Case Studies
Complex Capital Structure Analysis
The Challenge
Our client, an innovative developer of advanced laser lighting, has a complex capitalization table reflecting the rights, preferences and expectations of a diverse set of investors gathered over time. In addition to the normal terms, recent fundings have added a set of contingent, non-linear claims that cannot be modeled with the conventional valuation tools. Potential returns to specific investors are unclear and the potential future value of common stock, management’s main equity incentive, is equally uncertain and very low below certain implied, but unstated, thresholds that result from the mix of terms.
The Solution
We assisted management by developing an interactive model of the capital table, reflecting all of the terms and preferences of each equity class. Because of the many complexities in their capitalization, the standard OPM (“Option Pricing Method”) could not be used. We incorporated custom functions to identify and address non-linear “jumps” in the allocation of returns. We also provided user-selectable inputs to adjust underlying assumptions, the range of future company values, and to support testing of various scenarios. The model presents a complete, dynamic and accurate analyses of all equity claims and their interactions and can be configured by management to reflect virtually all reasonable outcomes.
The Benefits
In addition to having a robust tool going forwards (the model itself) management also gained a hands-on understanding of how the claims of various equities interact at different values of the firm, the returns that are earned by each investor and the ultimate return to common which drives the management incentive plans. In addition, management is able to identify the critical thresholds that drive changes in investor returns and explain them to their Board and investors.
Management is now equipped to rapidly analyze scenarios, including actual M&A offers, to understand the returns to investors and their own incentives and be able to explain these to all involved with a minimum of cost, time and confusion.
Valuing of Technology for Spin‑Out
The Challenge
The client had significant ongoing operations in the area of semiconductor IP and was looking to spin out an R&D project with a high-risk, high-reward profile with the intent to provide it better access to risk capital. As an internal project, the spinout had never been exposed to the market to determine its value separate from the parent company. A fair market value would have to be established to account for the spinout.
The Solution
Although the project to be spun out had not had market exposure, a large number of companies with competing technology solutions to the same problem had been funded by VCs. Publicly available data existed as to the amount and timing of their fundings. There were also several comparable public companies with data available as to their R&D headcounts and patent portfolios. By placing the spin out project into context as to the levels of invested capital, patent portfolio and team size, significant valuation information was extracted that was used to place the project into a valuation context compared to its more mature peers and produce a fair market value conclusion.
The Benefits
The spin out was completed. Within eight months, the other operations of the client were acquired by a major supplier of semiconductor IP.
International Tax Transfer Limitations
The Challenge
Our client, a New Zealand-based seller of enterprise software, was contemplating a transaction whereby one of the company’s principal product lines would be acquired by a US-based private equity buyer. The client’s home country has laws requiring government consent before overseas entities can acquire sensitive assets. The client needed to produce documentation to support their claim that the transaction would not, in fact, involve the sale of significant in-country assets despite the significant size ($150 million) of the anticipated transaction.
The Solution
The solution involved a two-step analysis. The first step was to allocate the value of the proposed transaction to the individual assets to be acquired, both tangible and intangible. The second step was to establish a reasonable basis to allocate the value of each asset to the geographical regions where its value resides. Although it was clear that the technology itself resided in the company’s home country, the vast majority of its revenues were from overseas clients, supported by a workforce that was itself largely located overseas.
The Outcome
The solution showed, to the satisfaction of government regulators, that the bulk of the client’s assets already resided overseas and that the transaction was compliant with applicable regulation. The transaction was approved and closed to the satisfaction of the client’s owners and management.
Post Customer Support Analysis
The Challenge
Recent changes to Revenue Recognition (ASC-606) has created issues for software companies, especially those offering on-premise, one-time license fee payment terms (as opposed to SaaS arrangements). In order to provide the appropriate accounting for on-going support as well as customary improvements, updates, and bug fixes, our client needed to get a detailed and accurate view of the value of promised services and support as separate for the core software license.
The Solution
Granite adapted the approaches used to value acquired liabilities, such as deferred revenue, to the client’s needs. This leveraged the existing best practices, methods, inputs, assumptions, and available data. A detailed understanding of the specific promises made at the time of sale, the cost to deliver on those promises and the specific mark-up applicable to each type of expense were developed. Along with an assessment of the appropriate risk of each work stream a present value of each promise was determined. This value can be used to recognize the revenue over time as the services are delivered.
The Benefits
This approach leverages the existing best practices, methods, inputs, assumptions, and available data. Granite was able to help the client address a new issue and provide detailed support for a critical revenue recognition assumption while at the same time providing well understood and accepted reasoning to the Company’s external auditors.