Nantucket Nectars

Nantucket Nectars has many options that determines their future at the time of this case. They are faced with a decision to remain independent, go public, or sell. The managers are comfortable with any of the options; however, pros and cons exist for each possible decision.
Decision One – Go Public with an IPO
If NN were to go public and have an initial public offering, many benefits would arise. First, the company would receive instant capital funding. Given their financially problematic history, financially uneasy present, and robust growth plans NN would be able to settle many of their financing issues and reduce their worry of compromising their product for the sake of costs if they were to go public. An IPO would also allow the managers to remain in control. A large concern of Scott and First was how the company would be managed after a decision. With an IPO, at least Scott and First would be able to manage NN according to the plans they have already strategized. Going public would greatly increase the brand awareness of NN. They know the value of their “quirky” and “memorable” brand and feel that they have tremendous geographic growth opportunities. An IPO would generate more awareness and, in turn, generate more consumer demand for the product.
The downsides of going public also could arise. First, despite their control retention, management would have to now report to the shareholders associated with an IPO. Since it would be their “job” first to make the company money, but second to appease the shareholders, the managers may risk compromising or losing sight of their vision for the company. In conjunction with managers adopting the vision of the shareholders, NN could also risk losing the company culture by going public. More short-term goals would arise and the company could quickly lose sight of their rich history, vision, and mission diluting the culture that Scott and First established. An IPO would also bring many legal and regulatory constraints – another downside against the carefree Nantucket spirit.
Decision Two – Remain Independent
If NN were to essentially do nothing and remain independent, the decision would have many benefits but would not come without shortcomings. Most obviously, a strong benefit to independence is independence. Scott and First and the initial investor would remain in control of the company and the team would be more flexible to execute the strategy that they desire. They would be able to retain the control of their employees, those who have also substantially worked to make Nantucket. Remaining independent could be the best choice for the company to keep the founding story and their strong company culture. Scott and First have established such a culture that they feel that it could ultimately determine their success or failure. Keeping it intact is a strong argument for remaining the same. Independence would also mean that if the company were to meet its growth potential, the founding team and managers would have robust financial gains.
Contrarily, if NN remained independent, they could struggle to finance their growth. Their financial struggles are a huge risk regarding the success of the business, and remaining independent could be a very foolish decision, resulting in insufficient funds to not only grow but to also invest into advertisements and market research. Also, Scott and First may be strong founders of the company, they lack expertise in outside business. Some expertise, either from within the team or within advisors that other decisions could bring, would further clarify and support Nantucket’s growth opportunity. Not only would they be hindered from additional expertise, remaining independent would also prevent them from achieving economies of scale as they could would other potential partners or acquirers.
Decision Three – Sell
The sale of NN would also have benefits. To the right acquirer, the company would be able to be managed by more experienced people that would have the expertise to grow the company successfully. In addition to more experience management, they could obtain the appropriate amount of financing to continue production of high-quality product; they could also achieve economies of scale so they produce more consistently cheaper. All of these combined would further enable NN to grow rapidly, even more so than they expect.
Unfortunately for Scott and First, a sale would mean that they would lose their control over the employment of their employees, many of which are integral to their business story. They could risk losing competitive advantage via their quality products, ability to respond quickly to changing customer preferences, strong culture and employee loyalty. Selling would pose a challenge for the management to negotiate deals without their employees finding out prematurely. Also, the initial investor’s 55% ownership would be a cause of possible difficult negotiations given a decision.
Many important valuation drivers should be factored into the valuation of NN, such as their brand creation, management history, and its popularity amongst customers and relationships with retailers. However, despite these drivers, using the discounted cash flow approach, NN would be valued between $45-48 million using a growth rate of 3-4% after ’02 or it would be valued between $52-57 million if a growth rate of 5-6% after ’02 was used. Using comparables would yield the following valuations: average revenue multiple 1.6 x ’96 sales values $46 million, average revenue multiple 1.6 x ’97 sales values $80 million; price to earnings ratio 26.9 x ’97 earnings values $26 million and a price to earning ratio 22.5 x ’98 earnings values $53 million. Scott and First would ideally like to have a higher value due to the amount of sweat equity that have into the company; however, if they were to seek an IPO, valuing the company too high could be detrimental in the long run. If the company were to be bought out, an acquirer would have to consider the various costs and expenses to maintain NN’s products. These could influence their attractiveness.
Other Factors
In addition to the value, management should consider they way they would sell the company. Public bidding, private bidding, and choosing industry favorable buyers all have implications. Public bidding would lead to the highest possible price for the company and would be the best way to determine it true market value. However, if the management team decides to not sell at the last minute, it would greatly damage the company’s reputation. Private bidding, on the other hand, would not lead to the highest possible price nor lead to a true market valuation. Yet, the team would be better able to negotiate beneficial terms for employees while also reducing publicity leading more customers to perceive it as being independent as opposed to acquired. Like private bidding, choosing favorable buyers would not achieve the highest price or a true market value; although, this factor could promote retention of the corporate culture and the management team and employees could be more likely to maintain their job status with the company.
NN should sell. A strong acquisition with Ocean Spray or Cadbury would be a best fit because of the synergies in their culture; Cadbury’s lack in distribution access could be achieved after sale. NN could greatly use the benefits of the additional financing and this sale would help to keep the entrepreneurial spirit preserved. The company would be able to gain access to more outside business knowledge and use it to help them manage the projected growth. Selling would grant them access to financing that they could not get alone. The management team could negotiate employment of employees and possibly their own retention.