positive earnings, while most other internet companies are not even close to being capable of.

a.The issue price may be higher now because of eBay's impressive performance.

b.It is hard to compare eBay to the internet stock index (ISDEX) because they have already proven themselves in the market place.

2.In relation to underpricing and underperformance, neither eBay nor the investment bankers want to leave a substantial amount of money on the table, although it is expected that we should plan to leave some margin of...
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