Company warrants - FINANCE101 FINANCE 221 - YouTube

principles of finance a la shmoop Beyond Thunderdome

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

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

signed different docks your collective efforts paid 1.4 billion dollars for

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

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

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

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

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

shops equity and fifty million dollars rolled in from management ownership

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

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

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

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

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

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

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

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

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

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

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

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

warrants which would eventually notionally turn into a million shares of

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

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

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

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

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

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

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]

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

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

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

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

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

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

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

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

you look now big fat telling dissolved so here you

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

management pitch but these were different especially when the banker

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

management's 50 million that 200 in after dead in

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

position for 750 million instead of 600 million

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

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

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

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

or profit participation based on superior investment performance is well

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

room knew it the queasy feeling in your stomach

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

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

you grumble and tell Apple thank you but no thank you

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ambien