Introduction
The case is about the international company Citrus Glow, which is facing a problem pertaining to the valuation of the company for the issuance of an initial public offering (IPO) in the market to increase the capital structure of the company. The Citrus Glow International is a company which launched the completely organic orange based cleaning agent by the name of ‘citrus glow’ into the market. The company has since its initiation, increased its portfolio to include detergents, and cleaners for se in home as well as industrial places. The paper highlights the different techniques that can be used to value the company for an IPO and discusses the advantages and disadvantages of the specific approached. The benefits of using an IPO to increase the capital structure of the company are also provided.
Situation
The situation that is presented in the case is that the company Citrus Glow International has grown considerably since its inception in 1984. Now in order to operate in the market and compete against the competitors who have started launching similar products as manufactured by Citrus Glow International into the market, the company needs to increase its capital structure to support the growing business and the expanding scale of its operations.
Analysis
Citrus Glow International is interested in going for an IPO. The reason behind it is that an IPO will enable the company to go public. By going public Citrus Glow International would benefit financially with an increased capital financing. This increase in the capital can be used by the company for research and development as well as for expanding the operations of the company to match the competition in the market. Moreover the public awareness of the company will also be increased as the IPO will generate publicity for the company. The main advantage that will be available to the company would be the increase in the market share of the company.
The increased operation as well as the increased resources of the company will enable it to reach to the people in the market who previously either were not aware of the product or did not have access to places where the product could have been bought. The disadvantages of the approach however pertain to increases rules and regulation that company will have to comply with the state, and the increase scrutiny which would be placed on Citrus Glow International. Additionally disclosures will have to be made for the investors in the business through the SEC Act of 1934. Financial reporting documents as well as investor relation departments would also need to be launched by the company which can increase the costs for the company through the Sarbanes Oxley Act.
The valuation model used by Lisa is the Corporate Valuation Model by which the company is values in terms of the present value of its free cash flows. Through this model the valuation of the company involves finding the market value by determining the present value of the company’s future FCFs. The market value is then subtracted form the debt of the company to come to the market value of the common stock for the company. The market valued common stock of the company is then divided by the outstanding shares to arrive at the stock price. This model is usually preferred to other models like dividend growth as it provides an estimate even when the dividend payout is unavailable or cannot be forecasted.
The price ratio model that is being considered by Dan is the approach by which the value of the company is determined by comparing the market value and the original value of the firm. The high value is taken as the value of the company which usually is the market value as this provides the most realist up to date valuation of the company. This approach is very easy to use however the main disadvantage of the approach is that there is very little information content and risk is not accounted for.
Conclusion & Recommendations
The Citrus Glow International Company should go for an IPO as this would greatly help the company in terms of competing with the substitute product manufacturing companies in the market as well as maintain the current position that they have in the mind of the consumer. The valuation of the company should be done on the basis which is most beneficial and realistic in terms of decision making and the long term objectives of the company.
References
Case: What are we really worth, Wallet, Wallet Cases in Mance, McGraw-Hill, 2nd Ed.