ShmoopTube

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principles of Finance a la shmoop strategic capital global distribution

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partnership pitfalls okay so you've got a small newly public company in the u.s.

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it sells expensive toy drones to a public hungry to find their youth Blade

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Runner is selling like hotcakes or you know like drones in the u.s. anyway big [people crowding around Blade Runner sale in store]

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growth big volumes big impact on the public's free time but you want to sell [spinning globe]

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your product around the world fortunately the innate desire to

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remote-control maneuver a flying robot into trees is a you know universal [man in Africa flies drone into tree]

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you've noodled about how hard it is to sell into foreign countries who have [bowl of noodles]

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protectionist policies that is they tax your goods heavily when you try to sell [world map]

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into those countries $100 pair of shoes gets a $50 tax levied on it a cellphone

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suffers an extra 300 your two thousand dollar drone gets a grand taxed on top

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of it you're trying to sell into fortress Europe [drone gets shot down by Europe]

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yeah and it's hugely protectionist as a continent desperately trying to protect

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their fragile failing economies in order for Bladerunner to really be allowed to

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sell into Europe well it was offered by European government backed investors the [investors in Paris]

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option of selling half of Bladerunner Europe for 50 million US dollars seems

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like a ridiculously low price insulting even given that your company thinks it

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could sell a hundred thousand units in Europe in year one say at $300 profit

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per unit yeah let's say 300 430 million dollars in profit contribution year one

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well the 50 million dollars for half the company valued Bladerunner Europe at

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just three point three times what your company thought it's pre-tax earnings

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would be just in that first year of launch and obviously to grow a lot from

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there right crazy low in a world where its own stock in the u.s. trades at well

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over 20 times earnings so when the management and board of Bladerunner box

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ie walks away from the deal that Europeans were preferring well the [investor walks away from Europeans in Paris]

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Europeans come back with an alternative they mumble in broken French news of

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Leone's hijo meaning we forgot a zero yeah we meant five hundred million for

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half the company not 5000 stupid French calculators manga but okay so what if

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the quote partner unquote who was intact ding very partner II in offering you

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what you think is a tenth of the value of your company for the European

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partnership then offers you a fair price well what if that euro partner gives you

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five hundred million dollars for half of your company in Europe good deal bad

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deal how do you do the math in thinking about whether or not you should take a

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serious look at this new deal well here's where the strategic really comes

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in let's notion that you really do build a

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nice business in Europe and things are great and then one day Apple or Tesla or [world map]

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Google comes a-knockin at your door and says hi we have Bank we want to buy you

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and you get all excited at first but then you realize you don't really own

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you anymore that is the u.s. part of your business

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when you have a big fat offer on the table from Google is easy to get in line [fried chicken served at table by Google robot]

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the employees all of whom own stock options licked their chops happy to sell

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and shop for homes and cars and whatever is on the profits of the stock options

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they'll sell to Google or whoever but the Europeans in not so much the

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Europeans hate Google and they'll make life miserable for you if you try to [Europeans on strike chasing Google robot]

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sell to Google they might even make drones illegal in Europe because you

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know those drones that they can flicked with the daily orchestra in the park [drone flies over people playing violins]

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thing there may be some other reasons the Europeans don't want to do this deal

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like more automation lots of Union European laborers then get fired and

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then European governments on the European tax system have to pay for them

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and yeah the whole thing's a mess so regardless the 10 billion dollar sale to

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Google now can't happen why well because Google doesn't want just the US entity [world map]

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the web is global Google wants all or nothing so then you can't even sell your

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own company or rather well then Google walks after reading your deal covenants [Google robot walk away with businessman latched onto its leg]

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with your partner and the hidden liability of partnering with a euro

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partner well turned out to be massive it made you virtually unsellable and the

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Europeans don't care they just wanted you as a political shield to make their

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government look like it was progressive you know techie forward-thinking

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risk-seeking doing something about their miserable

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economies you know modern and the government's wanted the drone

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manufacturing plants to create jobs for union workers there and on and on and on [union workers at drone production line]

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with problems so were you able to factor those factors

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into your financial model how do you Maithili make them fit well you can't

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you weren't you couldn't so that's dealing with Europe these days in quote

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partnerships unquote but what about China China's the other end of the

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strategic rainbow why well China is about China all about the profits China

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backs its own companies like their real partners and makes life extremely

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difficult for foreigners trying to do business inside of fortress China Gmail

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eBay and a whole bunch of other successful American web companies aren't

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even accessible in China without fancy software to get around their regulators

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China backs China and Chinese companies and unlike Europe China does not need

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the u.s. balls not to benoît but Brunswick's then what about distribution

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and financial partnerships with brick-and-mortar retailers like least

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bad buy in tarjay and wal-mart well they hate you now because you website and

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around them you spent 50 million bucks to build and then market the crap out of

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your product all over the web and it worked and today a huge part of your

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sales come right off of your website you don't really need brick-and-mortar

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retailers any more than China needs the US but what if you got all the

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brick-and-mortar retailers together and they collectively bought 20% of your

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company wouldn't they then have a different view of the deal economics in

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working with you they'd be a co-owner of you and would that change the deal

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dynamics mmm what about just buying back a ton more of your own stock with your

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own cash what does that do to you that's not in the numbers well let's say you

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bought back 40% of your shares outstanding kind of on the zone of

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taking a private instead of spending a lot of money and building out a global [fork lift going backwards]

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distribution sales force and all that stuff well that's great but now all the

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sudden 85 sending your shares are owned by insiders like you the founder and

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your friends and family and you guys all never trade the stock that went from

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trading 5 million shares a day to now trading just 1 million shares a day on

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such low volumes your stock has deemed illiquid by the large mutual funds and

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hedge funds who just started ignoring it well they like highly traded shares so

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if they ever want to get out they can quickly get out by having them you know

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out of the market as traders in your stock then you end up trading at a low

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multiple because you have a low number of shares outstanding you're still

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thinking about European distribution deals here and wondering

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you know what you're gonna do with the dough that's burning a hole in your

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pocket so hmm yeah maybe it was great you bought back 40% of your shares at 20

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times earnings but now you trade it 16 times earnings so what did you really

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accomplish here well historically share buybacks have been muted in their

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success and a lot of companies while they exist to replace dilution from

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stock options granted to employees most companies grant about 2% of their

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outstanding shares in options and they buy back 2% of their stock something

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like that anyway let's a lot of employees feel and act like owners

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rather than just employees and it's a better company for it

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right like who would want to feel like they're working for the man when they [janitor walks by]

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could instead feel like well they are the man or the womb yeah we're keeping

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it PC here anyway global distribution not an easy issue not an easy thing to

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tackle in our globally competitive world every now and then or maybe even off on

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our global quote partners unquote steal intellectual property from us and they [thief holding a stack of papers]

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claim it as their own and they say hey why don't you sue us in our own courts [french woman in jail]

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and see if you can win and we don't so global distribution kind of competes

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with other things that you can do with your cash like buying back your own

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stock up and your dividend maybe spending more marketing in the good ol

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US of A and or in friendly countries that don't hate us but that's for

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another story you [drone flies by moose]

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