ShmoopTube

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principles of finance a la shmoop Beyond Thunderdome

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okay so wow you did the deal maybe you're about to start actually [people shake hands]

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earning those big fat paychecks so yeah one rainy morning the docks all got

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signed different docks your collective efforts paid 1.4 billion dollars for

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ticker be rnd Bladerunner nano drone it bought everything the blades in [man discussing bladerunner nano drone company]

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inventory the cash on the balance sheet the pension liabilities the patents the

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distribution contracts the risks the potential the whole freaking shark [man on boat and shark moves]

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alright as part of the deal the company using five hundred million dollars of

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cash they already had on their balance sheet 150 million of your private equity

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shops equity and fifty million dollars rolled in from management ownership

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stakes yeah they weren't up for ponying the entire 150 million and you borrowed

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seven hundred million dollars at seven point one three percent interest total

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cost then for B rnd one point four billion dollars why the higher interest

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rate from the originally planned an estimated six point seven five percent

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except for the fact that you know it made for easy math and the fifty million [man discussing company purchase and math equations appear]

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dollar a year interest payments for this problem because your general partners

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didn't want to add warrant coverage to the debt deal adding warrants given to

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the bank for some percentage equity ownership of the company as a kind of

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equity kicker if the deal went well well that's a common practice in these kinds

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of LBOs warrants are a lot like stock options only they tend to last a lot [warrants and stock option comparisons appear]

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longer if not forever and they can be summarily issued by the company but you

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bought twenty million shares at seventy bucks each and the bank wanted a million

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warrants which would eventually notionally turn into a million shares of

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stock if the bank wanted them to that is if the deal went well and B rnd re IPO

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sa five years later well then the bank could benefit handsomely beyond the [BRND company timeline appears]

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interest it had received but the partners opted for just paying the

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higher interest rates on the debt and opted out of the million warrants that

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the bank wanted which would have made for the equivalent of you know

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twenty-one million shares outstanding instead of just twenty it's five percent

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of the company there right well you knew this wasn't going to be a smooth ride as [woman driving car and shakes side to side]

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one of your older wiser partners there were lots of cockroaches in the

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walls and when one crawls out firm what are the odds there are hundreds more [cockroach crawls out from floorboard]

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inside that wall well you found three big fat ones in your due diligence the

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biggest of which was that the factory needed meaningful upgrades to continue [factory stamped in need of upgrades]

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functioning safely in fact it would suck off all of the excess cash for three

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years other than interest payments to the build / repair efforts of you know

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making that factory modern lots of work lots of stress here's how you looked at

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big school graduation here's how you look the day of the deal and here's how [man and woman graduating]

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you look now big fat telling dissolved so here you

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are three years after you bought B rnd and took it private for one point four

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billion dollars you only feel thirty years older well the company has been

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flat flat on growth flat on profits flat on metrics but not flat on its back at [brand profits flat on chart]

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least not yet anyway finally that third drone you wanted to get out there into

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the marketplace to the consumer is the one that goes underwater hydro drones a

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gold digger aka thunder drone that's finally ready [woman presenting thunder drone idea]

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and everyone is excited about it so excited in fact that you were approached

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by bankers to take you public again right now ish selling only 15% of the

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company's equity to the public thunder drone wasn't that the Mel Gibson movie

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all right well whatever it's the hottest product never launched everyone at drone

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world is whispering about it the mock-ups were purposely leaked the drone [drone appears in water]

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swims underwater at up to 12 knots and comes with 12 different add-ons

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including an auto gold digger what is that well on a 24 hour battery charge it

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can dig off the coast of Alaska near Nome that's right it's a gnome drone in [Man discussing drone and gnomes appear]

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the shallow waters where there are literally tons of gold just laying there

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the thing digs up under the overburden filters the silt and creates

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theoretically rich pay dirt when it runs out of a charge and then it just floats [drone floats back to ocean surface]

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back to the surface texting a you know pick me up at these GPS coordinates

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signal to the boat oh and it works all day and night with no Union pension fund

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benefits for gold dinging or overtime charges or threats of a strike despite [drones protesting]

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the previous few years of flattish revenues and margins this new device is

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cited by all those in the know as being the best thing to hit droning

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since Charlie Brown's schoolteacher remember though wha-wha-wha wha-wha-wha [man talking and charlie brown on in the background]

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best thing since she did her thing with all of this heat and the option for the

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partnership to begin the process of getting liquid in its hundred 50 million

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of equity invested in this 1.4 billion dollar enterprise value deal well the

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opportunity to go public was welcomed so they went with silver slacks and took

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management on a road show wisely when the bankers marketed the deal [bankers outside building and drone flys by]

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they brought drones with them and/or had the hedge and mutual fund buyers meet

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them in parking lots and parks just outside their boring offices or they met

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on their yachts most yield meetings are just paper and lawyers and ACK and [lawyers signing papers]

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management pitch but these were different especially when the banker

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handed the fund manager the control device and had her fly it around peak in

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a few windows frightening shower cap wearers and you know returned safely [drone appears at window while man showers]

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while there wasn't anything radically new about these flying drones they flew

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way better and easier and lasted a lot longer than the old ones and they used

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to be the domain of techniques they were just making their way into mainstream

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society such that everyone had to have one and generally everyone soon pretty [person takes drone off shelf]

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much would at least that was the whisper anyway among the very pumped investment

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community most of the deal meetings not only left with the manager buying a

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drone for herself but a full order of a hundred thousand shares with almost no

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price limit at the IPO lots of mumbled oh this is the futures the deals

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Roadshow was to last three weeks and sure enough in the middle of it the

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company received a softball offer meaning not exactly a cashier's check

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but everyone knew Apple didn't mess around when they wanted something and

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they were good for the money and that deal came from Apple wanting to buy them

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for 1.6 billion dollars gross meaning that if they were to accept while they'd

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need to subtract the 700 million dollars in net debt and pay their own damn [apple offer and debt maths appear]

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banker fees net of everything the deal would bring the firm's 150 million plus

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management's 50 million that 200 in after dead in

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commissions were paid well it bring him over 800 million dollars that's about a

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400% gain or Forex and three and a half years nice one to be chalked up in the [woman smiling]

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win column you and your partners digest what all this means well specific

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it means that they'd have turned their 150 million into 600 million and you [small money pile transforms into large pile]

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feel good about having convinced the company to turn its go private winnings

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right back around the tune of well 50 million dollars their management stake

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would now be worth 200 million dollars if you take this deal so you feel good

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about making money for your friends you'd show a cash on cash gain of 450

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million dollars and your firm would keep 20% of that gain the 600 - the Oh 150

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there yeah they invested 20% of the 450 is 90 million dollars really a good

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return and you'd personally get a meaningful portion of that money in

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return for having kind of run and found the deal something like I don't know

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maybe five eight ten percent or so it would set you up for life more or less [woman outside house]

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at least in small-town America you could pay off the rest of your school loans

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and buy your parents a house and and have dough left over for a divorce or [parents give thumbs up]

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two down the line well you think you want to do this deal sell the Apple and

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take a nice clean safe victory lap so you rush back to your bosses and ask how

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you get the sales papers going and there's a long beat and a pause and they [woman asks bosses for sales papers]

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look at you and one of the partners not from California asks you are you high

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while the senior partner stands on a chair and intones to the assemblage of [senior partner stands on chair]

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partners in their boardroom Batsy we have the hottest electronic property on

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earth right here and he states it like he even knows what an electronic

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property is he was amazed last year when he received his first cell phone

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noting audibly to everybody nearby that gasp it has no wires magic so he knew a [man holding cell phone]

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lot about how to raise money for private equity shops but really next to nothing

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about drones and at 73 years old well who could fault him the lack of

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awareness didn't stop him however as he threw down on the table an issue of [man throws down magazine onto table]

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drones and ammo magazine whose cover has the Thunder drone on it we're gonna make

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a mint on this thing at 6x it takes our firm to the 25 percent instead of the 20

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percent carry grid and we're all the richer go back to Apple and hold up

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three fingers and ask him to read between the lines [man holds up hand with 3 fingers]

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translation if the firm got just a little bit greedy and sold out their

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position for 750 million instead of 600 million

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well they then take a higher cut of investment profits from their limited

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partners who had given them the money in the first place instead of 20% of the

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450 million of gains that gave them 90 million to spread around while they get

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25 percent of 600 million or 150 million to spread around there the higher carry

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or profit participation based on superior investment performance is well

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pretty common in this equity schmuck woody world and while everyone in the [people nodding]

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room knew it the queasy feeling in your stomach

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hadn't left for three and a half years you'd guessed you were lactose [womans stomach makes noises]

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intolerant but you're realizing that your stupid risk intolerant instead so

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you grumble and tell Apple thank you but no thank you

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and push the IPO forward as directed in this case you haven't killed the Apple

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option you could go public raise a little money and they could still buy [woman looking into apple store]

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you the company really doesn't need the cash and in fact it's only selling 10 to

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15 percent of itself to the public it'll start with 30 million shares outstanding

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that comprise the entire company at a 1.5 billion dollar valuation at $50 a

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share and sell 3 million newly minted printed shares to the public to raise

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150 million bucks for the company at its base case then the company would then

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have 30 million plus 3 million or 33 million total shares outstanding at 50

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bucks a share for a 33 times 50 equals one point six five billion dollar market

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valuation there would be a stock option pool incremental to this number and [stock option appears in a pool]

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there would also be accommodation for a green shoe to the investment bankers in

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case the deal got really hot so instead of then selling 3 million shares at 50

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bucks each well they could then sell maybe four or even five million shares

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at 60 bucks each or maybe more raise a little bit more money for a little bit

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more dilution but at a decent price well you like more more shares less risk

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more helps you sleep at night and it's not as addicting as [woman yawns and sleeps in bed]

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ambien

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