The purpose of this report is to determine the optimal course of action for KTM in order to pay BC European Capital, and to position our company for future growth and profitability.
Background. In 2003, BC European Capital, a venture capitalist firm owning 49% of KTM, expressed its intention to exit its investment in KTM by September of 2006. KTM’s net profit nearly quadrupled in 2002. It appears this growth will continue in 2003, though likely at a much slower rate. KTM has a 13.0% share in the stagnant European off-road market, and an 8.5% market share in the burgeoning United States off-road market.
Scope. We have investigated several possible solutions for KTM: (1) an initial public stock offering; (2) a re-purchase of shares with company funds; and (3) a buyout by another venture capital firm.
KTM should satisfy its financial obligations to BC European Capital by filing for an initial public offering. An initial public offering will generate financial capital for BCE, while allowing the company to continue its growth. In order to help finance the IPO, KTM should focus on growing its market share in the United States.
IPO Financial Analysis
Taking KTM public will allow the company to raise the money to execute BC European Capital’s buy-out, as well as raising the funds to incorporate a growth strategy. One important note is that KTM previously filed an IPO in 1996 in order to buy out a venture fund. While the company went private again in 1999, some managers disagreed with this direction.
In order for the initial public offering to help KTM achieve its goals, KTM must demonstrate financial strength; without it, investors simply will not purchase the stock. Fortunately, several key metrics indicate that KTM’s position may be attractive to investors. Appendix A shows the cost of goods sold for the primary competitors in the motorcycle industry. KTM sets the industry standard at this regard, with cost of goods sold totaling approximately 61% of revenue (compared to between 67-85% for competitors). KTM’s cost of goods sold has also decreased over the past three years. These numbers indicate to investors that KTM produces high-quality, high-priced products, and they do it for cheap. If our company continues this trend, growth should be expected; consequently, investors should be attracted.
Appendix B demonstrates that KTM also has a profit margin nearly five times greater than its closest competitor. This margin indicates that KTM has a successful pricing strategy, and controls for its costs (also demonstrated in cost of goods sold).
Other relevant financial indicators that show KTM’s ability to attract a large number of investors include cash flow from operations, liquid assets, and income per employee. KTM has cash flows of €26.6 million from operations, a total that has increased by over €10 million in the past three years. This demonstrates KTM’s proficiency with purchases, receivables, and inventory. KTM’s assets total €256.4 million, of which €115.4 million are liquid. 45% of KTM’s assets are quickly convertible to cash, which should indicate to investors that KTM has the ability to deal with any short-term problems that require cash. Income per employee has increased by nearly 300% in the last three years to roughly €13,000 per employee. The increase shows an improvement in operational efficiency by KTM.
Our company’s main goal should be to make a safe strategic decision that ensures our ability to pay BCE and grow in the future. Unfortunately, our financial position does not appear to currently be strong enough to buy out BCE and still have enough money left over to grow. Though net income is up to €16 million, we lost €5.9 million just two years ago. Our company would need to have shown more consistent profitability for us to buy out BCE with company funds. It is better in this instance to play it safe and use a strategy that...