Accessline as an Attractive Investment
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AccessLine as an Attractive Investment
AccessLine is an attractive investment based on purely its technology and business prospects. For AccessLine to be a good investment to Apex, the AVC must be redesigned to give Apex a board seat and a lower share price. A new AVC will solve control and valuation issues, respectively. Given that AccessLine is confident in its prospects then compromising on the AVC should not increase the perceived risk of AcccessLine. The following explains why and why not AccessLine is an attractive investment and also states the risks associated with this investment.
AccessLine is an attractive investment opportunity as it offers service differentiation, critical to survival in the intensely competitive telecommunications industry, via being the first commercial system to deliver a broad array of personal communication services. AccessLine has shown signs of market acceptance and penetration via current strategic alliances and signed license agreements with major players in the market, initiatives with international carriers (projections of $35.2 mm in 1995 and $208mm by 1999) in Europe and Canada, and initiatives in dense and high consumer-demand geographies such as Hong Kong. (See Appendix X) AccessLine has shown that the demand of the personal number market is expected to increase by approximately 25% over the next 5 years. AccessLine being established since 1989 and recently experiencing a growth phase since 1994 provides Apex an investment opportunity that balances out its portfolio and hence increases the attractiveness of the investment. Most attractive is the steady cash flows that would be available from a late-stage investment such as AccessLine.
AccessLine is capable of a decent ROI and a feasible venture with expectations of “modest capital requirements and operating expenditures”. Also, the management and board of Apex are “pensive” of the AccessLine investment with its appearance “to have extraordinary potential for growth”. Given their vast knowledge and experience, it can be assumed that their opinion is highly valued and hence AccessLine is in fact a good investment. Similarly, Apex can help AccessLine via industry knowledge and contacts since especially both Middlemas and Bolander (e.g. AT&T contact) had extensive telecommunication industry contacts. On the other side, Fuller as the creator of the “One Person, One Number” technology, current Chairman of AccessLine, with his technology and business experience from building and spinning off US Communications, has creditability and a strong reputation in the telecommunications arena.
Apex was “excited about AccessLines business approach” and Fuller certainly showed foresight and experience by timing his prior company spin-off in 1983, followed by applying for (award winning) patents, and then sourcing Kranzler from McCaw in 1983-1984. Its business approach proved to be successful as since its establishment to early 1994, AccessLine had survived and grown without private equity funding until mid 1994 when it successfully raised $15.5 million in private equity. The prospects of further investment under this business approach appear to be a good investment. At the same time, AccessLine is located in Bellevue, Washington a center of scientific and engineering knowledge and resources that are readily available to help further build AccessLine and to form further strategic alliances.
As the offer currently stands not having an Apex board member on AccessLines board places Apex at great risk. Apex will have a lack of control of its investment contributing to making AccessLine a poor investment. This risk is heightened if Apex takes a lead investor position. Some of the risks an investor would face center around the prospects of further growth and market acceptance of the “One Person, One Number” technology. AccessLine has only been experiencing growth in the last 7 quarters, prompting this wave of financing. It is likely that this growth was due to the granting of Fullers patent for “Telephone Control System with Branch Routing”. Additionally, the prior private equity funds were raised from only 4 investor one being McCaw who had ties with both Kranzler and Fuller. A significant risk is that Fuller could take his patent and start another company or sell it. If such a case arises, there is significant risk that Fuller could recruit, at the least, Kranzler and Epler who both have long-standing business relations with Fuller. The risk that is forthcoming is whether the patented technology will be accepted, will work, and will be long-lived. There is also mention that AccessLine recently in the third quarter of 1995 experienced positive cash flows. AccessLine shows credit default risk with a current unhealthy balance sheet and cash flows, the shareholders equity is negative, and total current liability is more than total assets. AccessLine has experienced increasing use of its service and as a result has offered increasing fees. The risk is in the appropriateness of forecasts of the demand for their service and also the fee that will be accepted. AccessLine is currently the only commercial venture of this sort established in the market but a few of its competitors with similar and promising technology are close to going commercial with their services. Also, its competitors are not facing a lack of funding.
Kranlzer, President of AccessLine, is currently spending much time formulizing market acceptance strategies. This shows that market acceptance is the crucial to their survival and indications of possible problems in this area. At the same time, both Fuller and Kranlzer have failed in a prior venture against US West. The risk of AccessLine and both their reputations may play a role in AccessLine now approaching Apex for investments. By approaching both Accel, “a formidable competitor”, and Apex, shows that Accel may not invest in AccessLine and that AccessLine will need to settle for investments from a less reputable venture capitalist firm. The less accepting AccessLine is as an investment, the more risky it is to Apex. Given these risks, Apex may need to source syndication partners to spread risks which may lead to extra problems and supports a lower valuation and a board member seat.
From the current AVC deal, AccessLine looks like an unattractive investment as neither party is satisfied. Kranzler has a sizable number of options which may contribute to conflicts of interest regarding his desire for a high valuation. Certainly both Apex and AccessLine are affected differently by either a high or low valuation which is influencing the stalemate deal. As a result, as the deal currently stands Apex would not be compensated sufficiently to take on the risks