Rosetta Stone: Pricing the 2009 IPO

Abstract

This case examines the April 2009 decision of Rosetta Stone management to price the initial public offering of Rosetta Stone stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone's unique language learning strategy and the associated strong financial performance. Students are invited to value the stock and take a position on whether the current $15 to $17 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 40% first-day rise in Rosetta Stone stock from the $18 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations.

Excerpt

UVA-F-1613

Rev. May 5, 2016

Rosetta Stone: Pricing the 2009 IPO

We are changing the way the world learns languages.

—Tom Adams

It was mid-April 2009. Tom Adams, president and CEO of Rosetta Stone, Inc. (Rosetta Stone), the language learning software company, reached for his iPhone to contact Phil Clough of private equity fund ABS Capital. Adams and Clough had been discussing plans to take Rosetta Stone public for some time. The wait was finally over.

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Keywords: Initial public offering, corporate valuation, multiples