Metapath Software Corp

Metapath Case

  Matt Pauley

Yi Ren

Huitao Tan

Pranjal Phirke

Executive Summary

       Metapath Software Corp., a private Seattle-based provider of software and services to wireless carriers, has two offers to consider. The first was an offer to be acquired by a recently gone public wireless products company--CellTech Communications, with 115 millions value CellTech common stock. The second offer was from a consortium of investors led by Robertson & Stephens Omega Fund (RSC) and Technology Crossover Ventures (TCV) to buy $11.75 million of stock at a $76 million pre-money valuation. Look back Metapath’s history, Metapath has raised four rounds of financing with the increasing preferred stock price, which shows the increasing trend for Metapath’s value. As a developing company, in order to maximize shareholders’ profit, whether to accept the two offers is the major considering for Metapath CEO.  

Metapath's capital structure

As of September, Metapath had raised $9 million in four rounds of financing.   The first two rounds occurred simultaneously at the founding of the company.  The initial funds were provided by STI and Bessemer, each was awarded redeemable preferred stock that was unable to convert into common.  Together, the initial funds of financing (A,B) raised $1.6 million.  The third round of financing (C), also by Bessemer, accounted for an additional $1 million and consisted of convertible preferred stock instruments.  The final round (D) accounted for $7 million, and also consisted of convertible preferred stock instruments.  Fund D was raised at a price of $1.62/share (the previous 3 rounds were $1.05/share), reflecting the company’s more favorable prospects in April 1996, and increased valuation. Metapath had closed several large deals, and was gaining attention as an attractive acquisition. Investors in fund D were granted more information by waiting, contributing to their investment at an increasing valuation. The redeemable aspect of the investments gives investors downside protection.  In the event of an IPO, the latter two rounds of funding would convert their preferred shares into common equity.

Valuation for Metapath

We use DCF Model to value Metapaths. Since there isn’t sufficient data, we made some assumptions: Annual growth rate is equal to the growth rate realized in the second half of 1997, which is 15%; Metapath growth terminates in five years; tax rate is 30%; Depreciation equals to CapEx; Interest income and expense stay constant; Use 10 year treasury rate 6.21% plus a 3% premium to justify the risk for Metapath’s business. [pic 1]we get an estimated market value of 54.41 million, which is  substantially smaller than the pre-money valuation of 76 million. This shows that RSC is very optimistic about Metapath’s business outlook and is generous in making the offer.