Rosetta Stone

What are the advantages and disadvantages of Rosetta Stone going public?
The main advantages of Rosetta Stone going public are that an IPO would allow them the capital to
expand their business into new markets as well as build on the Rosetta Stone brand. The IPO would
also help them establish business credibility as a public firm. As a public company, Rosetta could
enhance their image and reputation with newfound capital. It may also be advantageous to proceed
with an IPO as the market has shown encouraging signs after the crisis of 2008. Changyou.com, a
video game developer recently went public at 6.5 times EBITDA. Likewise, Bridgeport Education has
recently considered going public and estimates that they could do so at a range of 10-12 times
EBITDA. This may indicate that an IPO would behoove Rosetta Stone as it would be a successful
business decision. Furthermore, the language learning industry largely consists of self-study learning
as it counts for $32 billion of the $82 billion industry. Going public would allow Rosetta to be a major
market presence in a booming industry. Another advantage of taking Rosetta Stone public is Adams
concern of a takeover. Adams is worried that the limited amount of capital and resources they
could get from private sources leave them vulnerable to a takeover. An IPO would quell those fears.
There are, however,
a few disadvantages associated with going public. For one, the process is quite arduous and would
take three months at the minimum. Additionally, there is quite a bit of risk and uncertainty associated
with taking a young firm like Rosetta Stone public, especially in such a volatile market. Despite these
concerns, it may be advantageous to issue the IPO as analysts believe Rosetta is one of the few
firms who would be successful going public. As exhibit 8 shows, taking the firm public would lead to
increases in gross profit over the next several years.
Thay have to disclose some private information to public.2 and there is always some cost associated
with this process.

http://www.investopedia.com/ask/answers/06/ipoadvantagedisadvantage.asp
http://smallbusiness.findlaw.com/business-finances/pros-and-cons-going-public.html

III. Price Recommendation

As an underwriting syndicate, we would recommend a price of $23.73
based on valuation procedures using comparable industry averages, and
by also taking into account Rosetta Stones unique company position as
compared to other similar firms, which allows it to charge a higher price
than that of its competitors.

Questions

advantages and disadvantages for rosetta stone going public?

what do you think the current market price for the rosetta stone shares? justify
your valuation on a discounted cash flow basis and a market multiple basis?
at what price would you recommend that rosetta stone shares be sold ?

Analyses Used for Estimation

By using comparable industry averages, we are able to create a starting
point by which we can price Rosetta Stone. Because Rosetta Stone is a
combination of industries, its price will be similar to other industries, but will
not mimic a single industrys comparables. K12 is mentioned to be a close
comparable, but still not quite the same as Rosetta Stone. K12 has a
market of parents buying its product for students in kindergarten through
12th grade. Rosetta Stones target market has an unlimited age range, and
therefore has a higher likelihood of sustained growth than K12, and thus is
able to charge a higher price for its IPO. After Rosetta Stones roadshow,
the book was more than 25 times oversubscribed, which gives preliminary
pricing data that there is an exponentially higher demand for the stock at
Rosetta Stones initial pricing. Based on such analysis, Rosetta Stone
could theoretically set its prices 25% higher, but such a large increase in
price is too risky in fragile economic times, so we would recommend an
increase in price by a lesser percentage of 10%.
As shown in Exhibit 1, our team compiled industry averages of price to
earnings ratios, enterprise value to EBITDA ratios, and beta. Additionally,
we compiled this data for K12, as we agree with the CEOs
recommendation that this is the most comparable company to Rosetta.
Using P/E analysis, our staff found a preliminary price of approximately $4$7 per share. However, we are skeptical of this range due to the recent
volatility in net income despite strong revenue growth. Various expenses,
especially in operations, drive this volatility. With this in mind, our team
found a range of approximately $21-$27 per share when using the
EV/EBITDA multiple. This multiple is more pertinent to our analysis
because EBITDA presents a more stripped down view of the companys
earnings than P/E ratios. Thus, EBITDA makes comparison to competitors
more accurate. After our interns made these initial calculations, we had
them create a weighted average of these multiples given both industry

(80%) and K12 figures (20%). Then, we use the weighted average of these
averages - 80% EV/EBITDA and 20% P/E - to find an initial stock price of
$21.57. In our next staff meeting, we decided that Rosetta should be
priced 10% higher than this figure due to incredible recent success, even
during the recession, incredible investor demand as noted above, and a
general caution not to set the price too high given the weak economy.
How to find the current market share price.