Rosetta Stone: Pricing the 2009 IPO
In the following case study we intend to analyse Rosetta Stone’s 2009 IPO. The main purpose is to come up with a reasonable estimate of the price at which the firm’s shares should be initially offered. This estimation is preceded by a general consideration of the advantages and disadvantages that going public might have for Rosetta Stone. Following this qualitative analysis, we then estimated the price at which Rosetta Stone’s shares should be offered in the 2009 IPO. In order to do so, we first determined the current market price for shares of the firm by employing a market multiples as well as discounted cash flow valuation. On the basis of these values, we estimated the IPO price and then gave a final recommendation regarding the price in which we also considered factors beyond the pure numbers, such as the difficult market environment.
1. Advantages of going public
First of all, the IPO would help Rosetta Stone raise equity, giving the company the opportunity for further investment with the aim of establishing its brand globally and expanding its geographic outreach. As a publicly traded company, Rosetta Stone will receive more exposure to both national and the international capital markets, creating the opportunity to reach more investors. For example, the planned stock market listing would allow institutional customers, who currently represent 20% of Rosetta Stone’s customer base, to buy shares.
Another important advantage of going public is to provide liquidity for the firm’s shares, since equity investors consider liquidity highly valuable. From an investor’s point of view, non-traded companies have an additional layer of risk because one might not be able to divest immediately at a given point in time. Going public, Rosetta Stone would be able to mitigate this risk, which typically leads to a price premium of