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Key Features of Rosetta Stone’s Business Model and Core Business Strategy

From the case study, it has been evaluated that Rosetta Stone is one of the best brands in the English-speaking world in terms of language learning. With the passage of time, its revenues are increasing because of adopting the best methods and approaches in order to capture the customers’ interests. This business has focused on the developing business model, which continues to change in accordance with the sales force since it assists in managing the association with corporate customers (Véronis, 2000)buy dissertation online.

Mainly, Rosetta Stone is transitioning the cloud-based (Seattle-based Livemocha) business model due to its significant key features of being digitalised (Heminger & Robertson, 2000). This model goes beyond language learning to increase the knowledge of customers by bringing Dynamic Immersion Change in terms of images and texts for every individual belongs to different backgrounds while taking professional writing services . It can be used for deeper education technology to sell the best language-learning software packages to the customers. At the same time, the best pricing and elements are planned in this model to meet the needs of clients and generate revenues.

By contrast, this model cannot be acquired without using significant business strategies since it consists of making a qualified team of management and board of director prepare financial statements to develop a relationship with bankers and others when you asked to do assignment for coursework writing help. In order to be successful, this organisation focuses on the core business strategy called branding. For this purpose, the IPO process is being considered, which allows the organisation to be gone publically more by selling equity. In opposition, this process needs the use of social media (Google, commercials sites) for subscriptions that makes a profit by providing the way of charging high market prices. However, the social media is the secondary source for achieving the organisation’s purposes while IPO is only the core business method that has made the organisation dominating in the world.

Advantages and Disadvantages of IPO in Rosetta Stone

It has been mentioned previously that Rosetta Stone is more bending towards the use of Initial Public Offering (IPO), which was focused first in 2009. On this process, it raised approximately $112 million with the shares valued at $18.00. There might be several advantages of Rosetta Stone undertaking an IPO. The main benefit of Rosetta Stone going public is that the concerned process would allow the firm to expand the business by using capital since the equity is sold by the companies to make profits. Classical economic theory (2002) states that capital expansion is only possible if the investment is made. Further, this kind of expansion is vital for a business to enter into the new markets for internationalisation and to build the brand.

At the same time, an IPO process assists in establishing the business credibility while performing as a public firm. As a public organisation, Rosetta Stone could be advantageous in enhancing its corporate image and reputation. As per stakeholder theory (2002) soft and good, corporate image attracts or motivate the associated members to be a part of business activities, products or services. To proceed with an IPO is considered effective as the market for Rosetta Stone is showing the positive signs after the global financial crisis of 2008. Recently, several firms, such as a video game developer organisation (Changyou.com) and Bridgeport Education focused on “going public” and successfully experienced profitability.

Similarly, the language learning company consists of self-study learning that might be one of the leading organisations if IPO is used by taking over the capital and resources. Economically, no restrictions are imposed on Rosetta Stone with respect to the securities while the received fund may be used for common objectives including working capital, acquiring other businesses, and research and development. Modern finance theory (2013) demonstrates that the formal development of Capital Asset Pricing Model (CAPM) is based on the increasing funds and securities.

IPO may create public markets for raising Rosetta Stones’ securities by focusing on liquidity, which is often required for future investors.  Following an IPO process, Rosetta Stone may have greater visibility as the media becomes greater economic incentive in order to cover the public company because of the investors want information about of being better off by making a huge investment.  Conversely, some disadvantages are also associated with this process, such as it takes minimum three months and thus young firms might be at risks of profit and loss. Moreover, it is an expensive process that legally consists of accounting as well as printing costs that are needed to be paid regardless of success or failures of the process.  However, economic cost theory identifies the need of selecting those alternatives that reduce the opportunity cost (Brouthers, 2002).

As a public company, Rosetta Stone may incur higher costs in accordance with the requirements of Sarbanes-Oxley Act of 2002 and Consumer Protection Act of 2010. Once IPO process is adapted by a company, certain information (associated with financials and compensation) are required to be closed. Furthermore, legal undertakings necessary are the selection of the best team that ensures the need of listing the company’s shares through organising meetings in order to make rational decisions to proceed with IPO. With the help of market share listing, it would be possible to trade publicly in an efficient manner by controlling the specific proportion of the market.

Market-Multiples Approach

The approach of market multiples is a method that focuses on the idea that similar performance is present between companies that have similar economic and macro environment and same business. According to the concept, these businesses would have same profit margins, similar beta, same growth prospects resulting in an alike valuation multiple. Within the Market-Multiples approach, two methods are primarily used for comparison, which includes a comparison between the peers and the respected company. The methods for common market multiple includes Price to Free Cash Flow (P/FCF), Enterprise Multiple, Enterprise Value to Sales (EV/S), Price to Book (P/B), and Price to Earnings (P/E) (Luecke, 2002). The second method involves comparison of the market transaction between similar companies or those that fall in the same division, private equity corporation, purchased or acquired by a rival company, or those that are present in other classes of large and wealthy investors (Ryan, 2016).

The selection of the multiple values is dependent on the business nature and industry whereby the company functions. Compared to the equity value multiple approaches, the use of enterprise value multiples is more appropriate for Rosetta Stoned when it comes to the determination of exit value since it is the only method that despite the capital structure allows comparison of a variety of firm (Hollands, 2010). The enterprise value multiples method focuses on exit or terminal approach which functions assuming the company would be sold towards the end. Enterprise value method would allow a comparable acquisition that indicates the precise range of prices for an IPO.

Using the Market-Multiples Approach for Rosetta Stone’s IPO

In order to utilise the market multiples approach for presenting a suitable share price of the IPO situation of the Rosetta Stone, the Price-to-Earning ratio could be relevant here. It contributes in defining market value per share in terms of the earnings per share. This ratio indicates the market value of the stock in comparison with the relative earnings and can be calculated in the following manner,

Based on the 2009 data of the company (Nasdaq, 2009), the stock price of Rosetta Stone has been $ 112,500,000.00 and the EPS $ 6,250,000. The P/E ratio for the year 2009 becomes,

= $18.00

The above-presented calculations in terms of the Price-to-Earning ratio as the selected market multiples approach have indicated the share price for the company with respect to the IPO. This also identified capital-raising condition that had been faced by the company in 2009. This identifies the struggling period faced by the company based on the decision that was made by the management of Rosetta Stone regarding the pricing of the initial public offering of the company’s stock. The company does depict a strong financial performance for the described year.

In order to analyse this case from the IPO perspective, several considerations are to be made. The institutional factors regarding the equity issuance transaction should be investigated. It is highly recommended to understand the costs and benefits that related with the offerings of the public share. There has been a minimum amount of literature present that would identify the oral proficiency and the effectiveness of such methods of the organisation. This also includes the generalised opinions that are depicted by different individuals and the strong performance as well, which contribute in the IPO underpricing of Rosetta Stone in order for the evaluation of several financial aspects.

Rate of Return on Investment of Rosetta Stone

The following formula calculates the rate of return in terms of an investment for an organisation,

ROI =  x 100

Based on the data of 2009, the gain from investment has been $282.7 million and the cost of investment for the same year has been $276.6 million. By substituting these values in the above-defined equation, the following results have been obtained,

ROI =  x 100

ROI =  x 100

ROI = 0.02205 x 100

ROI = 2.205%

The profitability and investment factors can be compared in this context. With an ROI being 2.205%, it indicates the investment being made as an appropriate approach by the company. The reason for identifying the calculated return for the investments made as relevant is because this has been based on the present data of 2009. This ROI values instructs the company in employing the current approach for future profit as well. This is a positive impact on the financial performance of Rosetta Stone and would continue by investing in appropriate areas.

However, in comparison with the market, the investments for the organisation need to be enhanced in order to increase this ROI value of 2.205% to a greater extent, depicting more profit in future. Profit can be observed in this context; even so, incorrect depiction in the sense of limiting to this much profit only for future purposes should not be targeted.

Applying Free Cash Flow Model to Rosetta Stone

The Free Cash Flow (FCF) model presents itself as a measuring factor when it comes to the financial performance of a business venture in order to analyse the cash flow and capital expenditures. It indicates the cash that has been generated by the concerned organisation right after presenting the money, which is needed to maintain or develop the asset base of the organisation by itself.

Table 1: Free Cash Flow for Rosetta Stone

Free Cash Flow Statement for Rosetta Stone
2009 2010
Total revenue $ 209, 380 $ 226, 682
Cost of revenue $ 28, 676
Gross profit $ 180, 704 180, 704
Cost of Goods Sold $ 28, 676
Operating expenses:
Sales and marketing $ 93, 384
Research and development $ 18, 387
Acquired in-process research and development $ 0
General and administrative $ 39, 577
Lease abandonment $ 1, 831
Transaction-related expenses 0
Selling, general and administrative expenses $ 153, 179 $ 153, 179
Earnings before interest, taxes, depr. & amort. (EBITDA) $ 27, 525 $ 0
Depreciation and amortization $ 1, 967 $ 28, 499
Earnings before Interest and taxes (EBIT) $ 25, 558 $ 28, 499
Available tax-loss carryforwards $ 0 $ 0
Net taxable earnings $ 25, 558 $ 28, 499
Federal and State Income Taxes  $ 10, 223 $ 11, 400
Net Operating Profit After-Tax (NOPAT) $ 15, 335 $ 17, 099
Add back depreciation and amortization $ 1, 967 $ 28, 499
Subtract Capital Expenditures ($ 1, 458) ($ 1, 458)
Subtract New Net Working Capital
Free Cash Flow $15, 844 $44, 140

By applying the free cash flow model, it has been observed that what particular trends are being observed within this organisation. By 2009 when the organisation adopted IPO process, its revenues growth was experienced by the management of this company. In these revenues, expenses were relatively less, since the cost of revenues was only 28,676 $.  This cost of revenues is also called the cost of goods sold. On the contrary, these revenues have been further divided into operating expenses that were associated with the IPO process at the time when the process first introduced. This cost included the sales and marketing expenses 9$ 93, 384), research and development ($ 18, 387), general and administrative cost ($ 39, 577), Lease abandonment ($ 1, 831), Transaction-related expenses (o), and Selling, general and administrative expenses ($ 153, 179).

Furthermore, depreciation and amortisation expense within this year also observed that were $ 1, 967 while the sales income tax contributes to the reduction in the profitability with the cut off of $ 10, 223. To arrive at its valuation of free cash flow, it was observed that the total cash flow by the year 2009 was only $15, 844. By contrast, based on the previous year, the expected future cash flow could be assessed. By the year 2010, it has been expected that the marginal revenues for Rosetta Stone would higher since there would be no huge cost of goods sold. The major reason behind this reduction in cost is due to the no investment on sales and marketing techniques, research and development, general and administrative cost, Lease abandonment, Transaction-related expenses, and Selling, general and administrative expenses.

This increase would be mainly driven by depreciable equipment as well as finite-lived intangible assets. On the contrary, an expected increase in the depreciation and amortisation ($ 28, 4990 can be observed due to the merger of integration costs related to the other organisations’ acquisition. Furthermore, an increase in the sales income tax also contributes in the future more that may reduce its revenues with decreasing rates. Still, the free cash flow to the organisation to trade would be in the form of $44, 140. This free cash flow statement of 2010 indicates that the survival of Rosetta Stone is increasingly possible with huge generated revenues.

Conclusion

The offer price set for IPO process might be 18 $ or above, since the company is being successful at its initial public offering (IPO) price. From the analysis of Rosetta Stone and its fundamental process, it has been evaluated that the firm is progressing with the passage of time. Although, the firm is using cloud-based business model and branding strategy using social media; however, the major success factor for this firm is the use of IPO process that ensures the selling equity at suitable prices. In this context, Rosetta Stone is more at the peak of the business cycle. Following the market multiples approach for presenting suitable share prices, this company has reached the height of the success. At the same time, the cash flow statement analysis ensures its further progress in the future based on the data of 2009 when IPO was introduced. Conversely, IPO process may contribute to its failures, if appropriate pricing policy is not focused on the market since it affects the corporate image of a business.

Reference

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Dempsey, M., 2013. The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance? Abacus , 49(S1), pp. 7-23.

Heminger, A.R. & Robertson, S., 2000. The digital rosetta stone: A model for maintaining long-term access to static digital documents. Communications of the AIS, 3(1), p.2.

Hollands, M., 2010. Rosetta Stone Inc. The University of Oregon Investment Group (UOIG).

Lin, N., 2002. Social capital: A theory of social structure and action. Cambridge university press.

Luecke, R., 2002. Market Multiples Approach. In Finance for Managers. Harvard Business Press.

Nasdaq, 2009. ROSETTA STONE INC (RST) IPO. Nasdaq.

Post, J.E., Preston, L.E. & Sauter-Sachs, S., 2002. Redefining the corporation: Stakeholder management and organizational wealth. Stanford University Press.

Ryan, C.F., 2016. Equity Valuation: The Comparables Approach. CFA Institute.

Véronis, J., 2000. From the Rosetta stone to the information society. Netherlands: Springer.

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