The primary problem that Sabeer Bhatia faces is to choose between several potential solutions available to him in order to raise capital and finance the operations of the company. The company has shown remarkable growth since its inception, but has failed to maximize earnings. The corporation is running out of money, and he needs to make a quick decision by accepting one of the options available. The decision process has been made difficult due to the presence of two powerful venture capitals that hold shares of the company. Both venture capitals support different proposals, thus making it very difficult for Sabeer to make a decision. The offer from Microsoft is a very promising one, but Sabeer does not want to incur loss by selling off the company at a cheap price as he realizes that there is huge growth potential in this business venture. The investors are protecting their interests, and the bridge loan offered is one such indication. It is important that this round of raising capital be closed, as soon as possible, because the company desperately needs money to continue operations. The venture despite its huge growth potential has failed to generate substantial revenues for the company, this is one good reason for Sabeer to review the offer put forth by Microsoft Corporation.
There are some key factors affecting the problem Sabeer faces:
It is important to realize that Hotmail Corporation is not a new venture; it is an established project that has proven its worth to all sections of the market. It has been an initiator of personal Internet usage and has been an industry leader since its inception. Thus, it has high potential for growth and promising returns to investment for all that hold a stake in its ownership. This has led to the conflict of interest problem within the Board of Directors. There are primarily four parties that are evaluating every possible business venture taken upon by the Hotmail Corporation: the Founders, DFJ, Menlo Venture and the employees. While, the founders were considering the Microsoft’s offer against the potential for going public, DFJ wanted to accept this offer. On the other hand, DFJ had their reservations and proposals. The employees who had been loyal for the company through thick and thin wanted the founders to accept Microsoft’s offer as they thought it would not only increase the net worth of the company hut it would also result in higher salaries and other benefits for them.
Despite of the fact that Hotmail Corporation failed to achieve exponential growth rate for revenue generation as compared to that of their user base, the company nevertheless dominated the industry for personal Internet usage and transfer of information. It had achieved the highest growth rate for the user base and had introduced many different innovative products along with its main offering. The shortage of money to finance the operation of the company point at the extent to which the operation shave expanded; indirectly pointing out the growth perspective and the future returns. This scenario points out to the possible worth of Internet companies in the stock markets. If the same level of public interest is replicated in the stock market, then it would be a huge success for the founders and all the share holders.
An important factor that affected this decision was the urgent requirement of cash as the company did not have a sufficient amount to remain operational in case the negotiation lasted for a long time. Therefore, the decision had to make in the shortest possible time and favor of the offer that provided cash at the earliest. Thus, the optimum decision considered cash as an important factor.
The optimum approach to this problem should focus on addressing all the different aspects of the situation individually and then combining the results and comparing it with the most suitable option. It is important to analyze the past performance of the company in terms of revenue, as well as the user base. This would give a fair idea of future trend of revenues and the opportunity cost of accepting Microsoft’s offer. The founder must value the company and the post money valuation should then be compared with that being considered by outside investors like GE. It is also important to realize that one of the key shareholding parties, DFJ, is not going to make substantial future funding to the company in the form of capital. It has almost exhausted the amount of capital it invests in any one company. The solution can thus, be derived by comparing the future outlook with the string offer out forth by Microsoft.
The company requires urgent cash and accepting DFJ’s bridge loan would result in dilution of founder’s share in the company. Therefore, it is not wise to consider this option. In a scenario, where DFJ was protecting its interests fiercely and trying to make the most out of this opportunity Sabeer stands alone and has the tough task of evaluating Microsoft’s offer and compare it with the strategies financing available from other investors. Other investors are unwilling to evaluate the company at $125 million. Therefore, any acceptance of an offer would again not be satisfactory for the founder. In such circumstances, it seems optimum for the company to accept Microsoft’s proposal. The company has repeatedly faced capital problems despite its exceptional growth rate. It would be wise for the founders to negotiate terms with Microsoft and get the best price for this corporation. It would not only be beneficial for the founder, but the employers and Menlo’s Ventures will also appreciate it. This means that three out of the four major stakeholders will be in favor of such a decision. Investment offers made by Excite and Yahoo do not promise significant addition to the company’s revenue because the operating income for both these companies is very low. The stock price for Excite has varied greatly in the past as compared to that of Microsoft that has shown stable growth. Also, the Purchase agreement offered by Microsoft will leave Sabeer Bhatia well off while taking investments from Excite and Yahoo will impose risk of dilution of his share in the company. Sabeer Bhatia must not neglect the fact that the offer made by Microsoft is huge and in a situation where he does not have many favorable options, this could prove to be more beneficial. He could negotiate for a higher price, as Microsoft is serious in acquiring this company. Therefore, my recommendation is to accept Microsoft’s offer not only because of the monetary benefits, but also the fact that under Microsoft’s leadership the company will flourish more and not face the same challenges that it has encountered in the past. It would also make sure that the employee productivity is increased and revenues increase in line with the user base.