Nanpo (Holdings) Ltd.: Initial Public Offering Harvard Case Solution & Analysis

Question 7

Valuation compared to average multiple of other companies

Comparing to estimated developed in item 5 and 6 to the estimated developed by Mr. Tan and Mr. Yang, the level of debt is comparatively very high for Nanpo which must be reduced as the most optimum capital structure for the company is ratio of debt to total assets at 40% whereas when we compare the estimate of Mr. tan and Mr. yang with base case; the value of the company had fallen soon after the beta was adjusted. Furthermore it can also be seen that the company was able to generate a better value as compared to the average multiple of companies being traded on the stock exchange of Hong Kong at the target capital structure of 40% debt to total assets.

Question 8

Pros and cons of the terms stated in letter of interest


The benefit associated with the term of letter of credit included, was a price itself that would be paid to Nanpo i.e. $350 million. In addition to this; the synergies to be realized as CLP holding is expected to increase the revenue by 5% over the next year and a 10% thereafter, whereas the expenses are also expected to be decreased by 3%. Furthermore as per the terms stated in the letter of interest; CLP will also support the company with its debt by helping it repay the amount up to $ 50 million and an additional amount of $75 million will be invested in Nanpo’s business in order to align the business with the CLP’s vision. Alongside this, the letter of interest also stated the retention of 95% of the key employees. Therefore the investment is expected to help the company in financing its future growth and reducing its debt position.


Beside many benefits there are some drawbacks that need to be considered.The valuation offered by the CLP was definite and non-negotiable outside the range stated in the letter of interest. All the employees working in Nanpo were equally capable.Any reduction of the employees would result in a low morale. The time duration provided by CLP to accept the offer was very limited, making it difficult for the company to make such an important decision in a limited time frame. Apart from that, the cost synergies and the revenue assumed in the base case of the company was comparatively lower. Lastly, the parent company would be significantly influenced by Mr. Yang’s input on whether to stop the process of IPO and pursue the acquisition offer or to reject the offer and continue the IPO process.

Issues need to be clarified

Before the company agrees on any terms and conditions it is important that Nanpo should clarify the basis on which CLP would determine the final purchase,ranging between $250 to $350 million as the current value of company’s asset is much higher than the maximum price being offered by CLP i.e. $ 366 million. Moreover it should also clarify the extension of the substantial synergies between the company that is expected to result in increased revenues and reduced cost. Apart from this; it should also clarify the reason for removing 5% of the employees and the criteria on which the reduction of employees will take place.


It is recommended that the company should continue with its IPO process and should reject the offer made by the CLP holdings. It is mainly because,the terms stated in the letter of interest are non-negotiable and provide company with a limited time in terms of decision making. Furthermore the total value of the assets being hold by the company is far more than the maximum price being offered by CPL. Apart from that, any integration with CLP would affect the way the company conducts its operations. Furthermore CLP will be investing in the business only in order to align the Nanpo’s vision with the CLP,which will eventually deviate the company from its long term goal. The deal doesn’t seem to benefit the company much, therefore, it is advisable that the company should not make the deal with CPL and should continue with its IPO.


Exhibit 1

1994 (ESTIMATED) 1993 1992 1991 AVERAGE GROWTH
Revenues  $                2,534,286  $      1,801,894  $      1,782,219  $      1,549,336
  41% 1% 15% 19%
Operating Profit  $                     69,744  $           31,802  $           12,263  $             2,603
  119% 159% 371% 217%
Net Profit  $                     58,816  $           27,158  $           10,963  $             2,784
  117% 148% 294% 186%
Dividends  $                     23,377  $           11,819  $                180  $             1,271
98% 6466% -86% 2159%

Exhibit 2

FIXED ASSETS  $                        12,849,000
CURRENT ASSETS  $                      353,564,000
CURRENT LIABILITIES  $                      300,530,000
LONG TERM LIABILITIES  $                        10,077,000
 $                      513,000,000
NET ASSETS VALUE  $                        55,806,000
NEXT YEAR ESTIMATED PROFIT  $                        56,500,000
MARKET VALUE (ESTIMATED)  $                      452,000,000

Exhibit 3


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