Aqua Bounty Harvard Case Solution & Analysis

Question No. 1: What are the main risks facing the business? Why did it diversify? Why is it difficult to value? Why does it want to go to an IPO now?

Answer:

PROBLEM STATEMENT:

The Aqua Bounty was facing the problem of lack in customer loyalty as the customers of European countries were not so much receptive. The customers always have greater effect on the ongoing concerns of the company as this was one of the key variable in the success of the business. AquaBounty first filled for FDA approval of its AquAdvantage salmon in 1995. According to Elliot Entis, the company’s chief executive in 2007, the company had already given the agency’s studies showing that the fishes were healthy and the implanted genes remained stable over several life cycles. Additionally, the company affirmed that it had conducted tests revealing that the GM salmon were essentially identical to other farmed salmon, containing the same levels of fats, proteins and other nutrients, and would not set off allergic reactions. However, at that point, the FDA was still seeking more data from the biotech company on safety and environmental risks on the wild salmon population. Yet another problem facing by the company was the approval from Food and Drugs Administration (FDA) for the safe production of the genetically modified fish. The company was uncertain over the early approval from FDA for the fin-fish products and hoping to get approved within 18 months. The company was also uncertain about the market of the genetically modified fin-fish products. They were in continuous research to find market segments for the aqua genetic products. Since they were uncertain of the success of the genetic products, they were also in need to change its product line in order to get rid of depending on only seasonal revenues, as they were in the controversial nature of the product. Aqua Fish farming experienced rapid growth in the 90s with major growth experienced in the South American region that sell products to North American market. The problem of emergent increase in the General and Administrative expenses. The expenses were aroused to more than 200% in the period of September, which caused a huge in operating loss that created doubts over the ongoing concern of the company. Rise in the bad debts expenses or write off of affiliate receivables was yet another problem. Another problem was the rising interest expenses. The main difficulty in valuing the company was that the company were in great losses and they were generating negative cash flows, which definitely was creating problems in calculating the firm’s value. The company was in the market where there is one competitor who were strong enough for the company to compete.

INITIAL PULIC OFFERING:

In 2000, the company broke out with its parents and raised a further $12 million in small scale equity financing and debt financing to finance its projects which afterwards converted into a common share, but the long awaited regulatory approval had created problems of the company reserves and consequently the Aqua Bounty came in a great need of additional investment. For this purpose Mr. Entis believed that it would be beneficial for the company to go for Initial Public Offering rather than to go again for small scale funding from individual investor in order to continue the additional development and commercialization of the firm’s key product lines. In order for IPO, the company was confident that they would be able to attract potential equity capital holders. For this reason, Entis visited United States and meet with around thirty individuals and financial institutions but it was really frustrating to conclude that there was very little interest in the Aqua Bounty because of the lack in the knowledge of aqua products, and the one who had knowledge of the company’s products have eventually gone bankrupt. Given the unusual product line and continuous losses, it’s difficult to calculate the value of the firm. The main reasons behind that problem were the great risk and uncertainty over the future revenues driven by the regulatory uncertainty over the different product lines and the unique nature of operations of the Aqua Bounty.

Question No. 2: What would a standard DCF approach look like? What are the problems with this?

Answer:

The standard Discounted Cash Flows approach is one the best valuing method to evaluate the company’s position in the market in terms of money. It is the estimate of future revenues over the life of the project proposal......................

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