Mekong Capital Case Study Solution
IPO V/s Sale
On the basis of the given valuation of the IPO in the case Exhibit 10, IPO could be the best alternative for Mekong. As under holding the IPOs for a five year time period, the discounted value for Mekong’s 15% stake would be $37 million as compared to $15 million if the company decides to sale its stake in the current year.
Besides the quantitative justification of the suitability of holding IPOs for 5 years, there are certain qualitative points which make the IPO strategy more suitable for Mekong. According to Duy, the highest value for Golden Gate was going to the public considering the growing bull market in Vietnam. Moreover, the bank analysis shows that the aggressive growth strategy with an IPO would be the best way for value maximization at Golden Gate.
Moreover, other points for justification was that there was no major restaurant group’s IPOs presented in the Vietnam market. Along with it, achievement of growth through expansion towards Tier Two market would attract 30%+ growth minded investors. Moreover, IPO was recommended over sale as recent disappointing same-store results from 2012 could make the buyer deterrent to maximize the value and provide a high offer price to Mekong for its stake in Golden Gate.
However, there were certain negative concerns attached with the IPO as described by Chad Ovel. The underlying operational inefficiency of the company could lead to a failure of IPO. The investor may get, sooner or later, dissatisfied with inefficient operational performance of the company and the company may not get the desired output from the IPOs and the aggressive expansion.
In this scenario, it could be said that the IPO could be a better strategy for increasing the value of Mekong’s stake Golden Gate if the company goes through an aggressive expansion along with the operational improvements.
Valuation of IPO and Strategic Sale
The company could acquire more value through an IPO rather than a strategic sale. As stated above, Vietnam is going through a growth in the bull market where investors are willing to buy new share at a higher price, therefore an IPO could provide more value to Mekong as compared to the strategic sale.
Moreover, the highest value for Golden Gate was going to the public considering the growing bull market in Vietnam. The aggressive growth strategy with an IPO would be the best way for value maximization at Golden Gate and for increasing the value of 15% of Mekong in Golden Gate.
It could be seen from the attached excel spreadsheet that the value of 15% stake in the Golden Gate at holding IPO’s for five years would be $37 million as compared to $15 million form the strategic sale. However, the $37 million value is based upon the assumption of holding the shares for 5 years.
With the analysis of the value acquired by IPO and by the strategic sale, it could be determined that still the company would get a high value from IPO rather than a strategic sale. The major reason behind it is that the recent performance of Golden Gate would resist the strategic buyers to provide high value for the Mekong’s stake in Golden Gate. However, due to the presence of young investors in the market with 30%+ investors focused at growth, the IPOs could be a success for the company and Mekong could get a high value form the IPOs as compared to the strategic sale. (Brigham, 2016)
Recommendations
On the basis of above qualitative and quantitative analysis, Mekong is recommended to hold IPOs for 5 years and avoid the trade sale in the existing year. It is also recommended to make efforts for the operational improvements at Golden Gate to avoid the dissatisfaction of investors.
The company is recommended to go for the IPOs rather than the strategic sale because Mekong could acquire higher value by going to IPOs as compared to the strategic sale as explained in the previous section. Moreover, the valuation for IPO provided in the case Exhibit 10 shows that the company would get 2 times more value for its stake if it holds the IPOs for 5 years rather than selling the stake in the current period.
Moreover, the Vietnam’s growing bull market shows that Mekong could get high value for its stake from IPOs as compared to the strategic sale. The recent performance of Golden Gate also resist the company to go for the strategic sale as Mekong may not get the potential buyers for its stake due to the under performance of the company in 2012 and the trade buyers may not provide potential value for the Mekong’s stake in the business.
However, while holding the stake for 5 years, the company must use its operational oriented vision and its expertise in improvising operational management at Golden Gate to avoid investors’ dissatisfaction in the future and the decline in the share prices in future due to the inefficient operational performance at Golden Gate.
Conclusion
Despite of the strong growth through expansion, the profitability of Golden Gate is susceptible. With the under performance of the company in 2012, Mekong is considering an exit strategy for its 15% stake in Golden Gate. The recommended strategy for Mekong is to hold the IPOs for 5 years with efforts for operational improvements at Golden Gate to achieve highest value for it 15% stake...........
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