EBay Case Study

1503 Words May 2nd, 2004 7 Pages
Section A: Problem/Issue Statement

Following a 220% increase in profits and 800% increase in revenues over six months, eBay Inc. is considering the following courses of action:

1.One being an IPO offering, requiring the sale of less than 9% of the company. This offering will be for 3.5 million shares, with an expected sale price at between $14 and $18 per share.

2.The other is to delay the offering for six months. This will cost eBay approximately $1 million in direct expenses; however eBay's additional losses will be far greater due to the delay of major investment initiatives.

In determining the appropriate course of action, the following topics were considered:

1. What are the costs and benefits of eBay going public?

*How do
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*eBay's positive earnings fix this issue because they prove that eBay is already far ahead of the game.

4.We determined an appropriate WACC to be 16% and an appropriate terminal growth rate to be 6%. (Exhibit 1)

We used the following approach for our valuation of eBay:

*The discounted cash flow approach, in which we used the following strategies:

oNon constant growth free cash flow model.

oEstimating the free cash flow.

oEstimating the discount rate.

oEstimating the terminal/horizon value.

Section D: Analysis

Part I: Quantitative Analysis

We found the appropriate IPO price, if issued today, to be around $17.

*This will make the intrinsic value of eBay about $59.5 million, should eBay decide to issue the 3.5 million shares. This $59.5 million will be very beneficial for eBay's future growth. (Exhibit 2)

*This will value the current owners' holdings at nearly $616 million, which is on the higher side of Goldman's recommendation. (Exhibit 2)

*We calculated the cash flows of the firm and discounted them by our WACC, which was roughly 16%. We used a terminal growth rate of 6% (Exhibit 1)

Part II: Qualitative Analysis

With going ahead with the IPO issue, we found that it will have the following impacts on the areas we found relevant to our analysis.

The benefits of eBay going public include:

1.It will give the current eBay shareholders more liquidity.

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