Prada Case

Prada

Considering that Prada has relied heavily on debt/asset ratio, and most of their debt is in Euro and US dollars, it is a good idea to list an IPO. DRS states that excessive reliance on long term debt significantly raises financial risk and requires a higher return for investors (Daniels, Radenbaugh & Sullivan, 2013). Another funding option for Prada would be a strategic partnership, however this would lead all the incoming money to go to the partnership instead of staying within the parent company. Choosing the IPO in Hong Kong would be a good idea to fund their expansion in the new and upcoming Asian market as sales of luxury items are predicted to continue to rise. This would give stockholders in the Asian market an opportunity to capitalize on the expansion. Another factor in favor of the IPO is that it will not add burden to the company's balance sheet. Last, the IPO would increase publicity to the market in which they intend to expand. The downside to this would of course be in the "prediction" that sales are going to continue to soar, and the economic market is very tempermental. Also now we will have to deal with cultural differences between the two. An IPO also decreases the amount of ownership to the Prada family.

Since the currency in Hong Kong is significantly below the Euro and the US dollar, and mainly that is where Prada's long term debt is, there is significant foreign exchange risk. If the Hong Kong dollar plummets against the Euro or US dollar, Prada may not be able to service their debt.

I would advise them to use extreme caution when listing this IPO in Hong Kong. The exchange risk is subject to change at any moment, and the economic status as well. They need to be cautious also when thinking about what percentage of the company to sell, and what they will be able to recover should the exchange risk increase further. There will also be the opportunity to list further shares should things continue to be successful.