Rosetta Stone

[pic 1]

CASE ASSIGNMENT

“ROSETTA STONE”

MASTER IN FINANCE

ADVANCED CORPORATE FINANCE

ANA CAROLINA COELHO, Nº152416013

DANIEL RICARDO, Nº152416003

DIOGO LEITE, Nº152416075

SUSANA GAMITO, Nº152416043

1. What are the advantages and disadvantages of Rosetta Stone going public? Is it a good idea for Rosetta Stone to go public?

There are quite a few advantages and disadvantages of Rosetta Stone going public.

First of all, regarding advantages, Rosetta Stone can obtain the capital required to expand their business into new markets and build its own brand. It would be able to increase its image, awareness and reputation, while the IPO would also help them to stablish business credibility as a public firm. An IPO can be a good move because of globalization that lead to more and more people needing or wanting to learn different languages and due to the fact that market has shown encouraging signs after 2008 crisis. For example, as we can see in the case, Changyou.com, a video game developer, went public at six and a half times its EBITDA. Other important information is that the language learning industry mainly consists of self-study learning as it counts for almost $30 billion of the $85 billion industry; going public would mark Rosetta as one the biggest companies in a booming industry. The case also told us that Rosetta Stone’s CEO had concerns about being taken over if they stayed private. By going public, an IPO would allow them to implement anti-takeover measures.

In spite of all these advantages, we can find some disadvantages. Going public will last a big amount of time (more than 90 days) and it requires lots of effort and money. Bringing potential investors and additional people to take the company cost money along with other costs associated with an IPO. Alongside these expenses, there will be more regulations a public firm must comply with after the IPO. Public companies are heavily monitored by the SEC and costs of complying with every regulation are a big disadvantage; however, we can say the biggest one is the increased scrutiny and pressure to increase earnings the company will face. Shareholders will look to earnings, they will measure the improvement and be able to criticize management’s decisions.

Summing up all the factors, we think going public will be the best decision as the company will be able to raise a lot of money and Rosetta Stone’s shares will be trading at a higher value. Large institutions and government agencies will also have more trust in a publicly listed company and this fact will certainly help Rosetta’s business.

1. What do you think the current price is for Rosetta shares? Justify your valuation on a discounted-cash-flow basis and a market multiple basis.

 Discounted Cash-Flow Basis

We decided to make this analysis using the APV method [VL = VU + PV(TS) - PV(FDC)]. So first we started by looking at the financial forecast data for Rosetta Stone and using that (together also with the statements for the company from 2006 to 2008) and used that to create an income statement and calculate the Free Cash-Flows for Rosetta Stone from 2008 until 2018.[pic 2]