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KTM: Venture Capitalist Exit Case Solution & Answer

KTM: Venture Capitalist Exit

Introduction

KTM is the manufacturer and designer of the rally bikes, motocross and racing motorcycles, which was founded in Austria. The company has responsibly maintained its reputation and position for manufacturing high quality and reliable motorcycles. It has also earned an expertise in the production of the core components of engine.  The company has always strived to build a strong and positive brand image, with the legacy of championship titles, high quality products and technological leadership. In the late 1980s, pushed by the strong financial marketplace; the company was purchased by a financial investor. Even though, KTM was providing high and exceptional quality products and had a good and strong reputation in the market; the company had so many products, high debts and low profitability. In the year 1991, KTM was about to announce its bankruptcy, and at that time there were few importers who convinced the venture capitalist group to create some feasible situation for KTM.(Wong, 2007).

BC European Capital had invested 49 percent stakes in KTM in the year 1999. It was one of the foremost and largest venture capitalist company all around Europe, with the experience of approximately 15 years as well as the involvement in nearly forty acquisitions. The venture capitalist BC has assisted the company’s management in acquiring business contacts and new skills whenever it needed. The capitalist BC has also been giving a liberty to the company’s management to practice their business and corporate strategy. From the year 1999 to the year 2002, the 50 percent cumulative average growth in profits and 31 percent revenues were rewarded to the investors. In the year 2002, the major revenue generating areas were off road motorcycles as well as related accessories from which the company generated 80 percent of its total revenues.

KTM wants to expand its product base through offering ATV, on-road motorcycles and other related products. In addition to this, it also plans to expand geographically in the USA and EU countries.

Qualitative assessment of each of the financing alternatives

Initial public Offering (IPO)

The initial public offerings would be a good strategic move for KTM, as it provides the opportunity to easily access the desired funds as well as finance the growth strategy and relevant capital exit. Additionally, the company would be able to obtain possessions in the financial market, which in turn would allow the company to raise more funds, in near future. Also, it would create demand for the product, and allow the company to generate higher profit returns. At the same time, the Initial public offering would incur high cost of marketing, accounting and administration to the company.

Financing the strategies with the use of the initial public offerings, would increase the company’s equity portion of the total equity and liability, and it would also reduce the debt to equity ratio of the company. Thus, financing the company’s strategies through initial public offerings would be expensive for the company on account of the fact that the shareholders retain the considerable amount of interest in the company’s profit returns and dividend is not a deductible expense while calculating the taxable profit returns. …………….

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