Servervault Analysis free essay sample

There are several approaches which are worth for SeverVault to consider. The first alternative is Status Quo (SQ), it means do nothing and let the business keeps running in the old way. Since Severvault is going to meet the venture capitalists who are interested in taking an equity stake in SeverVault in exchange for a cash investment, there are few possibilities that may might happen if it has decided to use Status Quo. The first possibility is that ServerVault has failed to attract those venture capitalist to invest. Then, due to the limited cash that ServerVault is holding and the negative cash flow, it will record a negative cash balance of $706422 in September 2000 (Appendix 1). Therefore, as there is no more additional capital investment in this period, ServerVault will not be able to keep operating its business and will result of bankrupt in the end. The second possibility is that if the venture capitalists invest only 5 million. We will write a custom essay sample on Servervault Analysis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This amount of capital can maintain its business in a short run. However, because investing in hosting company is classified as long term investment, and ServerVault is still in the early stage of its development. 5 million is not adequate to maintain its operation in long run. Since the cost of building the new facilities and the computer hardware are the major cash outflow, the net cash flow will still be negative. Therefore, November 2000 will be the last month recording of a positive cash flow of $798678 and it will have a negative cash balance of $876022 in December 2000 (Appendix 2). ServerVault is still walking towards the way of bankruptcy. The last possibility is that if the venture capitalists invest 15 million. In this case, although ServerVault will not have sufficient cash to run its business, it will be able to operate for a longer time compare to the second possibility. According the Appendix 3, Servervault will record its first negative cash balance of $102422 in July 2001. In short, quoting to the 12 months cash flow forecast of ServerVaut in Appendix 4, the cash outflow is exceeding than its cash inflow. If there is not additional funding besides those venture capitalists, ServerVault will not have enough cash to keep operating and will declare bankrupt eventually. The second alternative is the merging between ServerVault and the other hosting company. There are several advantages of merging with the other hosting companies in the same market. First of all, merging can expand its market share in hosting industry. Since each hosting company has obtained certain percentage of the market share, its market share may be sufficient to affect the market price of internet hosting service. If merging happens between two companies, their market shares will turn into a single company. Thus, that company will have more market share. More market share will enable a company to have a larger bargaining power to its suppliers, customers, investors. In this case, Serervault will have more bargaining power to its venture capitalists. Not only will the venture capitalists have a higher chance to invest 15 million, but also it will attract more capitalists to invest. Take the example of the two largest online video firms Tudou and Youku, the acquisition of Todou can grant more than 35% of market share which giving it more bargaining power with potential advertisers . Moreover, The joint operation is expected to help the firms cut costs in areas such as copyrights, bandwidth and server purchases. In short, not only merging can increase the market share, but also reduce the operating cost. Therefore, if merging can reduce the operating cost such as set up, hosting, and services cost will be definitely decrease in a significant portion. Another advantage is that merging can increase the competitiveness of its company. As the market share will be increased by merging two companies, it will has a lower production cost (operating cost). As a result, ServerVault can provide the same hosting service with a lower market price because of the lower production cost. Thus, since ServerVault has been doing the product differentiator because of its unique security technology, it can shift its cost driver from product differentiator to cost leader gradually. So it can widen its customer base not only for those who are looking for fast and secure internet service, but also for customers who cannot afford for the original price. With reference to the example of facebooks Instagram acquisition, since Instagram has become a popular application used on facebook, a site that has built an audience of some 950 million users,and its nature is similar with facebook about sharing photos on the internet, the acquisition can help facebook to eliminate a large competitor in photo sharing market. This movement helps facebook to maintain its competitiveness in the market. If ServerVault merges with the other hosting company, it will bring a similar effect as facebook and Instagram. Last but not least, merging with the other hosting company can help Servervault to solve its financial problem. If the merging company has adequate cash balance, it enables ServerVault to implement its original plan of expanding its business and building more new facilities. If the venture capitalists invest 5 million, ServerVault needs $11140422 to keep operating its business until it record a positive cash flow (Appendix 5). If they invest 15 million, it needs $1140422 until there is a positive cash flow (Appendix 6). (This calculation is based on the cost before merging, the real cost will be lower because of the lower operation cost after merging) However, there are some drawbacks about the merging. Firstly, the control power of the company will be shared between the merging company and ServerVault. Therefore, ServerVault may not have the full decision making power on its original plan. It may need to cooperate with the merging company to come up with a new plan for its future. Moreover, the confidential information such as the secure technology will no longer solely belong to ServerVault but the merging company as well. Therefore, there are some risks that ServerVault has to take if it has decided to merge with other hosting company. In conclusion, if Servervault chooses the alternative of Status Quo, it will no longer survive in the long run. Even if the venture capitalists invest 15 million cash in it, the longest life span of Serervault will be in Decemeber 2001 and as a result of bankruptcy. Therefore, as there is a high demand of cash in operating a hosting company, I strongly recommend ServerVault to consider the possibility of merging with the other hosting company. However, there are some arrangements which Servervault should concern. The first one is which company is the most appropriate one to merge with. To answer this question, we should focus on the market share and the financial position of that company. Servervault will not able to survive if the company has tiny market share and insufficient cash balance to support its expansion plan. Secondly, with reference to Appendix 4,the expected growth of web hosting industry are different among companies in different segment. Since the growth rate of managed section is way better than the co-located and shared (from 1million 2000 to almost 11 million 2004), we should consider merging with company which is also in managed section. The recommended companies are Digex, IBM, Data Return, and also Carpathia. If there is no company which can fulfill the above requirements, it means that expanding of its business rapidly is no longer a wise choice for Servervault.