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Workbrain Corp A Case in Exit Strategy Case Solution
Workbrain Corp., a Toronto-based company, was a leading supplier of workforce management software. The company’s products helped customers with a large labor force to improve operational productivity and achieve significant cost savings. In April 2003, company acquired Workforce Logistics Inc. to enhance workforce management product line. In order to broaden the customer base, expand the product line and augment distribution channel, Workbrain is expected to continue selective strategic acquisitions. Workbrain is working in the market of workforce management software. By 2006, it is estimated that the combined market of for all areas of workforce management would total $6.8 billion annually in products and services. Due to reduction in growth, in ERP and HRM markets, major vendors in these categories – SAP, Oracle, and PeopleSoft – are looking forward to investing in the market of workforce management space. A race is developed in Workforce management space between different vendors to control more than 50 per cent share of the market and dominate other players. Like all other companies, Workbrain is looking forward to achieving market dominance. To do so would require a lot of investment to grow product base, research and development, industrial and geographic coverage, salespeople and distribution channels. Immediate movement in these different fronts would require a lot of cash and Workbrain should pursue IPO to finance this investment.
Workbrain Corp A Case in Exit Strategy Case Analysis
Although there is a risk involved in being the first IPO after a long downturn in the public stock market from late 1990s to 2001/02, investment bankers indicated that there is a demand for technology stock by Canadian institutional investors. Many portfolios of public market investors had portions required to be invested in Canadian technology stocks. Moreover, as estimated by industrial analyst, the workforce management space will show a rapid growth in the future, and the time and attendance component of the market would grow alone to $400 million. By 2006, combined market of workforce management would total $6.8 billion. High forecasted growth in the market attracted many vendors, and a race is developed to gain significant market share. To be the “standard” vendor, Workbrain needs a lot of immediate investment for growth in multiple fronts such as product line, research and development, industrial and geographical coverage, salespeople and distribution channels. Workbrain had the strongest product offering, and this is the right time for Workbrain to prepare for an IPO and gain maximum market share. Delay in the investment will result in lower revenues due to lower share in the market.
Two stock market exchange, Toronto stock exchange and NASDAQ, can serve Workbrain in an IPO. Although NASDAQ was the leading associations for the technology companies and many Canadian, European and Asian companies had gone to NASDAQ, TSX listing in the near future looks more viable, as on the whole TSX was a small-cap market. Moreover, demand/supply imbalance in Canadian technology would prove to be attractive, and Workbrain IPO would gain considerable analyst coverage by leading firms. One of the reasons for not considering NASDAQ is that it would require revenues in $75 million range for a successful IPO. To be listed on the NASDAQ, company had to wait for two years. By the end of year 2005, company would be able to achieve this range as per forecasted revenues, but delaying IPO would make Workbrain loose a decent market share. As mentioned earlier, a lot of cash in needed immediately to expand multiple frontiers of the business. In conclusion, small-cap market, demand/supply imbalance and immediate need of investment make TSX more viable for Workbrain.
Initial financing, common shares of US$1 million, in Workbrain came from its founder. Afterward, Workbrain had issued two classes of preferred shares through raising three rounds of venture capital. Now, the company needs investments for acquisition of different firms, and to increases its market share. Comparing the two options, financing through potential acquirers or IPO, initial public offering is more favorable for the shareholders. Even though company can finance its investment by conducting another round of venture financing as the current investors had indicated a willingness to invest more money, but a number of nonfinancial issues is making IPO more favorable option for shareholders and the company. In case of Initial Public offerings, Workbrain will be looked as more disciplined and well organized for its onlookers, investors and customers. Henceforth, Workbrain would be able to attract more investors and customers, helping it to acquire more firms and gain more market share. Last but not the least, there would no longer a need for Workbrain to enter into long discussions with its customers about financial feasibility since all the financial information would be available for all to see. In conclusion, IPO looks to be more viable, and shareholders would be better off if the company pursued an IPO rather than potential acquirers.
With regard to the need of instant investment, Workbrain can consider many financing options. At the present, shareholders of the company include founders/employees, individual investors, and venture capitalists. Major two capital financing streams for Workbrain are Debt financing and Equity financing. Company had never financed its capital through debt financing, and it is not a valid financing alternative as the company has already $10 million in cash. Although, interest payments are tax deductible, debt financing is not an acceptable alternative as it results in lower net income of the company. In Equity financing, company can consider many financing alternatives. New investments by the company can be financed by the founders, individual investors and many other potential acquirers like venture capitalists. There can be number of financing alternatives in front of Workbrain, but IPO seems to be the best option among all of them.
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