Roman Kassebaum wrote:

> Tony,
> 
> > What he means is that if today you spend $500 on a Delphi upgrade,
> > $500 appears in the January profit&  loss - it's a product sale. If
> > you spend $600 on SA - it's a payment for a service so $50 appears
> > this month, then $50 per month for the next 11 months. At the end
> > of month one the other $550 appears on the balance sheet as a
> > liability - which it is, to provide support over the contract
> > period, or - in theory anyway - to return a pro-rata amount if you
> > are no longer able to offer the contracted service.
> > 
> > If you're not already confused, assume that the current split is
> > 50% new sales, 50% upgrades (say $500). Then Nick waves a wand and
> > next month all the upgrades turn into $600 SA. But in Feb only $50
> > of this is taken + the same $500 for new sales, and the headline
> > figure is a 45% collapse in sales! Of course the rest of the money
> > will be drawn down but banks are vastly more impressed by sales
> > revenue not expectations.
> 
> I'm already confused. That's why I have some questions:
> 
> 1. Why is there a bank of investors? In the German news Embarcadero
> has been advertised as a normal software company. Is Embarcadero a
> bank of investors or is there someone else who invested a lot of
> money?

Thoma-Cressy-Bravo is a private equity firm that purchased Embarcadero,
which was a public company, several years ago and took it private. TCB
(http://www.tcb.com/) and Embarcadero then went looking for another
company to "blend" into the the portfolio with EMBT. That was about the
time that CodeGear was still being shopped around. They looked like a
good match with very little overlap in similar markets. So TCB ponied
up more $$ and purchased CodeGear from Borland and then "assigned" the
asset to Embarcadero.


When a PE firm does this kind of transaction, they represent a
consortium of many investors who give them $$ to invest. Generally,
they don't use all their $$ for one investment. They only put in what
they feel is an adequate amount of risk and will have the highest
return for their investors. The balance of the sale price is then taken
out in bank loans, with the company itself as collateral. These loans
are not put onto TCB's balance sheet, but are Embarcadero's to bear.
So, not only does the company have to pay back the investors, it also
on the hook to the banks that have also fronted a huge load of $$. Part
of the "terms" of the bank note is that the company must provide a
certain EBITDA (http://www.investopedia.com/terms/e/ebitda.asp) in
order for the bank to continue to provide "favorable" terms. This is
"normal" for many software firms in the industry. For instance,
AutomatedQA was purchased by another PE firm a couple years ago.


Do not confuse this with venture capital, which has a whole different
set of common scenarios. PE investments are usually only done with
existing, stable, sometimes profitable, businesses or product lines.
VC, by contrast is way more gamble, gut feel, and like playing a game
of craps. VC can also pay off way more because the risk is way higher
too.


-- 
Allen Bauer
Embarcadero Chief Scientist
http://blogs.embarcadero.com/abauer