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G-III Apparel Group Inc IPO Valuation - Case Study Example

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G-III Apparel Group Inc IPO Valuation

The growth looks impressive, but the firm should not expect that type of continuous growth since in the apparel industry prolonged above average growth is rare. The company operates in a fragmented industry, but its 10% market share is relative large which gives the firm a competitive advantage. The company is perfectly positioned to achieve further growth by utilizing an acquisitions strategy. A positive aspect of the IPO plans of the firm is that company plans on reducing its long term and short term obligations from $22.3 million to $6.4 million. This strategic move is very wise because the firm is reducing its fixed costs by lowering its total debt. The organization has a workforce composed of 235 employees. G-III generated in 1989 total sales of $98.78 million. A strategy that has helped the company generate revenues at different price points is the use of multiple brands. Three of the brands the firm owns are G-III, Siena, and Cayenne. 6. Who is Oppenheimer? What was the role of Oppenheimer in the process? Was Oppenheimer’s role commensurate with its fees? Oppenheimer is the firm that handled the IPO. The person from Oppenheimer that was in charge of the IPO was Richard White. The IPO process began in September 1989 and it was completed three months later on December of 1989. The stock of G-III following the IPO was going to be traded in NASDAQ. The underwriter price obtained by Oppenheimer was $0.91per share. I believe the fees that Oppenheimer negotiated were reasonable. The $0.91 per share price was equivalent to a 7% commission. 7. Was $13 an appropriate price for G-III? What was the intrinsic value of a share of G-III? The intrinsic value of a stock can be defined as the actual value of the firm which may be different that the market value of the shares of a company. There are several metrics that can help an investor determine the intrinsic value of a company. The book value of G-III can be calculated by subtracting total debt from total assets (Little). Prior to the IPO the book value of the company was $18,923,000. The book value per share of the company was $4.07 (18923000 / 4644144). The market to book ratio assuming the $13 price is the market price was $3.19. The earnings per share of the firm in 1989 was $1.28. The price earnings ratio is calculated dividing the market price of the company by its EPS (Garrison & Noreen). Based on the $13 IPO price the price-earnings ratio of the company is $10.15. Due to the intrinsic value of the company I believe that the firm got a good deal by selling the stocks at $13, since this price is three times higher than the book value of the firm. 8. How would picking the wrong comparables influence estimates? Choosing the wrong comparable can distort the information which can lead to making bad decisions in regards to the valuation of G-III. One of the problems the company faced when it was choosing comparables was that most companies in this niche industry were not public which made it hard to find information regarding the industry financial performance norm. The problem with choosing wrong comparables is that it can undervalue or overvalue a firm. If the analysis undervalues the firm the company would be selling the stock at too cheap of a price. An overvaluation could hurt the company because investors might not be willing to buy at the high price which could lead to disastrous results in the IPO. 12. Did G-III display ...Show more
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Summary

1. How sound was G-III’s business? Was it suitable for an IPO? G-III is a great opportunity for investors looking to obtain capital gains by investing in a company with lots of potential. G-III is an apparel company that specializes in leather products. Leather is a material that represents 90% of the raw materials used by the company…
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