Essay:
To IPO or Not To IPO
Prada is an Italian fashion label that specializes in luxurious goods for both men and women. The goods include leather, accessories, ready to wear, hats, shoes and even luggage. Mario and Martino are the Prada brothers who founded the company in 1913. Originality of the company made it one of the most influential houses of fashion.
However, it is never always smooth for enterprises like Prada. It currently requires quite a huge amount to refinance their debt which will be maturing in about six to twelve months. On the other hand, it also needs capital to finance the growth it intends to have in the Asian markets, china to be specific. The opportunity in Asia is too good to abandon. According to their research, Asia is an area for future growth. Their growth is currently higher than in other parts of the world. The benefits Prada can salvage from this market will be immensely valuable.
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The board is having it tough since they are experiencing pressure from outside the firm. The media has made sure that the stakeholders of the company are aware of the current situation Prada is facing. In return, the stakeholders have been applying immense pressure on the company to air their intentions on how they are handling the matter. This has led Prada to hire the services of Guido Santini of the investment bank group Capo Milano. He is to prepare a report with recommendations and ranking alternatives for raising more than one billion Euros within the next twelve months. They therefore need a credible strategy to meet these obligations.
The financial needs of the company could not have been kept a secret. This is because they have many high profile deals that the parent company has been having over the past ten years. They were on a quest to hold title as one of the pre eminent luxurious brands in the world. The series of acquisitions did not get to be as successful they were intending to be. They in fact left Prada in a lot of debts. Before making the conclusion on which proposals to give and in what order to give them, Santini assembled information on the fashion industry. He also looked at the company’s current strategic and financial position.
The media was discussing that Prada were putting into consideration an initial public offering, IPO. An IPO is a onetime only and first sale of the public tradable stock shares in the company that was previously in private ownership. This is also known as going public. If all shares of an IPO are sold, the stock becomes tradable through specialists that trade in the stock or stock exchange. As a result, the stock gets flexible and can either go up or down.
Currently, luxurious goods are on the list to get of most people. Most people want to be associated with the biggest luxurious brands. It has come to a place whereby they compete to see who has been able to be consistent in maintain this status. Even with the current economic constraints in some parts of the world, people are going out of their way to acquire these goods. This is to show that the goods are currently doing just fine even though some few people are unable to afford. Prada should put all their effort in maintain their status in the market. Luckily, they are a popular brand among the people and this will not be too hard. They should try increasing their range of goods so as to keep up with their competitors. It is clear that most of these good get their way into the market by using celebrities who people like emulating nowadays. This will be one of the ways they can use to keep up.
Before evaluating their financial alternatives, they should put together basic market information and the same information on comparable firms in the industry. This will give them benchmarks against which to evaluate the company and help determine which alternatives give the best opportunity to curb their financial problems. This will also be of help in assisting the company achieve its set goals.
Things are all not as bad as they seem for the company since they have a number of alternatives that can help raise the funds they are in need of. They have the IPO option, strategic partnership or debt. An IPO would mean the company being undervalued. It will also mean that the Prada family will no longer have the sole control and the company’s future success to their name. The only good option the company has so as to avoid undervaluing in the IPO process is by doing it in Hong Kong than in Europe. The other option is by letting private equity firms purchase some piece of the company. The company’s financial constraints are quite public and many of these firms are approaching it for this purpose. They also have some debt alternatives available to them. For instance there are investors in Europe who are lending financial help to quality names and Prada can also benefit from such. Most companies prefer taking up debts instead of issuing equities. The differences between equity and debt methods are legally important even though subtle in some ways. As seen, they both involve outside sources funding the company. For debts, the creditors only expect payment of the interest and principal. However, the investors issued equity expects a return of their investment with time, dividends and even ownership of the company. This is the reason why many business entities avoid equity or use it as a last result because of the consequences it comes with. There should be a preference for raising capital in one country in relation to another. Clearly, the company will be able to do well in a country like China with its current and future predicted growth. They should also be keen in choosing investors if they do chose to go that way. This has a lot of influence on the capital sources available. No one would like to finance a company that has association with investors that have negative reputations in the business world.
With all the available potential, the company should know all the pros and cons that come with choosing either. They already tried the IPO method in the past which cause a lot of problems for them. Since they really want to hold on to their control of the company, they should hence consider whether they are ready to suffer this consequence in undertaking the IPO plans. In considering this, they should be prioritizing the company’s ownership structure. Instead of risking their company ownership, they should try meet their financial requirements in other ways like the current lending options.
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