Case #1 - Amazon IPO: due April 23, 1997


Deutsche Morgan Grenfell Underwriting Team

Study the red herring prospectus for the Amazon initial public offering (IPO). Amazon has hired the Underwriting Team (Deutsche Morgan Grenfell) to represent it today, March 24, 1997. The proposed transaction is an initial public offering (IPO) of common stock. Your job is to negotiate a price for the newly issued stock. (Do not be influenced by actual events related to this transaction that occurred after March 24, 1997.)

Your compensation from Deutsche Morgan Grenfell is tied to the success of the IPO. Your pay will be structured as follows:

Thus, if you achieve the lowest price in the class, you receive the full 25 points. If you achieve the highest negotiated price, your receive 15 points. Since this will be a firm commitment underwriting, Amazon receives the extra proceeds from higher sales prices, but the Underwriter bears more risk of losses if the IPO doesn't sell. Both Amazon and Deutsche Morgan Grenfell face potential litigation risk if the price of Amazon stock falls substantially after the IPO.

Your assignment includes: (a) perform a formal valuation of Amazon, determining a range for the IPO price that is financially justified, and (b) negotiate with a management team from Amazon. [Note: it is illegal to rebate any part of your fees to Amazon management.] Your legal advisor has informed you that there is a general legal prohibition against fraudulent misrepresentations in these types of dealings. When (and if) a deal is consummated, you should get a sign-off on the terms of the deal from the opposing team.

REQUIRED:

(1) Before the negotiation day: Prepare a formal report showing the financial basis for the range of prices for Amazon, complete with explanatory text, calculations, formulas and assumptions. For more details about the structure of the report, see the attached list of requirements. This report is highly confidential. It is due in class on Wednesday April 23. After your report is turned in, you will be assigned the opposing team that you must negotiate with.

(2) On or before the negotiation day: You must submit a completed Negotiation Form (attached at the end of this material) in class on Wednesday April 30. You must also submit a brief final report describing the negotiations at that time. What factors moved you away from your original price range? Justify the difference between your beginning price range and the final price.

Grading: Your group grade will be determined as follows:

REPORT REQUIREMENTS

FIRST SECTION: Should discuss your overall opinion of Amazon. You should mention the main reasons or assumptions supporting your overall opinion.

SECOND SECTION: Should describe the types and results of analyses performed on Amazon's financial data. Examples would be:

Note that some of these factors may not be relevant to the analysis of Amazon.

THIRD SECTION: Should discuss your negotiation strategy. What will be the main arguments supporting your price range? What defenses can your raise against the weaknesses in your analysis?

IT IS ABSOLUTELY PROHIBITED TO DISCUSS THIS CASE WITH ANYONE OTHER THAN MEMBERS OF YOUR OWN GROUP. VIOLATING THIS RULE CAN RESULT IN A ZERO GRADE BEING ASSIGNED TO THE VIOLATING GROUPS. (Besides, sharing information can destroy your bargaining position.)


Amazon Negotiation Form

Names of people in your group:

__________________________________

__________________________________

__________________________________

__________________________________

__________________________________

Names of people in Management group:

__________________________________

__________________________________

__________________________________

__________________________________

__________________________________

Initial price offered to Management group:

$__________________________________

Initial price requested by Management group:

$__________________________________

Final negotiated price:

$__________________________________

If no deal was reached, enter the

LOWEST PRICE ASKED: $__________________________________

HIGHEST PRICE OFFERED:$__________________________________



A full-text version of this assignment is available in Acrobat's portable data format (.pdf). The file is about 143K and can only be viewed (and printed) using a copy of Acrobat Reader.

If you do not have a copy of this program, you may download a program that works for Windows 95 or NT now [this is a self-extracting ZIP file that you must install on your computer to read PDF files]. If you want the current version of the Adobe Acrobat Reader for other platforms, visit Adobe's web page.

Click here to download this assignment.


A full-text version of the red herring prospectus is available in Acrobat's portable data format (.pdf). The file is about 296K and can only be viewed (and printed) using a copy of Acrobat Reader.

Click here to download the red herring prospectus.


A full-text version of the Dow Jones News Retrieval information is available in Acrobat's portable data format (.pdf). The file is about 111K and can only be viewed (and printed) using a copy of Acrobat Reader.

Click here to download the DJNR information.


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Last Updated on 4/9/97

© Copyright 1997, G. William Schwert