a InterCat Janet Richards fixes her eyes on those of her partner Gilbert Baker and says firmly, \"Alright. Let's do it.\" And with those words, InterCat, a firm that specialises in the design and maintenance of Internet catalogues for small consumer businesses founded by Janet and Gilbert immediately after completing their MBA, will be going public. InterCat now employs 50 individuals, with the majority of them computer programmers and analysts. Many of the employees have followed the high-technology market very closely and have decided that since high-tech firms are more understood and valued in the United States than in other countries, InterCat should issue its stock only in the United States. The new issue will comprise five million shares. The IPO Project The task the company has ahead of itself is certainly daunting. Janet and Gilbert know that many steps have to be completed in the process of making an initial public offering (IPO). They also know that they need to complete the process as soon as possible because they need the new capital fairly soon to ensure that InterCat has the resources to capture valuable new business from its competitors and continue growing. They also value a speedy IPO because they believe that despite the recent slump in stocks, there still is a good opportunity for obtaining a good stock price. Actually, few companies offering Web page design services have gone public so far, and because the public is getting more and more enthusiastic about on-line shopping, they believe that the IPO should come as quickly as possible. Janet and Gilbert decide to map the steps in the process of making an IPO. They list each major activity that needs to be completed and the dependencies between the various activities. They list, for each activity, on which other activities it depends, in the sense that it can only be executed when all of these predecessor activities have been completed. They also list an estimate for the time needed to complete each activity, and its estimated cost. The list is shown in the table below. Janet and Gilbert decide to start with the process first thing next Monday, December 15 2008, and would like to plan the project using a standard 5-day working week, as most of their employees are on standard contracts (no stock options, except for a few key people) and are, in general, not very willing to work during weekends. This case is prepared solely as the basis for class discussion, and is not intended to serve as a source of primary data, or as an illustration of effective or ineffective management. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of the George Washington University. Activity (short name in capitals) EVALUATE the prestige of potential UNDERWRITERS SELECT a SYNDICATE of underwriters NEGOTIATE the COMMITMENT of the syndicate members NEGOTIATE the SPREAD of the syndicate members PREPARE the REGISTRATION STATEMENT including the proposed financing and information about the firm's history, existing business, and plans for the future SUBMIT the REGISTRATION STATEMENT to the Securities and Exchange Commission (SEC) MAKE PRESENTATIONS to institutional investors and develop the interest of potential buyers DISTRIBUTE the PRELIMINARY PROSPECTUS, affectionately termed the red herring CALCULATE the ISSUE PRICE RECEIVE DEFICIENCY MEMORANDUM from the SEC AMEND the REGISTRATION STATEMENT and resubmit it to the SEC RECEIVE REGISTRATION CONFIRMATION from the SEC CONFIRM that the new ISSUE COMPLIES WITH the \"BLUE SKY\" LAWS of each state APPOINT a REGISTRAR APPOINT a TRANSFER AGENT ISSUE the FINAL PROSPECTUS including the final offer price Preceding Activities Time (weeks) 3 1.5 2 3 5 Cost ($) 8,000 4,500 9,000 12,000 50,000 Prepare the registration statement 1 1,000 Submit the registration statement to the SEC 6 25,000 Submit the registration statement to the SEC 3 15,000 Submit the registration statement to the SEC Submit the registration statement to the SEC Receive deficiency memorandum from the SEC Amend the registration statement and resubmit it to the SEC Make presentations to institutional investors and develop buyer interest Distribute the preliminary prospectus (the red herring) Calculate the issue price Receive registration confirmation from the SEC Receive registration confirmation from the SEC Receive registration confirmation from the SEC 5 3 1 2 1 12,000 0 6,000 0 5,000 3 3.5 5 12,000 13,000 40,000 4 9,000 Evaluate the prestige of potential underwriters Select a syndicate of underwriters Select a syndicate of underwriters Negotiate both the commitment and spread for the syndicate members Confirm that the new issue complies with the \"blue sky\" laws of each state; Appoint a registrar and transfer agent PHONE INTERESTED BUYERS Confirm that the new issue complies with the \"blue sky\" laws of each state; Appoint a registrar and transfer agent Assignment Make a report of approximately 3 pages (excluding figures, graphs and appendices) summarising your results, your interpretation of the results and your conclusions and recommendations. Also explain how you derived your results. In your report, follow the structure of the assignment, i.e. provide results and recommendations for each of the questions separately. You are free to deviate from the questions and include additional analyses that you think are valuable. 1. Summarise the project definition. 2. Using pencil & paper or MS Project, prepare a Network Diagram for the IPO of InterCat stock. InterCat 3. Using pencil & paper or MS project, determine the minimum time needed for the IPO process. What are the critical steps in the process? What is the total estimated project cost? IF YOU CHOOSE TO USE MS PROJECT Use Project / Project Information to set the project start date. In Tools / Options / Schedule, you can set the default time units to weeks (\"Duration is entered in: Weeks\"). In the Gantt-chart view, use View / Table / Entry (the default view) to enter activities and their durations (you can copy/paste from Excel). Double-clicking an activity shows the Task Information box. Use View / Table / Cost to enter costs. Use the network diagram view (View / Network Diagram; right-click on the background and choose Hide fields) to model precedence relations. This can also be done in the Gantt chart or in the predecessors list. In the Gantt-chart view, you can define milestones by adding an activity with zero duration. In the Gantt-chart view, you can define a Work Breakdown Structure using the Indent button (green arrow pointing to the right). This will allow you to see summary information such as overall duration and cost. In the Gantt-chart view, Format / GanttChartWizard allows you to highlight the critical activities in red. In the Gantt-chart view, Use View / Table / Schedule to look at the Critical Path Analysis results. 4. Janet and Gilbert also want to examine how possible unexpected changes would affect the project schedule. Therefore, investigate how the following changes would affect the time to complete the IPO (and interpret the effect of the changes). Evaluate each change independently: Suppose the SEC finds many deficiencies in the initial registration statement, and we should expect the underwriters to spend 2.5 weeks amending the statement and resubmitting it to the SEC instead of just 1 week. Suppose the underwriters are truly math geniuses, and we overestimated the time it takes to calculate the issue price by 1 week. Suppose some members of the syndicate are playing hardball. In that case, we may have to increase the time it takes to negotiate the commitment of the syndicate members from 2 to 3 weeks. 4 InterCat IF YOU CHOOSE TO USE MS PROJECT Use the undo-redo buttons for examining the effect of a change over and over. You can always go back to the previously saved \"InterCat1\" if you think the current project file contains errors. 5. Janet and Gilbert hear through the grapevine that their most fierce competitor, Soft Sales, is also planning to go public, somewhere late May 2009. They fear that if InterCat does not complete its initial public offering before Soft Sales, the price investors are willing to pay for InterCat stock will drop. Janet and Gilbert therefore decide that they want to move their planned IPO date forward to Monday, 18 May 2009. This allows only 22 weeks for the entire project. They think such a goal is possible if they throw more resources (people and money) into some activities. They list activities that can be shortened, and the cost of the activity if they decide to shorten it (see table below). Can InterCat meet the new deadline set by Janet and Gilbert? At what cost? Activity 1 Original Time EVALUATE the prestige of potential New Time Original Cost ($) 3 2 8,000 New Cost ($) 14,000 1.5 5 1 4 4,500 50,000 8,000 95,000 6 4 25,000 60,000 3 2 15,000 22,000 5 1 4 0.5 12,000 5,000 31,000 8,300 UNDERWRITERS 2 5 7 8 9 13 SELECT a SYNDICATE of underwriters PREPARE the REGISTRATION STATEMENT including the proposed financing and information about the firm's history, existing business, and plans for the future MAKE PRESENTATIONS to institutional investors and develop the interest of potential buyers DISTRIBUTE the PRELIMINARY PROSPECTUS, affectionately termed the red herring CALCULATE the ISSUE PRICE CONFIRM that the new ISSUE COMPLIES 5 InterCat 14 15 16 17 WITH the \"BLUE SKY\" LAWS of each state APPOINT a REGISTRAR APPOINT a TRANSFER AGENT ISSUE the FINAL PROSPECTUS including the final offer price PHONE INTERESTED BUYERS 3 3.5 5 2 2 2 12,000 13,000 40,000 19,000 21,000 99,000 4 2 9,000 20,000 IF YOU CHOOSE TO USE MS PROJECT Do not forget to update the activity costs in Project. 6. As is the case for many start-ups, InterCat is working with a very limited capital base. InterCat has a cash reserve of approximately $200,000 that can be spent on the IPO process. However, as Janet and Gilbert are aware that this is not enough to cover the costs, they negotiated a deal with the investment bank that a bridge loan of $200,000 would be provided to cover IPO-related expenses. However, this loan would only be granted once the SEC has confirmed the registration. Therefore, Janet and Gilbert have to make sure that the $400,000 is enough to cover the costs of the entire IPO process, but also that the $200,000 cash reserve they have available now does not run out before they receive the extra cash injection. They are worried that this arrangement will not suffice to cover the IPO costs when they target the aggressive May 18 date because of the associated crashing costs, and that they perhaps should focus on a later IPO date instead, despite the possibility of a lower stock price. 7. Can you think of other options for Janet and Gilbert to cut the project lead time instead of shortening individual activity's durations and incurring the associated costs? (please make specific recommendations for this project, not general ones) 6