EAS 545 Yiting Huang Oct 29
Dubinsky and Hawkins are facing four financial options. The first option is to accept an offer from Alpha Computers, who would make an investment of $1 million at a $30 million valuation following with an additional $2M of funding. The second option is to partner with ABC Venture Capital, who would make a $1 million investment at a $9 million valuation. The third option Palm faced was to accept offers from some potential partners from Europe and Asia. The last financing option for Palm was be purchased by US Robotics (USR). Palm would get close to $50 million in USR stock with a share worth around $75 at the time of offer. It means that they would get around 667k shares of USR. I would suggest Jeff Hawkins and Donna Dubinsky to be acquired by USR by illustrating the drawbacks of the other three options and the benefits Palm will get from US Robotics.
First, Alpha computers disagrees on some major issues of the company. The first disagreement lies at where Alpha Computers wants to launch joint products under their label name. Palm could still launch their own brand products but Palm thinks it might cause a delay of launch and hinder Palm's future development. They also disagreed with channel differentiation and source code issues. Dubinsky realized they two companies had fundamental different ideas of the company's future business plan. Alpha Computers believes that whatever Palm is going to have will become Alpha Computers' product. They treat Palm as a supplier not as an independent company that could launch its own products. This is definitely not what Hawkins and Dubinsky want. They are looking for more flexible environment that could let them successfully launch Touchdown. They are looking for synergy and distribution and marketing experiences from their investors rather than giving their ideas directly to their investors.
Second, ABC Venture Capital's offer of $1 million at a $9 million valuation should not be considered because the $9 million valuation is rather low compared to what Alpha Computers' valuation of $30 million. Given the burn rate of $250000 per month of Palm, $1 million investment won't last for more than four months.
Another option is to partner with firms from Europe and Asia. Investors from Europe and Asia are less cynical about the handheld computers. However, none of them has given a specific offer with valuation to Palm yet. Partner with international companies will extend the process of the financial investment. Also, it will complicate the financing process as a whole. Palm is running out of money right now and need to find a solution in 30 days. Partnership with international companies is not a good choice.
The last option of being acquired by USR is more favorable. First of all, USR is very generous on the investment. The purchase price close to $50 million in USR stock is very appealing compared to the investment of $1 million from Alpha Computers and $2 million from ABC VC. USR agrees to satisfy Palm's any investment requirements. Also, USR fully trusts Palm's decision and gives Palm a lot of room to develop. USR lets Palm to run independently in the future, which could let Hawkins operate his ideas freely. Palm don't need to worry about postponed launch of their future products of joint products in the Alpha Computers' case. However, there might be some potential drawbacks of this deal with USR. As Hawkins mentioned, even though both parties are happy about the deal in the first place, the information Palm has for USR is rather limited. They don't know how exactly the company operates. Even though the synergy already existed for the two companies, Palm don't know to what extent the synergy will actually help Palm. How will USR help to distribute the products? How will they launch the new products? How good is USR's marketing skills? Is what USR want from Palm the same as what Hawkins want Palm to be? These questions will be answered only after Palm is acquired by USR. If Hawkins disagree with USR on some major issues after Palm is acquired by USR, there is no going back for him. He has little control over big decisions and has to follow what USR want Palm to do. Also, the two companies might not have the same culture. It's important for Palm's employees to adapt into USR.
To conclude, the option to be purchased by USR is the most favorable among the four options because of higher investment and more flexibility. However, Hawkins and Dubinsky needs to make sure that USR is on the same page with Palm on the important steps in the future and what USR has provided, like manufacturing, distribution and marketing strategies will actually help Palm to successfully launch their products.
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