The following information is for pedagogical purposes only and unlike earlier questions does not deal with real terms of the deal.
In 2013 EMC, VMware and General Electric (GE) announced a Joint Venture called Pivotal.
GE has invested $ 105 M in the venture in return for 10% ownership in the form of convertible preferred shares.
In 2014 Pivotal posted $ 58 M in revenues demonstrating 24% annual growth.
GE anticipates that Pivotal will go public by the end of 2018.
Applying Price/Sales ratio of 16,
•what is the estimated 2018 value of GE's share in Pivotal?
•What is the GE's implied cost of capital that justified the $ 105 M investment?
•How would your answers change if the annual growth were only 20%?
•What is the advantage of having convertible preferred instead of common equity?
2013 Investment: $ 105,000,000
2013 Investor's Ownership: 10%
2014 Revenue: $ 58,000,000
Revenue annual growth : 24%
Price / Revenue ratio : 16
•What is the estimated 2018 value of GE's share in Pivotal?
2018 estimated revenue: $137,124,398
2018 Value: $2,193,990,369.28
2018 value of investor's share: $219,399,037
•What is GE's implied cost of capital that justified $ 105 M investment?
Implied Cost of Capital : 4.79%
•How will your answers change if the annual growth were only 20%?
Revenue annual growth : 20%
2018 estimated revenue : $120,268,800
2018 Value: $1,924,300,800
2018 value of investor's share: $192,430,080
Implied Cost of Capital : 5.46%
•What is the advantage of having convertible preferred instead of common equity?
The dividends from preferred stock are assured compared to those of common equity which fluctuates with company's profit.
Preferred stock have a preferential claim against the assets of the company in case of bankruptcy as opposed to common equity.
Convertible preferred shares do not dilute the shareholders' control in the parent company.