Assignment C - ServerVault
Name: Ching Leong Kwok
Date: 28th June 1999
To: Board of Directors of SeverVault
From: Ching Leong Kwok
Subject: Alternatives evaluation and recommendation of ServerVault
After reviewing all the potential problems that ServerVault is facing, the most crucial problem is the shortage of cash. It is because ServerVault wants to maintain its competitiveness in hosting industry. Therefore, it needs adequate cash to build more new facilities in order to expand its business in a larger scale. There are several approaches which are worth for SeverVault to consider.
The first alternative is Status Quo (SQ), it means do nothing and let the business keeps running in the old way. Since Severvault is going to meet the venture capitalists who are interested in taking an equity stake in SeverVault in exchange for a cash investment, there are few possibilities that may might happen if it has decided to use Status Quo.
The first possibility is that ServerVault has failed to attract those venture capitalist to invest. Then, due to the limited cash that ServerVault is holding and the negative cash flow, it will record a negative cash balance of $706422 in September 2000 (Appendix 1). Therefore, as there is no more additional capital investment in this period, ServerVault will not be able to keep operating its business and will result of bankrupt in the end.
The second possibility is that if the venture capitalists invest only 5 million. This amount of capital can maintain its business in a short run. However, because investing in hosting company is classified as long term investment, and ServerVault is still in the early stage of its development. 5 million is not adequate to maintain its operation in long run. Since the cost of building the new facilities and the computer hardware are the major cash outflow, the net cash flow will still be negative. Therefore, November 2000 will be the last month recording of a positive cash flow of $798678 and it will have a negative cash balance of $876022 in December 2000 (Appendix 2). ServerVault is still walking towards the way of bankruptcy.
The last possibility is that if the venture capitalists invest 15 million. In this case, although ServerVault will not have sufficient cash to run its business, it will be able to operate for a longer time compare to the second possibility. According the Appendix 3, Servervault will record its first negative cash balance of $102422 in July 2001.
In short, quoting to the 12 months cash flow forecast of ServerVaut in Appendix 4, the cash outflow is exceeding than its cash inflow. If there is not additional funding besides those venture capitalists, ServerVault will not have enough cash to keep operating and will declare bankrupt eventually.
The second alternative is the merging between ServerVault and the other hosting company. There are several advantages of merging with the other hosting companies in the same market. First of all, merging can expand its market share in hosting industry. Since each hosting company has obtained certain percentage of the market share, its market share may be sufficient to affect the market price of internet hosting service. If merging happens between two companies, their market shares will turn into a single company. Thus, that company will have more market share. More market share will enable a company to have a larger bargaining power to its suppliers, customers, investors. In this case, Serervault will have more bargaining power to its venture capitalists. Not only will the venture capitalists have a higher chance to invest 15 million, but also it will attract more capitalists to invest. Take the example of the two largest online video firms Tudou and Youku, the "acquisition of Todou" can grant "more than 35% of market share which giving it more bargaining power with potential advertisers" . Moreover, " "The...