Flexics Prof. Ian Giddy, New York University Flexics, Inc., is a leading producer of plasma technology display devices in the USA. One of the company's latest innovations is a patented process that permits the rapid production of customized semiconductor wafers using plasma-based etching technology instead of quartz plates. Flexics, based in Seattle, started business in 1987 and now has production facilities in Vancouver and a research affiliate in Princeton, New Jersey. In mid 2003 Alex Pereira, the founder and CEO of Flexics, was considering options for realization of the value of his shareholding in Flexics. Pereira was seeking a method that would offer greater liquidity and diversification of his and his family's investment in the company. One option was to talk to investment bankers about an initial public offering (IPO). This would allow him to sell some or all of his shares in the market. But he was unhappy about the IPO market, which was weaker than in 2001 when bankers had talked about an IPO price in the $40-45 range. In the past year, public offerings of similar technology companies had brought price/earnings ratios of about 15. A recent private placement of Flexics shares with a venture capital investor had been done at an effective price of $24 per share. Another possibility was to sell his shares to Photronics, which was rumored to be interested in buying a stake in Flexics. Among the other options he was considering was a leveraged buy-out by management. Pereira liked the idea of giving key officers a greater stake and control, but he wanted to get a good price for his shares. He was willing to receive payment partly in cash, and partly in the form of a $30 million, 15% prepayable subordinated note. Management had discussed the LBO possibility with Seattle Partners, a venture capital firm that was familiar with Flexics. The firm's advisors had calculated that of the minimum amount of $216 million needed for the LBO, $20 million would have to come from managment, as much as $120 million could be raised through a senior debt issuance led by Bank of America, and the remainder from a private equity group led by Seattle Partners. B of A indicated the rate would be 12% and that lenders would need a Net Operating Income/Interest Expense ratio of at lease 2x. At this time 35% of the 9 million shares outstanding were held by the founder and his family, and the remainder was held by venture capital and private equity groups. Net operating income was $30 million. Other key indicators are listed below. Balance sheet (millions) Cash 50 Other current assets 100 Long term assets, net 120 Total assets 270 Noninterest bearing short term debt 60 Short term debt (10%) 10 Senior long-term debt 0 Subordinated debt 0 Equity 200 Total Liabilities & Equity 270 Interest Coverage Net Operating Income 30 Interest Expense - Short term debt 1 - Senior long term debt 0 - Subordinated debt 0 Total 1 NOI/Interest expense 30 Effective tax rate 30% Depreciation $20 million 1. What is Flexics worth (Market Capitalization) if the company were to be sold in the IPO market? 2. From the point of view of Phototronics, consider making an ofer. What would Flexics be worth to Phototronics? 3. If Flextronics NOI exceeded $18,333,333 would this change the company