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Harvard Case - Shakey's Initial Public Offering: The Dilemma of Investing

"Shakey's Initial Public Offering: The Dilemma of Investing" Harvard business case study is written by Maria Theresa Manalac, Stefanie Mae Margaret Jakosalem, Sandeep Puri. It deals with the challenges in the field of Finance. The case study is 17 page(s) long and it was first published on : Nov 20, 2019

At Fern Fort University, we recommend that investors carefully consider the risks and potential rewards associated with Shakey's proposed IPO before making an investment decision. While Shakey's presents a compelling growth opportunity, the company's financial performance, competitive landscape, and industry dynamics require thorough analysis to determine if the IPO is a sound investment. We recommend a comprehensive due diligence process, including a detailed financial analysis, an assessment of the company's competitive position, and a consideration of the broader economic and industry trends impacting the pizza industry.

2. Background

Shakey's Pizza, a well-established player in the pizza industry, is seeking to raise capital through an initial public offering (IPO). The company aims to utilize the proceeds from the IPO to fund expansion plans, including new restaurant openings and potential acquisitions. The case study presents the dilemma faced by potential investors who must decide whether to invest in Shakey's IPO, considering the company's financial performance, market position, and the overall economic climate.

The main protagonists in the case study are:

  • Shakey's Management: The company's leadership team, responsible for developing the IPO strategy and presenting the investment opportunity to potential investors.
  • Potential Investors: Individuals and institutions considering investing in Shakey's IPO, weighing the risks and rewards of the investment.

3. Analysis of the Case Study

We will analyze Shakey's IPO using a framework that considers the company's financial performance, competitive position, and industry dynamics.

Financial Analysis:

  • Financial Statements: A detailed examination of Shakey's financial statements, including the balance sheet, income statement, and cash flow statement, is crucial. Investors should assess profitability ratios, liquidity ratios, and asset management ratios to understand the company's financial health and efficiency.
  • Capital Structure: Shakey's capital structure, including its debt-to-equity ratio and interest coverage ratio, should be analyzed to understand its financial leverage and ability to service debt.
  • Cash Flow: Investors should examine Shakey's cash flow generation and its ability to fund future growth initiatives. A strong cash flow is essential for a company to meet its financial obligations and invest in future opportunities.
  • Financial Forecasting: Investors should assess the company's financial projections and the assumptions underlying those projections. This analysis will help determine the potential for future growth and profitability.

Competitive Analysis:

  • Market Share: Shakey's market share within the pizza industry should be analyzed to understand its competitive position. Investors should consider the company's ability to compete against established players and emerging competitors.
  • Pricing Strategy: Shakey's pricing strategy and its ability to maintain profitability while competing on price should be examined. Investors should consider the company's value proposition and its ability to differentiate itself in the market.
  • Customer Loyalty: Shakey's customer base and its ability to retain customers should be assessed. Strong customer loyalty is essential for long-term success and profitability.

Industry Dynamics:

  • Economic Outlook: The overall economic climate and its impact on the pizza industry should be considered. Investors should assess the potential for growth and profitability in the industry.
  • Technological Trends: The impact of technological advancements, such as online ordering and delivery platforms, on the pizza industry should be evaluated. Investors should consider Shakey's ability to adapt to these changes.
  • Regulatory Environment: The regulatory environment surrounding the food industry, including food safety regulations and labor laws, should be considered. Investors should assess the potential impact of these regulations on Shakey's operations and profitability.

4. Recommendations

Based on the analysis, we recommend the following:

  • Conduct a thorough due diligence process: Investors should conduct a comprehensive review of Shakey's financial statements, competitive landscape, and industry dynamics. This due diligence process should include:
    • Financial analysis: A detailed examination of Shakey's financial performance, including profitability, liquidity, and asset management.
    • Competitive analysis: An assessment of Shakey's market position, pricing strategy, and customer loyalty.
    • Industry analysis: A review of the overall economic climate, technological trends, and regulatory environment impacting the pizza industry.
  • Assess the company's growth strategy: Investors should evaluate the feasibility and potential profitability of Shakey's expansion plans. This assessment should consider the company's ability to execute its growth strategy and the potential for cannibalization of existing stores.
  • Consider the risks associated with the investment: Investors should carefully consider the risks associated with investing in Shakey's IPO, including the potential for competition, economic downturns, and changes in consumer preferences.

5. Basis of Recommendations

Our recommendations are based on the following considerations:

  • Core competencies and consistency with mission: Shakey's has a long history in the pizza industry and a strong brand recognition. The company's expansion plans are consistent with its mission to provide quality pizza and a family-friendly dining experience.
  • External customers and internal clients: Shakey's has a loyal customer base and a dedicated workforce. The company's expansion plans are designed to meet the needs of its customers and provide opportunities for its employees.
  • Competitors: The pizza industry is highly competitive, with established players and emerging competitors. Shakey's needs to differentiate itself and offer a compelling value proposition to compete effectively.
  • Attractiveness - quantitative measures: Investors should assess the potential return on investment (ROI) and the risks associated with investing in Shakey's IPO. This assessment should consider the company's financial performance, growth prospects, and competitive landscape.

6. Conclusion

Investing in Shakey's IPO presents both opportunities and risks. While the company has a strong brand and a history of success, investors should carefully consider the company's financial performance, competitive position, and industry dynamics before making an investment decision. A thorough due diligence process, including a detailed financial analysis, an assessment of the company's competitive position, and a consideration of the broader economic and industry trends, is essential for investors to make an informed decision.

7. Discussion

Other alternatives not selected include:

  • Investing in another company in the pizza industry: Investors could consider investing in other companies in the pizza industry that may offer a more attractive risk-reward profile.
  • Investing in a different sector: Investors could choose to invest in a different sector altogether, such as technology or healthcare.

Risks and key assumptions of our recommendation:

  • Economic downturn: A significant economic downturn could negatively impact the pizza industry and Shakey's financial performance.
  • Increased competition: The pizza industry is highly competitive, and new entrants or aggressive marketing campaigns by existing players could erode Shakey's market share.
  • Changes in consumer preferences: Consumer preferences for pizza could shift, impacting Shakey's sales and profitability.

8. Next Steps

Investors should follow these steps to implement our recommendations:

  • Conduct due diligence: Investors should immediately begin conducting a thorough due diligence process, including a review of Shakey's financial statements, competitive landscape, and industry dynamics.
  • Develop an investment thesis: Based on the due diligence process, investors should develop a clear investment thesis that outlines the potential risks and rewards of investing in Shakey's IPO.
  • Monitor the company's performance: Investors should closely monitor Shakey's financial performance and industry trends after the IPO to assess the company's progress and the validity of their investment thesis.

By carefully considering the risks and potential rewards associated with Shakey's IPO, investors can make an informed decision that aligns with their investment goals and risk tolerance.

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Case Description

In early December 2016, a student member of the Philippine Fund of the finance lab at the Asian Institute of Management was wondering whether to invest in the initial public offering (IPO) of Shakey's Pizza Asia Ventures Inc. (Shakey's). Shakey's was the market leader in the full-service chain restaurants industry in the Philippines and would be the fourth company to be listed in the Philippine Stock Exchange. The IPO period was from December 2 to December 8, 2016, and the company was offering a total of 306 million shares. The student member must decide whether to buy Shakey's stock based on her estimate of the intrinsic value of Shakey's relative to the IPO price, Shakey's strategy and prior performance, and the attractiveness of the food service and restaurant industry.

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