Case Number: 5-104-020, Year Published: 2004
HBS Number: KEL074
Cash Flow Analysis, Competitive Strategy, Growth Strategy, Valuation
West Teleservice, a telemarketing firm, is considering going public at the end of 1996 and the case asks the students to price the IPO. During the previous 18 months, seven other telemarketing firms have gone public. Prior to this, there were no publicly traded telemarketing firms. The industry is in flux. Historically, telemarketing was conducted by wholly owned subsidiaries of telephone companies, banks, and insurance companies. However, cost cutting has caused many of these firms to outsource the business. Thus, although total telemarketing business isn't growing very quickly, the outsourced portion is growing fifty percent per year. This case can be used as an introduction to IPO valuations. It is also designed to demonstrate the use and pitfalls of valuing firms with multiples. Given this is the eighth firm to go public, there are seven other potential comparable firms. The case contains enough information to construct a rough DCF. This is useful to demonstrate what assumptions must be implicit in the multiples to arrive at the same valuation. Finally, the case can be used to discuss the idea of mispriced equity (Myers/Majluf, 1984), since there seems to be evidence that the price of equity is not sustainable.
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