Alpha Company Ltd., A private Japanese Company, was founded in 1972, producing cold-forged parts in various fields.

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Alpha Company Ltd., A private Japanese Company, was founded in 1972, producing cold-forged parts in various fields. These included electronic components and automobile parts. In one of his reports, Tetsuji Kataoka stated that we have constantly strived to develop new concepts for original technology and techniques, earning our Company an excellent reputation. In 1989, we began to apply our technology to heat sinks. We have used our technology to develop high-performance heat sinks previously thought impossible to produce. We developed Micro-Forging, a new technology surpassing previous forging techniques during this time.

Our products and technology offer a significant contribution to many industries. Our customers include Cisco, Fujitsu, Hewlett-Packard, Hitachi, Intel, Nokia, Oracle, and Toshiba. We serve many additional domestic and overseas electronics and technology companies.

In 1977, to serve its customers better in North America, the Company opened its Alpha Novatech. Novatech's line of business includes the wholesale distribution of electrical apparatus and equipment wiring supplies. Alpha has expanded its wide range of off-the-shelf products to meet customer requirements.

Its recent new development Farmless Fan Heat Sinks (FF) has become very popular among its customers. Electronic devices have become more powerful and compact, often requiring more efficient heatsinks. At the same time, PCBs have become more densely populated. These factors can make it difficult to cool all the devices on a PCB properly. If there is insufficient airflow, an active fan heatsink solution may be necessary.

As a result, of its new FF system Novatech has become very profitable. This year, Novatech's sales are expected to reach $450 million, exceeding the parent company's expectations.

Management Quandary

The success of Novatech has created a dilemma for the parent company and the management is thinking how they could provide the profit of Novatech to its parent’s shareholders.

There are several ways the management could transfer the benefit to the parent company. Below are examples of the ways the management could transfer it.

Spinoff.
Equity carves off.
Initial public Offering.

Questions:

Discuss pros and cons of each of the above methods and explain which method you recommend.

The Company expects its sales to grow at a 20% rate in 2024 but given the competition and regulatory environment this growth rate will slow by 2% per year to a long-run growth rate for the industry of 2% by 2034.

Novatech estimates its earnings before tax to be 15% of sales. The investment in net working capital requires to be 8% of any increase in sales, and capital expenditures 4% with depreciation expenses of 5% of the sales. The tax rate is 28%.

Novatech has $125 million in cash, no debt, and an unlevered cost of equity of 14%.