Psychology / Creative Computers
Autor: andrew 18 February 2012
Words: 334 | Pages: 2
On December 9th, Creative Computers had 10,238,703 shares outstanding and Ubid had 9,146,883 shares outstanding. When Ubid IPO, it opened at $15 per share and closed at $48. This gave a market cap for Creative Computers at approximately $232,930,000 and Ubid a market cap at approximately $326,429,000,.The rapid growth in Ubid's share price was very typical trend for tech companies, especially during the dot com bubble. Mean while, Creative Computers was priced at about $23 per share. The valuation between Creative Computers and of Ubid describes a condition commonly referred to as "negative-stub-values", which means that there is a stock that is mispriced. This condition occurs when a firm's market value is less than the value of its ownership stake in a publicly related subsidiary, and it's a direct consequence of the equity carve-out of Creative Computers from Ubid. One reason why Creative Computers may have divested (leading to the carve-out) in relation to the company's assets was to raise capital separately. This allowed Creative Computers and Ubid to focus on their core operations. Raising capital is used to increase an investor's confidence, which could ultimately increase the value of a share price. By spinning off 20% of its value to Ubid, Creative Computers also protected itself from flooding the market from too many shares. A negative stub value also implies that there is an opportunity for arbitrage, which can help Elena decide which equity to purchase (discussed in problem 3.)
Examining the balance sheet of both companies, Creative Computers has about 127,000,000 in assets (excluding cash and equivalents), while Ubid only has about 5,500,000 in assets; however, Creative Computers can protect itself from potential risks with its $15.5 million in cash and equivalents. Unlike Creative Computers, Ubid has very little assets that could protect the company from significant risks. Even though increased assets means more liabilities, Creati...