DigiMerchant Revisited - Assignment 2 Candice Edwards xes her eyes on those of her partner Ray Olsen and says rmly, \"Alright. Let's do it.\" And with those words, DigiMerchant, a rm that specializes in the design and maintenance of mobile device-based catalogs for small consumer businesses founded by Candice and Ray immediately after completing their MBA, will be going public. DigiMerchant now employs 200 people, with the majority of them computer scientists and data analysts. The IPO Project The task the company has ahead of itself is certainly daunting. Candice and Ray 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 DigiMerchant 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 similar services have gone public so far, and because the public is getting more and more enthusiastic about mobile shopping, they believe that the IPO should come as quickly as possible. Candice and Ray 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. The list is shown in the table below. Candice and Ray nd it hard to estimate the time needed to complete each activity, and the associated costs. They reaiize that they can cniy provide rough estimates, since they have no prior experience with this type of project. They decide to provide three estimates for each activity's duration, an optimistic (best case) vaiue, a most likely vaiue, and a pessimistic (worst case) vaiue. Activity (short name in capitals) Preceding Activities EVALUATE the prestige of potential UNDERWRITERS SELECT a SYNDICATE of underwriters Evaluate the prestige of potential underwriters NEGOTIATE the COMMITMENT of the syndicate members Select a syndicate of underwriters NEGOTIATE the SPREAD of the syndicate members Select a syndicate of underwriters PREPARE the REGISTRATION STATEMENT including the proposed Negotiate both the commitment and spread for the syndicate members financing and information about the firm's history, existing business, and plans for the future SUBMIT the REGISTRATION STATEMENT to the Securities and Prepare the registration statement Exchange Commission (SEC) MAKE PRESENTATIONS to institutional investors and develop the . Submit the registration statement to the SEC interest of potential buyers DISTRIBUTE the PRELIMINARY PROSPECTUS, affectionately termed . Submit the registration statement to the SEC the red herring CALCULATE the ISSUE PRICE Submit the registration statement to the SEC RECEIVE DEFICIENCY MEMORANDUM from the SEC Submit the registration statement to the SEC AMEND the REGISTRATION STATEMENT and resubmit it to the SEC Receive deficiency memorandum from the SEC RECEIVE REGISTRATION CONFIRMATION from the SEC Amend the registration statement and resubmit it to the SEC CONFIRM that the new ISSUE COMPLIES WITH the "BLUE SKY" Make presentations to institutional investors and develop buyer interest LAWS of each state Distribute the preliminary prospectus (the red herring) Calculate the issue price Receive registration confirmation from the SEC APPOINT a REGISTRAR Receive registration confirmation from the SEC APPOINT a TRANSFER AGENT Receive registration confirmation from the SEC ISSUE the FINAL PROSPECTUS including the final offer price 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 agentFor some activities, such as the presentations to institutional investors and distributing the red herring, the duration can be fixed in advance. Candice and Ray are not so sure about other activities such as evaluating the underwriters and selecting a syndicate, and decide to include some uncertainty to be on the safe side. Some activities may actually take quite a while longer than expected. For instance, while negotiating the spread, Candice and Ray cannot seem too eager, as this will affect their bargaining power. They may have to 'sweat it out' a bit, and therefore decide to include some extra time in their pessimistic estimate. The SEC is also known to be quite unpredictable, and although receiving their memo and final registration confirmation should happen quite quickly, they have heard that it sometimes takes them several additional weeks, especially if there are a lot of deficiencies in the initial registration statement. Costs are even harder to predict. The best they can do is to come up with a most likely cost estimate, although deviations from that estimate are possible. They think that the actual costs may deviate by as much as 50% from the initial estimate (either up or down). After several deliberations with key people in their company, Candice and Ray have come up with the estimates in the table below. Candice and Ray decide to start the project first thing in the week of 9 April, 2018 and would like to schedule 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. As they want to go public as soon as possible, to raise capital and to get a good price while they believe there is still the opportunity to do so, Candice and Ray set out to produce a project plan that will allow them to complete the entire process as expeditiously as possible. However, they do not want to announce an IPO date that they cannot meet, because this could raise concerns with potential investors, thereby possibly lowering the valuation of DigiMerchant. Therefore, they want to be fairly confident that they will actually be able to make any date they put forward. Activity Optimistic Likely Pessimistic Likely Cost Time Time Time ($) (weeks) (weeks) (weeks) 1 EVALUATE UNDERWRITERS 2 3 4 8,000 2 SELECT SYNDICATE 1.5 1,500 3 NEGOTIATE COMMITMENT 1 2 w 9,000 4 NEGOTIATE SPREAD 1 2.5 12,000 5 PREPARE REGISTRATION STATEMENT w 50,000 SUBMIT REGISTRATION STATEMENT 1,000 MAKE PRESENTATIONS 6 6 25,000 8 DISTRIBUTE PRELIMINARY PROSPECTUS 3 15,000 O O W O 9 CALCULATE ISSUE PRICE 4 5 12,000 10 RECEIVE DEFICIENCY MEMORANDUM 2 2.5 0 11 AMEND REGISTRATION STATEMENT 0.5 0.5 3.5 6,000 12 RECEIVE REGISTRATION CONFIRMATION -1 0 13 CONFIRM ISSUE COMPLIANCE WITH "BLUE SKY" 0.5 0.5 3.5 5,000 LAWS 14 APPOINT REGISTRAR 12,000 15 APPOINT TRANSFER AGENT 3.5 13,000 A W N N 16 ISSUE FINAL PROSPECTUS 5 40,000 17 PHONE INTERESTED BUYERS 9,000Assignment 2 Make a report of approximately 3 pages (excluding gures, graphs and appendices) summarizing 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. One report per person please. 1. Copy the Excel workbook "Doc_DigiMerchant_nc.xls" that can be found on Canvas to your desktop. The spreadsheet contains the data for the DigiMerchant project and the results of a Critical Path Analysis. using the most likely duration and cost estimates. Using Excel, perform a scenario analysis and sensitivity analysis (not a simulation analysis) and interpret the results. TIPS The Critical Path Analysis (CPA) in the spreadsheet uses the \"Estimated Duration" and \"Estimated Cost\" columns for the calculations. Do not change the CPA calculations (the columns with E8, EF, etc..). The easiest way to perform a Scenario Analysis in Excel is to use CopylPaste, copying the data for the different scenarios in the relevant columns (\"Estimated Duration\" and \"Estimated Cost\"). 2. Perform a simulation analysis using @Risk for Excel. For now, forget about overconfidence and other syndromes that typically plague projects. Report on the following issues: What is the average project duration and project cost? When would you set the IPO date (how many weeks after the project start)? Determine a viable project budget. How big would you recommend the budget contingency to be, as a percentage of the base-case budget? Determine which activities Candice and Ray should focus on when making sure that the project will be delivered on time and to budget.3. Candice and Ray hear through the grapevine that their fiercest competitor, FastRev, is also planning to go public, sometime mid-September. They fear that if DigiMerchant does not complete its initial public offering before FastRev, the price investors are willing to pay for DigiMerchant stock will drop. Candice and Ray therefore decide that they want to move their planned IPO date forward to Monday, 10 September, to make sure that they go public before FastRev. 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). Shortening activities implies that the three time estimates for each activity are reduced, but often there still remains uncertainty on their actual duration. Crashing an activity also implies an additional cost; Candice and Ray think that the same proxy can be used for modeling the uncertainty in activity costs (50% less to 50% extra). Do Candice and Ray have a good chance of finishing the project to meet the IPO date of 10 September? (Only consider the crashing options given below, do not consider other ways of speeding up the project.) After talking to some insiders, Candice discovers that FastRev is experiencing delays, and will probably not IPO before the mid-October. Therefore, she believes they should shoot for a more realistic IPO date of Monday, 8 October, giving them a total of 26 weeks. Would this be possible? At what cost? Activity Original Times New Times Original New Cost ($) Cost ($) 1 EVALUATE the prestige of potential [2,3,4] [1,2,3] 3,000 14,000 UNDERWRITERS 2 SELECT a SYNDICATE of underwriters [1, 1.5,2] [1, 1, 1] 4,500 8,000 5 PREPARE the REGISTRATION STATEMENT [3,5,7] [2,4,6] 50,000 95,000 including the proposed financing and information about the firm's history, existing business, and plans for the future 7 MAKE PRESENTATIONS to institutional [6,6,6] [4,4,4] 25,000 60,000 investors and develop the interest of potential buyers 8 DISTRIBUTE the PRELIMINARY PROSPECTUS, [3,3,3] [2,2,2] 15,000 22,000 affectionately termed the red herring 9 CALCULATE the ISSUE PRICE [4,5,6] [3,4,5 12,000 31,000 13 CONFIRM that the new ISSUE COMPLIES WITH [0.5,0.5,3.5] [0.5,0.5,2] 5,000 8,300 the "BLUE SKY" LAWS of each state 14 APPOINT a REGISTRAR [2,3,4] 1,2,3 12,000 19,000 15 APPOINT a TRANSFER AGENT [2,3.5,5] [1,2,3 13,000 21,000 16 ISSUE the FINAL PROSPECTUS including the [3,5,7] [1,2,3] 40,000 99,000 final offer price 17 PHONE INTERESTED BUYERS [4,4,4] [2,2,2] 9,000 20,000 4. Continue with the crashed schedule you recommended in the previous question. As is the case for many start-ups, DigiMerchant is working with a very limited capital base. DigiMerchant has a cash reserve of approximately $200,000 that can be spent on the IPO process. However, as Candice and Ray 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, Candice and Ray have to make sure that the $400,000 is enough to cover the expenses 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 an IPO date of 8 October because of the associated crashing costs. However, they do not want to delay the IPO because being beaten by FastRev might result in a lower stock price. What is your opinion in this matter? What would you recommend?The DigiMerchant IPO Opt. Likely Pess. Estimated Estimated Total Free Activity Description Duration Duration Duration Duration Cost Succ Pred ES EF LS LF Slack Slack Activity Critical Evaluate underwriters 3 3 8000 2 0.0 3.0 0.0 3.0 0.0 0.0 YES Select syndicate 1.5 1.5 4500 3,4 3.0 4.5 3.0 4.5 0.0 0.0 YES AWN - Negotiate commitment 2 2 9000 5 NN- 4.5 6.5 5.0 7.0 0.5 0.5 NO Negotiate spread 2.5 2.5 12000 4.5 7.0 4.5 7.0 0.0 D.0 YES Prepare registration staten 50000 3.4 7.0 12.0 7.0 12.0 0.0 0.0 CO NOUAWN - YES Submit registration statem TWO-VVWNA 1000 7,8,9,10 5 12.0 13.0 12.0 13.0 0.0 0.0 YES Make presentations UI WO - UI 25000 13 6 13.0 19.0 14.5 20.5 1.5 0.0 NO Distribute preliminary pros 15000 13 6 13.0 16.0 17.5 20.5 4.5 3.0 NO 9 Calculate issue price 12000 13 6 13.0 18.0 15.5 20.5 2.5 1.0 9 NO 10 Receive deficiency memor 2.5 2.5 0 11 6 13.0 15.5 13.0 15.5 0.0 0.0 10 YES 11 Amend the registration sta 0.5 O. .5 6000 12 10 15.5 16.0 15.5 16.0 0.0 0.0 11 YES 12 Receive registration confir 1. .5 0 13,14,15 11 16.0 17.5 16.0 17.5 0.0 0.0 12 YES 13 Confirm issue complies wi 0.5 O.! 3.5 0.5 5000 16,17 7,8,9,12 19.0 19.5 20.5 21.0 1.5 1.5 13 NO 14 Appoint registrar N 3 3 12000 16,17 12 17.5 20.5 18.0 21.0 0.5 0.5 14 NO 15 Appoint transfer agent 3.5 3.5 13000 16,17 12 17.5 21.0 17.5 21.0 0.0 0.0 15 YES 16 Issue final prospectus AWI 5 40000 13,14,15 21.0 26.0 21.0 26.0 0.0 0.0 16 YES A UI 17 Phone interested buyers A A 9000 13,14,15 21.0 25.0 22.0 26.0 1.0 1.0 17 NO Project Duration (weeks) 26.0 Total Cost $221,500