Question: IT service companies develop Web storefronts that are integrated with

IT service companies develop Web storefronts that are integrated with back-end implementation systems. Only a small number of companies offer such extensive e-business integration. The industry continues to grow because of customer demand. Unlike traditional valuation, companies in the IT services sector are valued based on revenue multiples. Following are two tables that summarize comparable valuation multiples and operating metrics as of November 22, 2005—a leading Wall Street investment bank, using its own estimates and company data, compiled these tables.

a. Explain why analysts employ a revenue multiple model when valuing these companies. How do the “non-financial” operating metrics supplement this model?
b. Can you explain why the distribution of revenue multiples appears to have such a wide variance? Billing rates do not appear to be as varied.
c. Most operating metrics are based on headcount. This can be a problem for an industry enjoying such rapid growth. Can you explain how this can be a problem?
d. Explain why the revenue multiples for year 2006 are all lower than the comparable revenue multiples for 2005.
e. With such rapid industry expansion comes consolidation through business combinations. Shortly after the above tables were compiled, Razorfish completed a merger with International Integration (I-Cube), another company in the IT services sector. Razorfish offered I-Cube shareholders 0.875 share of Razorfish for each one I-Cube share. The deal was valued at $24.72 per share, nearly 18% above what I-Cube was trading for prior to the announcement. At the time of the acquisition announcement, I-Cube was trading at a price-to-revenue multiple of seven. What is your assessment of the price that Razorfish paid to acquireI-Cube?
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