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Principles of Finance: Unit 8, Beyond ThUnderDrone 5 Views
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Description:
You paid $1.4 billion for ThunderDrone. What happens now (after you pray)? What do you owe? The company is doing meh. All hopes ride on the new HydroDrone - will it work?
Transcript
- 00:00
principles of finance a la shmoop Beyond Thunderdome
- 00:06
okay so wow you did the deal maybe you're about to start actually [people shake hands]
- 00:10
earning those big fat paychecks so yeah one rainy morning the docks all got
- 00:15
signed different docks your collective efforts paid 1.4 billion dollars for
- 00:20
ticker be rnd Bladerunner nano drone it bought everything the blades in [man discussing bladerunner nano drone company]
Full Transcript
- 00:26
inventory the cash on the balance sheet the pension liabilities the patents the
- 00:30
distribution contracts the risks the potential the whole freaking shark [man on boat and shark moves]
- 00:35
alright as part of the deal the company using five hundred million dollars of
- 00:38
cash they already had on their balance sheet 150 million of your private equity
- 00:42
shops equity and fifty million dollars rolled in from management ownership
- 00:47
stakes yeah they weren't up for ponying the entire 150 million and you borrowed
- 00:52
seven hundred million dollars at seven point one three percent interest total
- 00:56
cost then for B rnd one point four billion dollars why the higher interest
- 01:01
rate from the originally planned an estimated six point seven five percent
- 01:05
except for the fact that you know it made for easy math and the fifty million [man discussing company purchase and math equations appear]
- 01:09
dollar a year interest payments for this problem because your general partners
- 01:13
didn't want to add warrant coverage to the debt deal adding warrants given to
- 01:18
the bank for some percentage equity ownership of the company as a kind of
- 01:22
equity kicker if the deal went well well that's a common practice in these kinds
- 01:27
of LBOs warrants are a lot like stock options only they tend to last a lot [warrants and stock option comparisons appear]
- 01:31
longer if not forever and they can be summarily issued by the company but you
- 01:35
bought twenty million shares at seventy bucks each and the bank wanted a million
- 01:40
warrants which would eventually notionally turn into a million shares of
- 01:44
stock if the bank wanted them to that is if the deal went well and B rnd re IPO
- 01:49
sa five years later well then the bank could benefit handsomely beyond the [BRND company timeline appears]
- 01:54
interest it had received but the partners opted for just paying the
- 01:57
higher interest rates on the debt and opted out of the million warrants that
- 02:01
the bank wanted which would have made for the equivalent of you know
- 02:04
twenty-one million shares outstanding instead of just twenty it's five percent
- 02:08
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]
- 02:11
one of your older wiser partners there were lots of cockroaches in the
- 02:16
walls and when one crawls out firm what are the odds there are hundreds more [cockroach crawls out from floorboard]
- 02:20
inside that wall well you found three big fat ones in your due diligence the
- 02:25
biggest of which was that the factory needed meaningful upgrades to continue [factory stamped in need of upgrades]
- 02:29
functioning safely in fact it would suck off all of the excess cash for three
- 02:34
years other than interest payments to the build / repair efforts of you know
- 02:39
making that factory modern lots of work lots of stress here's how you looked at
- 02:43
big school graduation here's how you look the day of the deal and here's how [man and woman graduating]
- 02:47
you look now big fat telling dissolved so here you
- 02:50
are three years after you bought B rnd and took it private for one point four
- 02:54
billion dollars you only feel thirty years older well the company has been
- 02:59
flat flat on growth flat on profits flat on metrics but not flat on its back at [brand profits flat on chart]
- 03:04
least not yet anyway finally that third drone you wanted to get out there into
- 03:08
the marketplace to the consumer is the one that goes underwater hydro drones a
- 03:13
gold digger aka thunder drone that's finally ready [woman presenting thunder drone idea]
- 03:17
and everyone is excited about it so excited in fact that you were approached
- 03:21
by bankers to take you public again right now ish selling only 15% of the
- 03:26
company's equity to the public thunder drone wasn't that the Mel Gibson movie
- 03:29
all right well whatever it's the hottest product never launched everyone at drone
- 03:34
world is whispering about it the mock-ups were purposely leaked the drone [drone appears in water]
- 03:38
swims underwater at up to 12 knots and comes with 12 different add-ons
- 03:43
including an auto gold digger what is that well on a 24 hour battery charge it
- 03:49
can dig off the coast of Alaska near Nome that's right it's a gnome drone in [Man discussing drone and gnomes appear]
- 03:54
the shallow waters where there are literally tons of gold just laying there
- 03:58
the thing digs up under the overburden filters the silt and creates
- 04:02
theoretically rich pay dirt when it runs out of a charge and then it just floats [drone floats back to ocean surface]
- 04:06
back to the surface texting a you know pick me up at these GPS coordinates
- 04:11
signal to the boat oh and it works all day and night with no Union pension fund
- 04:15
benefits for gold dinging or overtime charges or threats of a strike despite [drones protesting]
- 04:20
the previous few years of flattish revenues and margins this new device is
- 04:25
cited by all those in the know as being the best thing to hit droning
- 04:29
since Charlie Brown's schoolteacher remember though wha-wha-wha wha-wha-wha [man talking and charlie brown on in the background]
- 04:34
best thing since she did her thing with all of this heat and the option for the
- 04:37
partnership to begin the process of getting liquid in its hundred 50 million
- 04:41
of equity invested in this 1.4 billion dollar enterprise value deal well the
- 04:46
opportunity to go public was welcomed so they went with silver slacks and took
- 04:50
management on a road show wisely when the bankers marketed the deal [bankers outside building and drone flys by]
- 04:54
they brought drones with them and/or had the hedge and mutual fund buyers meet
- 04:58
them in parking lots and parks just outside their boring offices or they met
- 05:03
on their yachts most yield meetings are just paper and lawyers and ACK and [lawyers signing papers]
- 05:07
management pitch but these were different especially when the banker
- 05:10
handed the fund manager the control device and had her fly it around peak in
- 05:14
a few windows frightening shower cap wearers and you know returned safely [drone appears at window while man showers]
- 05:18
while there wasn't anything radically new about these flying drones they flew
- 05:22
way better and easier and lasted a lot longer than the old ones and they used
- 05:27
to be the domain of techniques they were just making their way into mainstream
- 05:31
society such that everyone had to have one and generally everyone soon pretty [person takes drone off shelf]
- 05:36
much would at least that was the whisper anyway among the very pumped investment
- 05:40
community most of the deal meetings not only left with the manager buying a
- 05:43
drone for herself but a full order of a hundred thousand shares with almost no
- 05:48
price limit at the IPO lots of mumbled oh this is the futures the deals
- 05:53
Roadshow was to last three weeks and sure enough in the middle of it the
- 05:57
company received a softball offer meaning not exactly a cashier's check
- 06:01
but everyone knew Apple didn't mess around when they wanted something and
- 06:05
they were good for the money and that deal came from Apple wanting to buy them
- 06:09
for 1.6 billion dollars gross meaning that if they were to accept while they'd
- 06:14
need to subtract the 700 million dollars in net debt and pay their own damn [apple offer and debt maths appear]
- 06:18
banker fees net of everything the deal would bring the firm's 150 million plus
- 06:22
management's 50 million that 200 in after dead in
- 06:26
commissions were paid well it bring him over 800 million dollars that's about a
- 06:30
400% gain or Forex and three and a half years nice one to be chalked up in the [woman smiling]
- 06:36
win column you and your partners digest what all this means well specific
- 06:40
it means that they'd have turned their 150 million into 600 million and you [small money pile transforms into large pile]
- 06:45
feel good about having convinced the company to turn its go private winnings
- 06:49
right back around the tune of well 50 million dollars their management stake
- 06:53
would now be worth 200 million dollars if you take this deal so you feel good
- 06:57
about making money for your friends you'd show a cash on cash gain of 450
- 07:02
million dollars and your firm would keep 20% of that gain the 600 - the Oh 150
- 07:07
there yeah they invested 20% of the 450 is 90 million dollars really a good
- 07:13
return and you'd personally get a meaningful portion of that money in
- 07:16
return for having kind of run and found the deal something like I don't know
- 07:20
maybe five eight ten percent or so it would set you up for life more or less [woman outside house]
- 07:24
at least in small-town America you could pay off the rest of your school loans
- 07:28
and buy your parents a house and and have dough left over for a divorce or [parents give thumbs up]
- 07:32
two down the line well you think you want to do this deal sell the Apple and
- 07:36
take a nice clean safe victory lap so you rush back to your bosses and ask how
- 07:41
you get the sales papers going and there's a long beat and a pause and they [woman asks bosses for sales papers]
- 07:45
look at you and one of the partners not from California asks you are you high
- 07:50
while the senior partner stands on a chair and intones to the assemblage of [senior partner stands on chair]
- 07:54
partners in their boardroom Batsy we have the hottest electronic property on
- 07:59
earth right here and he states it like he even knows what an electronic
- 08:03
property is he was amazed last year when he received his first cell phone
- 08:08
noting audibly to everybody nearby that gasp it has no wires magic so he knew a [man holding cell phone]
- 08:15
lot about how to raise money for private equity shops but really next to nothing
- 08:20
about drones and at 73 years old well who could fault him the lack of
- 08:24
awareness didn't stop him however as he threw down on the table an issue of [man throws down magazine onto table]
- 08:28
drones and ammo magazine whose cover has the Thunder drone on it we're gonna make
- 08:34
a mint on this thing at 6x it takes our firm to the 25 percent instead of the 20
- 08:40
percent carry grid and we're all the richer go back to Apple and hold up
- 08:45
three fingers and ask him to read between the lines [man holds up hand with 3 fingers]
- 08:48
translation if the firm got just a little bit greedy and sold out their
- 08:53
position for 750 million instead of 600 million
- 08:57
well they then take a higher cut of investment profits from their limited
- 09:02
partners who had given them the money in the first place instead of 20% of the
- 09:06
450 million of gains that gave them 90 million to spread around while they get
- 09:10
25 percent of 600 million or 150 million to spread around there the higher carry
- 09:15
or profit participation based on superior investment performance is well
- 09:20
pretty common in this equity schmuck woody world and while everyone in the [people nodding]
- 09:24
room knew it the queasy feeling in your stomach
- 09:27
hadn't left for three and a half years you'd guessed you were lactose [womans stomach makes noises]
- 09:30
intolerant but you're realizing that your stupid risk intolerant instead so
- 09:35
you grumble and tell Apple thank you but no thank you
- 09:39
and push the IPO forward as directed in this case you haven't killed the Apple
- 09:43
option you could go public raise a little money and they could still buy [woman looking into apple store]
- 09:47
you the company really doesn't need the cash and in fact it's only selling 10 to
- 09:52
15 percent of itself to the public it'll start with 30 million shares outstanding
- 09:56
that comprise the entire company at a 1.5 billion dollar valuation at $50 a
- 10:02
share and sell 3 million newly minted printed shares to the public to raise
- 10:07
150 million bucks for the company at its base case then the company would then
- 10:11
have 30 million plus 3 million or 33 million total shares outstanding at 50
- 10:16
bucks a share for a 33 times 50 equals one point six five billion dollar market
- 10:20
valuation there would be a stock option pool incremental to this number and [stock option appears in a pool]
- 10:24
there would also be accommodation for a green shoe to the investment bankers in
- 10:28
case the deal got really hot so instead of then selling 3 million shares at 50
- 10:33
bucks each well they could then sell maybe four or even five million shares
- 10:37
at 60 bucks each or maybe more raise a little bit more money for a little bit
- 10:41
more dilution but at a decent price well you like more more shares less risk
- 10:46
more helps you sleep at night and it's not as addicting as [woman yawns and sleeps in bed]
- 10:51
ambien
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