1. How sound was G-III’s business? Was it suitable for an IPO?
G-III’s business was based on consumer consumption of leather goods. While leather was a hot fashion item, and growth rate projections were expected to grow at about 3.5% in 1989-1990, the general economic conditions during this time period had increased such that people had more disposable income to spend on apparel. This brings up an interesting point-G-III’s business was based on the fickle tastes of consumers, which were tied closely to the state of the economy. G-III was generally predicted to capture about 10% of the 1989 industry sales, up from only 2% in 1985, in an industry that grew at a 15% annual rate.
However, the company’s net sales had grown at a compound rate of 68% from 1986-1989. It should be noted that there were no other leather companies that had IPOs at this time. Finally, in any case, minimum earnings growth potential should be 20% per year, if a company is considering an IPO. Current financial statements can argue that G-III was certainly moving in this direction, but it is unclear if it can continue on this path, or if an economic boom was the cause of this.
Having noted these factors, there were several clear risk factors for G-III, including the dependence on key customers and key personnel, and seasonality risks. Therefore, it seems that G-III was not best positioned for an IPO. However, it seems that because of the nature of its business, it wouldn’t ever be possibly better positioned. Therefore, if G-III were to ever seek out an IPO, now is the time.
2.Who was Oppenhiemer? What was the role of Oppenheimer in the process? Was Oppenheimer’s role commensurate with its fees? Oppenheimer was the group that was to handle the IPO, via Richard White, they were a well ranked underwriting group; they were to serve as the non-lead underwriter. Oppenheimer conducted road shows to increase investor awareness of G-III. Oppenhiemer had agreed to underwrite 612,500 shares itself, with other underwriters as well. Historically, companies the size of G-III would do all of the underwriting, this was not the case here.
Oppenheimer would receive a 20% of the 7% ($.91 per share) management fee, and the brokers distributing the shares would receive the remaining 60%. However it should be noted that underwriting expenses are allocated to Oppenheimer’s 20% as well. Oppenheimer’s role was not commensurate with its fees: essentially they were not making hardly any profit. However, there was the concept of reciprocity, that in the next deal, they would have the opposite end of the deal spectrum and would then reap the financial benefits they were due.
3. Was $13 an appropriate price for G-III? What was the intrinsic value of a share of G-III? $13 was an appropriate price for a G-III stock based on comparable data of previous IPOs. However, the COGS of goods didn’t grow, but their sales grew. There was a modest amount of discounting the price, as the accurate price was 13.50.
Who was clive? Investor, was G-III a suitable investment? What did Clive forget to ask? No comparables. Clive forget to ask about policy of never giving out dividends. Also, how is he going to get paid?
4. Would G-III come back to raise more money soon? Would it matter? It does not seem likely that G-III will come back to raise more money soon, based on a cursory reading of their financial statements. This would matter very much if G-III were to later on ask for more money. This could cause stockholder confidence to drop and thus the market value of G-III stocks to drop as well. Therefore, it is important that G-III ensure that with this IPO, there will never a situation where this needs to be done. If anything, they would need to raise funding via issuing bonds, that would be their best bet with retaining the confidence of investors and the market.
5. What skeletons could potentially hide in the closet? Skeletons that could reside in the closet include control by upper management. This could be a good thing, or this could be a bad thing if the upper management isn’t doing such a good job, or if their viewpoints end up hindering advancing of G-III. The most significant skeleton in the closet beyond that would be if there was a lack of significant trading, which would cause the NASDAQ to drop G-III. This would be catastrophic for G-III.
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