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Please refer to Case and Rubric for completion.

Read the Case Study: "Shell Game: STK Steakhouse Chain Goes Public Through a Reverse Merger".

Distinguish the differences between the terms fair market value and fair value. Provide examples real world references of each term to substantiate your understanding of the concepts.Also, develop a table that summarizes the strengths and weaknesses of the four approaches to the valuation of private

CASE STUDY: SHELL GAME: STK STEAKHOUSE CHAIN GOES PUBLIC THROUGH A REVERSE MERGER Case Study Objectives: To Illustrate Some of the motivations for \"going public\" The mechanics of reverse mergers Risks and rewards associated with reverse merger Introduction With growth slowed by limited resources, a robust stock market, and intensifying investor interest in high-end restaurant dinning chains, One Group LLC, the owner of steakhouse chain STK faced a critical decision. Should the firm go public now and dilute their ownership stake or continue to rely on their financial resources and risk missing an opportunity to enter the public stock market? This is a choice commonly faced by fast growing successful privately held firms. One Group is a hospitality holding company that develops and operates upscale restaurants and lounges. It opened its first restaurant in New York City in 2004. Its primary brand is STK. Managing member,a Jonathan Segal, owns about 35% of the firm and has additional ownership stakes in subsidiaries operated by the holding company. With annual revenue of more than $130 million (up from $6 million in 2006), STK is a New York-based steakhouse restaurant that markets itself to women with the mantra \"STK is not your daddy's steakhouse.\" In a departure from steakhouses typically serving huge steaks, STK focuses on serving smaller portions to its targeted female clientele. STK has seven locations in major metropolitan areas and a hospitality business providing food service for restaurants, bars, and hotels. STK plans locations in Washington, DC, Chicago, Dubai, London, and Montreal. Longer term, the firm intends to launch a chain of smaller, less expensive restaurants under the name Rebel STK. To realize these objectives, One Group knew it needed additional funding. The Decision The timing appeared to be right. The broad stock market indices were up by almost 30% during the first 9 months of 2013 over the same period the prior year. Niche high-end restaurant chains appeared to be in vogue. In mid-2013, Del Frisco's Restaurant Group undertook an IPO at $13 per share. Since then its shares have risen by 40%. In early October 2013, hedge fund Barrington Capital took a 2.8% stake in Darden Restaurants Inc. urging the dining conglomerate to separate its faster growing Capital Grille and Eddie V's from its larger restaurant chains through spin-offs or divestitures. Committed Capital Acquisition Group (CCAC), a special purpose acquisition company (SPAC), seemed to offer an immediate vehicle for entering the public stock market. SPACs are shell or so-called blank-check companies that have no operations but which raise funds through an initial public offering with the intention of merging with or acquiring companies. SPACs often raise additional funds by issuing warrants enabling investors to buy additional shares in the SPAC at a later date at a preset price.b On October 16, 2013, One Group LLC merged with CCAC in a deal that converted the privately held firm to a public company in which CCAC investors paid One Group owners a combination of CCAC common shares and cash. The merger occurred simultaneously with a private equity placement (often referred to as private investment in public equity) to raise cash. The investors valued the deal at $5 per share giving the firm a market value of about $118 million or as much as $147 million if warrants are exercised before expiration. Warrants are issued by firms and grant their holders the option but not the obligation to buy stock in the issuing firm at a predetermined price during some future time period. The shares initially traded over the counter, although the longer term objective is to list the firm on the NASDAQ Stock Exchange. The cash will initially be used to open new restaurants, retire existing debt, and to buy out minority investors in individual restaurants. The Process The combination of One Group and CCAC involved a process called a reverse merger. To undertake a reverse merger, a firm finds a shell corporation with relatively few shareholders who are interested in selling their stock. The shell corporation's shareholders often are interested in either selling their shares for cash, owning even a relatively small portion of a financially viable company to recover their initial investments, or in transferring the shell's liabilities to new investors. Alternatively, the private firm may merge with an existing special purpose acquisition company already registered for public stock trading. In a merger, it is common for the surviving firm to be viewed as the acquirer, since its shareholders usually end up with a majority ownership stake in the merged firms; the other party to the merger is viewed as the target firm as its former shareholders often hold only a minority interest in the combined companies. In a reverse merger, the opposite happens. Even though the publicly traded shell company survives the merger with the private firm becoming its wholly owned subsidiary, the former shareholders of the private firm end up with a majority ownership stake in the combined firms. While conventional IPOs can take months to complete, reverse mergers can take only a few weeks. Moreover, as the reverse merger is solely a mechanism to convert a private company into a public entity, the process is less dependent on financial market conditions because the company often is not proposing to raise capital. In recent years, private equity investors have found the comparative ease of the reverse merger process convenient, because it has enabled them to take public their investments in both domestic and foreign firms. The story of the rapid growth of Chinese firms has held considerable allure for investors prompting a flurry of reverse mergers involving Chinese-based firms. With speed comes additional risk. Shell company shareholders may simply be looking for investors to take over their liabilities such as pending litigation, safety hazards, environmental problems, and unpaid tax liabilities. To prevent the public shell's shareholders from dumping their shares immediately following the merger, investors are required by US law to hold their shares for a specific period of time following closing. What follows is a description of a reverse merger with a shell corporation. The shell corporation in this instance is a SPAC established by the investment group Committed Capital Acquisition Corporation (CCAC) through an initial public offering in 2011. The expressed purpose of the SPAC, which holds only cash raised from the public offering and its own common shares, is to acquire operating companies. SPAC shareholders make money when the SPAC liquidates through a public offering or sale to strategic investors at a later date. The Deal On October 16, 2013, CCAC, a publicly traded Delaware Corporation, agreed to merge its wholly owned CCAC Acquisition Sub (Merger Sub) into One Group LLC. CCAC had created Merger Sub transferring cash and its common shares in exchange for all of Merger Sub's shares. One Group was the surviving legal entity of the merger. As such One Group became a wholly owned subsidiary of CCAC (Figure 10.1). Simultaneously, CCAC issued 12.6 million shares of its common shares having a par value of $0.0001 per share plus $11.8 million in cash for their ownership interest (membership interest) in One Group LLC. CCAC also issued 1 million common shares to the former managing member of One Group, Jonathan Segal, as a control premium. These shares are in addition to the 7.7 million common shares issued to Mr. Segal for his ownership stake in One Group and his interest in certain One Group operating subsidiaries. The total merger consideration paid to One Group owners was $118.4 million consisting of shares with a market value of $106.6 plus cash of $11.8 million. Warrants set to expire 2 years from the date of closing to purchase 5.8 million in new common shares with an exercise price of $5 per share could boost the merger consideration to as much as $147 million. Committed Capital Acquisition Corporation announced the change in its ticker symbol (CCAC) to STKS. The common shares trade under that symbol over the counter. The firm's name also was subsequently changed to The One Group, Inc. Coinciding with the closing date, CCAC completed a private placement of 3.1 million common shares at a purchase price of $5 to investors consisting of some CCAC's existing shareholders realizing proceeds of $15.5 million. In connection with the private placement, CCAC agreed to register the shares with the Securities and Exchange Commission within 120 days of closing. This activity is sometimes called private investment in public equity or PIPE financing. Companies that become public through a reverse merger with a shell company are not permitted to list on a major public securities exchange until certain conditions have been satisfied. The new firm must complete a 1-year \"seasoning period\" in the United States by trading over the counter market or another regulated US or foreign stock exchange following a reverse merger and be registered with the SEC. The shares must maintain a minimum share price required by the exchange for a sustained period for at least 30_60 trading days. Concluding Comments One Group had the choice of remaining private or taking STK public. Each ownership structure has its pros and cons. For example, after 20 years as a publicly traded company, Dell Inc. converted from to a private corporation. While gaining access to additional capital, STK will face new challenges as a public company. To go public, One Group chose a reverse merger from a range of options. While sometimes effective, reverse mergers often create more problems than alternative strategies. Discussion Questions 1. What are common reasons for a private firm to go public? What are the advantages and disadvantages or doing so? Be specific. 2. What are corporate shells, and how can they create value? Be specific. 3. What were the options available to One Group LLC to raise capital to finance their expansion plans? 4. Discuss the pros and cons of each. Be specific. 5. Discuss the pros and cons of a reverse merger versus an IPO. 6. Why is it likely that shares trade at a discount from their value when issued if investors attempted to sell such shares within 1 year following closing of the reverse merger? 7. What is the purpose of One Group ultimately listing of a major stock exchange such as NASDAQ? Paper and Case Study Analysis 1 Unsatisfactory 0.00% 100.0 %Criteria 70.0 %Concepts and Terminology Does not demonstrate familiarity with concepts and terminology. 2 Less than Satisfactory 65.00% Utilizes concepts and terminology appropriately. 3 Satisfactory 75.00% Demonstrates competency in both concepts and terminology. 4 Good 85.00% 5 Excellent 100.00% Demonstrates Demonstrates professional professional level level competency in competency in both concepts both concepts and terminology. (strengths and weaknesses) and terminology. 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