METAPATH SOFTWARE Assignment

METAPATH SOFTWARE
Executive Summary
Metapath formed in ‘95 out of JV between Securicor Telesciences Inc. & Networks Northwest.
MP would be run by CEO John Hansen (formerly associated with Networks Northwest.
Metapath has made good progress in developing its business since its inception – generating
$6.4m revenue in the September quarter of 1997 with representation of three large customers.
However, with the ambition to win a good chance of IPO within the next two years, more
capital needed to be raised to gain traction in customer acquisition and smooth out current
quarter-to-quarter revenues. Metapath has received two offers as at September 1997 and they
are discussed as follows: RSC and TCV consortium offered to buy $11.75 million of stock at a
$76 million pre-money valuation (“Series E Preferred”). The proposed stock instrument was a
participating convertible stock (“PCPT”). This instrument functions the same as the convertible
preferred stock in the event of a qualified public offering whereas in the event of a sale, RSC
and TCV consortium not only receives the face value of the consideration, but also gets the
equity participation
Equity Financing Offer: MetaPath’s goal of next round of financing was to get to cash break-
even, smooth of Quarter-to-Quarter revenue, and attract more customers - necessary to make
an attractive IPO
CellTech Acquisition Offer Details: Unsolicited offer from CellTech for $115MM in Common
Stock
MetaPath has two options for its financing needs.
Option 1: Acquisition by CellTech & Option 2: Equity Financing from RSC and TCV consortium
Offer from CellTech to MetaPath
CellTech a leading company of hardware provider for the telecommunication sector offered to
acquire MetaPath at a valuation of $115 million in exchange of all the all of the shares, options,
and warrants of MetaPath solutions .Metapath will be benefited from this offer as unlike the off
by RSC the CellTech deal would not dilute the ownership of the existing shareholders.
Following are some ways in which MetaPath is going to be benefited from the acquisition offer.
1. CellTech’s fully developed marketing and domestic supply chain will help MetaPath to
offer its services to a larger customer base as both the companies have more for less
same type of customer base.
2. CellTech’s engineers having expertise in field based hardware installation and
maintenance will definitely be useful to MetaPath’s development projects.
3. The Valuation by CellTech for the acquisition will help MetaPath to increase its
shareholders value in the near future.
4. CellTech’s stock was performing good and Investor Sentiment is mostly bullish towards
its stock prices hence in near future it is possible that CellTech’s share price will grow by
more than 40% which will provide additional liquidity to MetaPath’s shareholders.
5. Analysts believe that CellTech will be able to maintain its current momentum of growth
in revenue and in EPS rate due to its leadership in technology, strict financial policies
and internally development programs for new products.
6. Incurring competition in the Telecom. Industry will force wireless service providers to
add new features to their existing service lines with competitive pricing and MetaPath
by associating itself with CellTech will be gained from the scenario.
The proposed deal: In perspective of CellTech

Pursuant to the merger, CellTech would issue or reserve for issuance shares of and options on
its Common Stock in exchange for all of the shares, options, and warrants of MetaPath. The
aggregate number of shares issued or reserved for issuance as Merger Consideration would be
equal to $115,000,000.00 divided by the average closing stock price of Metapath’s common
stock over the five trading day period ending two trading days prior to closing. All shares of
CellTech’s Common Stock received by MetaPath shareholders in the merger will be subject to a
lock-up for a period of up to 90 days as required by underwriters in connection with any public
offerings.
It is undoubtedly true that Metapath Has every potential to be leading player in the Telecom
Industry. Recently both MetaPath and CellTech has been expanding their operations
internationally, hence for CellTech diversification will be the major advantantage. It CellTech
merges with Metapath it will going serve a large customer base with both the hardware and
software solutions. The proposed value for MetaPath is high in comparison to the company’s
current standings yet CellTech is focusing for the future synergies which are there when the
conglomerate penetrate international markets. CellTech hopes to be a one stop solution for all
the customers’ requirements in the Telecom industry and this will definitely going to pay well.
Conclusion
We would take the Celltech offer. If Metapath attempted to go public in the next two years, the
market is paying three to five times revenues and would put a maximum value of the company
now of $125 million. However following issues need to be further investigated before accepting
the offer.
 The willingness from CellTech to sacrifice such a large amount of capital indicates that
either CellTech genuinely believed that Metapath would contribute significantly to the
synergies to the New Company or there could be asymmetric information hidden from
the management. It signaled CellTech’s underlying business might have limited upside.
 CellTech’s balance sheet indicated ongoing liquidity and financing risks. As we can see
from the table below, the company continued to face liquidity pressure where its cash
ratio and quick ratio deteriorated over the course from 1995 to 1997. CellTech had six
consecutive quarters operating loss, which indicated that its unhealthy operating cash
flow ratio

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METAPATH SOFTWARE

The proposed deal: In perspective of CellTech

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