Case Monmouth Inc

BUS 433a: Company Valuation and Value Creation

Spring 2013, AUBG

Cases and Case Reports

Case report 5: Tom.Com: Valuation of an Asian Internet Company Case - 25 points;

Due Monday, April 15, 2013Prepare an analysis of the Tom.Com case. Present your findings in a report to Andy Lau not to exceed three single-spaced typed page, plus relevant exhibits. The report should not be in question and answer format, but it should address the following questions. Include a brief introduction, analysis, and summary/conclusion.(a) Size up Tom.Com, Ltd. Assess Toms business model, revenue model, potential risks, and major shareholders.

(b) Consider the valuation of Internet stocks versus traditional firms. What are the similarities? What are the differences?

(c) Consider the following three methods for estimating the value of Tom.Com. Clearly state and be prepared to defend any assumptions. What is Toms worth compared to the suggested IPO price?

Data Summary:

Total shares after IPO

2,849,000,000Risk-free rate

6%

Market risk premium

6%

Estimated required return for Tom 15%-25%

Toms 1999 revenue

$51,695,000

Toms tax rate

15%

Method 1 - Implied Average Annual Revenue Growth Rate -Use the spreadsheet to compute this growth rate for the three scenarios. Using the Goal Seek tool in Excel, estimate the Market Capitalization at IPO if the Implied Average Annual Growth Rate is 50%.Method 2 - Discounted Cash Flow-Again use the spreadsheet. Consider using scenario and sensitivity analysis.

Revenue growth 2000-2004

80%

Revenue growth 2005-2009

30%

Operating margin 2000-2002

-150% (after tax)

Operating margin 2003-2009

5% (after tax)

Beta 2000-2004

1.8

Beta 2005

0.5

Debt/Assets 2000-2004

0

Debt/Assets 2005

50%

Cost of debt 2005

9%

Capital expenditures 2000-2002 $200 million above depreciation

Capital expenditures 2003

Same as depreciation

Net working capital

8% of revenue

Terminal growth rate

5%

Method 3 - Relative Valuation Using Trading Multiples - Consider the usefulness of the following multiples to valuing Tom.Com: Price/Earnings, Price/Sales, Price/Book.

(a) What would you recommend to Andy Lau and EuroGlobal regarding the purchase of Tom.Com shares?

(b) Think about this issue for discussion, but do not worry about including it in your report: (1) How would the value of Tom.Com be affected if it were to be purchased by a U.S. company interested in repatriating free cash flows back to the U.S.?