Investo: A New Business Opportunity for Mutual Fund Services

Corporation ${?}^{12}$

Mutual Fund Services Corporation $($MFS$)$ is a major supplier of financial data and

computer software to the financial services industry. Investo is a new venture in the area

of mutual fund compliance software. Investo needs to raise new capital, and has offered

a $30$ percent interest in the value of Investo and an exclusive marketing agreement for

Investo's product to MFS in exchange for $$10\mathrm{.}5$ million.

Derrick Bond, President and CEO of MFS$,$ is considering the proposed

investment in Investo. The investment would provide MFS with an equity interest in the

value of a company with a new product with growth potential. The investment would

also give MFS exclusive marketing rights for Investo's product. MFS would be able to

utilize its strong marketing clout and sales force to market the new product. However,

Bond is also concerned with the riskiness of the $$10\mathrm{.}5$ million investment. The size of

the market for the product is uncertain, there is substantial competition from other

companies, and production costs are uncertain.

To obtain the required funding, John Donnelly, CEO of Investo, has hired a

venture$-$capital consultant. The consultant brought the deal to MFS$.$ The consultant

acknowledged that he had already approached several investment banks with the

proposal, but had not had success. Investo's proposal to MFS is to give them $30$ percent

of Investo's equity and the rights to market Investo's products through MFS$\text{'}$

international distribution system. In exchange, MFS would pay Investo $$10\mathrm{.}5$ million.

Under the agreement, MFS would become the sole purchaser and marketer of the Investo

product. Investo would produce the product and sell it to MFS at a pre$-$determined

transfer price. Investo's pro forma income and cash flow statements are shown for a base

case, most likely scenario in Exhibit $1($see exhibits spreadsheet$).$

Regarding the marketing opportunity, MFS would provide its name, sales force,

and advertising in exchange for a mark$-$up over the transfer price. Pro forma projections

for the marketing agreement are shown for a base case, most likely scenario in Exhibit $2.$

Part of the SG&A expenses is the sales force provided by MFS$.$ Sarah Collins, VP of

Sales for MFS argued that there is an opportunity cost of using the MFS sales force to

market the Investo product. She estimates that the new product will take up $2$ percent of

the sales force's time at a cost of $$150,000$ per year. This opportunity cost is included

each year in the SG&A projections in Exhibit $2($see exhibits spreadsheet$).$ Derrick Bond

is unsure of this allocation. MFS would not need to hire any new salespeople to sell the

Investo product. However, selling the new product would take away some of the

salesperson's time available to sell other MFS products. However, Bond believes that

any erosion of current product sales would be made up through increased sales of service and supplies that accompany the Investo product. He is inclined to argue that these competing effects are a wash, and that the sales force$$s time should not be included as an expense in the analysis.

Bond needs to make a quick decision if he wants to invest in the Investo deal. He has asked Sharon Tewes, CFO of MFS to conduct a detailed capital expenditure review of the proposal. He would like to see the following:

An estimate of the value of the investment to MFS