Ait Memo

1. Is AIT an attractive transaction for Bessemer? What is your estimate of its current value per share?

Answer: Overall, we believe the deal is attractive if investors agree to step-up price or compensate Bessemer with warrants of equivalent value.

Pros:

1. If the capital being invested helps in successfully turning around the company, it is an extremely profitable deal. Since the purchase value of the shares is ~2% of the recent highs of AIT stock.
2. AIT had a good reputation amongst its customer base and unlike few CRM products in the market, AIT products actually helped customers (e.g. Financial institutes) increase their revenues.
3. Potrait, the new CRM product, has a strong customer acceptance. During the due diligence process the team conducted customer assessment and third party corroboration of the product and found that it was viable.  
4. If we take into consideration the accounting issues and use the worst case projections by Levine, the estimates value of the company’s equity is $27.5M (subtracting $1.5M debt instead of the swap). If the 3.5p/6p step-up deal was accepted, it would bring the estimated value of share to 6p/share. While the weighted price to core group was 4.2p/share. [Exhibit1]

Cons:

1. The AIT deal was too complicated and outside the early stage & private deal focus of Bessemer.
2. In 2002, a lot of technology companies were going bankrupt so finding investors was becoming difficult. Additionally, AIT’s erroneous accounting muddled the situation.
3. Bessemer was taking a lot of risk by injecting money to turn-around the company, however, if the investors didn’t agree to a step-up pricing, there was hardly any upside in the deal. Without step-up, everybody would buy the stock at 3.5p and the estimated value of the share would be 4.5p.

2. How do transactions involving public firms differ from those involving private companies? How has the fact that Bessemer intended to raise a portion of the funds through a public offering affected the transaction process and structure?

Answer:

1. In public offering, you can’t just put equity money even if the company stock has been suspended, you need to comply with market rules, company law and guidelines set by the investors.
2. In private deals investors just injected money. In comparison, in order for a public offering to take place in the UK, any new shares had to be offered to existing shareholder first before they were made available to new investors. This created an issue (which could have derailed the deal) because the core group (including Bessemer) didn’t want to loan any money until approvals were granted. However, the slow speed of the process coupled with AIT’s financial situation meant that Bessemer would have to do a partial investment before getting the investor approval.
3. In private deals investors receive the right to appoint board members. However, in public offering (in UK) this was highly unusual and difficult to explain to investors.
4. Timing issue: Board couldn’t set a deadline for the bid because a public company could be purchased in a hostile takeover.
5. In private deals, the companies are mostly early stage with few pages of documents. In this case, the public company (AIT) had tons of documents which made the due diligence process costly and time consuming.

Since, Bessemer decided to raise a portion of the fund through public offering, the risk taken by Bessemer and the core group increased (initial loan without approvals) and hence the structure of the deal changed because increased risk (initial loan) should receive higher reward (creating a need for step-up pricing).  However, investors weren’t agreeing to a step-up pricing and hence the core group started thinking of issuing warrants.

3. What was the rationale for the two-tier pricing structure? Why did the investors object? How reasonable are these objections?