Boston Beer Company
Case Study (3)
Avnit Bambah & Shrey Raturi
Jim Koch, President and founder of Boston Beer Company, had filed a registration with the SEC for an IPO that aimed to raise between $26 million and $34 million. The Boston Beer Company is leader in craft beer industry with market domination in the craft beer segment and perfect marketing team. The two previous IPO by competitors were very successful and stock value increasing by forty percentage by the end of the trading day. The company banker has priced the stock between $10 and $15. Koch thought was the stock price should present the correct market value.
(1) What is Boston Beer’s strategy? What are the sources of its competitive advantage? How sustainable is its competitive advantage? What does your analysis imply for Boston Beer’s valuation?
Jim Koch and Rhanda Kallman founded the Boston Beer Company in 1984. The Boston Beer Company was a contract brewer. They outsourced their brewing to the Pittsburg brewing company, which possesses and controls its own brewery. This outsourcing gave them an advantage to start the company with low initial capital and outsourcing help them to focus on selling and organize distribution network. Boston Beer focuses on producing the highest quality of beer in its industry.
The competitive advantage of Boston Beer was their quality, product innovation and huge sales and marketing team. The Boston beer’s marketing approach was stressed on premium ingredients, quality-brewing process and gave consumers a sense of patriotism. They educated consumers on flavor, ingredients and characteristics of good beer. They selected rare breeds of ingredients in Europe to differentiate from mass beer producers. They did an intense advertising to raise their brand recognition. They had diversified and innovative product line with 14 products as compared to 6 from their primary competitors.
We think that Boston Beer Company is a very good investment opportunity. The ROE is pretty high as compared to other companies in same segment.
(2) A dual class stock structure can consist of stocks such as Class A and Class B shares, and where the different classes have distinct voting rights and dividend payments. The class offered to the general public has limited voting rights, while the class available to founders and executives has more voting power and often provides a majority control of the company. Why has Boston Beer chosen a dual-class structure for its IPO? What are the implications of adual-class structure for outside investors?
(3) Identify and analyze the risks of investing in Boston Beer.
(4) What does Boston Beer plan to do with the cash raised in its IPO? Is it possible for a company to be “over-capitalized”? (Note: An overcapitalized company has more capital than can profitably be employed.)
The company was planning to distribute $12.5 million to its existing partners by using $1,552,000 in cash and borrowing $10,948,000. This borrowed amount will be repaid by the IPO. The company was also planning to use $7million of the proceeds to fund capital expenses expenditure in 1996. The remaining amount was to be used to fund working capital expenses or they were planning to invest in investment grade securities.
Yes, It is possible for a company to be “Over- Capitalized “. Overcapitalized company is those companies when their earnings are not sufficient to justify a fair return on the amount of capital raised through equity and debentures. It is said to be over capitalized when the total of owned and borrowed capital exceeds its fixed and current assets. This happens when it shows accumulated losses on the assets side of the balance sheet. Unless the condition of over-capitalization is rectified, the company may suffer from many difficulties.
The important reasons of over-capitalization are:
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