Sunday, January 8, 2017

H/DJI and Ming

Note: People have been referring to Ventizz, but the correct name of the firm is Vorndran Mannheims, and they are a private equity firm not, as Kevin Raber suggested, a venture capital firm. I botched the name earlier, sorry. I will use VMCap here, which is how they seem to refer to themselves.

Ming Thein's written a remarkably silly bit of analysis of the Hasselblad/DJI situation in which he adds exactly one bit of information, namely Chinese businessmen are sharp dealers who do not invest in things they think will fail. As opposed to whom? Are the Swedes famous for investing in things they're pretty sure will collapse?

First a little background. Suppose that a year ago Hasselblad's outstanding stock consisted of 100 shares, and that VMCap, the private equity firm that acquired H some years ago, owned 80 shares, and DJI owned 20. This is, obviously, simplified for clarity.

In order to infuse cash into H, would DJI buy some of VMCap 80 shares? No, they would not. That is the wrong layer of the ownership onion. Money given to VMCap to buy, say, 31 of their shares, would go to VMCap's fund, and become cash potentially to return to their investors or whatever. That money would not be accessible to H, unless VMCap elected to either loan to it H or purchase new shares of H with it. It is VMCap's money, not Hasselblad's.

If I buy a share of Microsoft from you, does Microsoft get the money? No. Even if I buy every share of Microsoft that's out there, Microsoft sees not one cent.

No, the only way money actually goes to H to fund the company is if H issues more shares. They print up another 100 shares and sell them to DJI. Now DJI owns 120, and VMCap owns 80, and DJI is the majority shareholder. The value of H has changed by the value of however much money DJI gave them for the shares. That cash is now sitting in H's bank account, and counts toward the value of H. So VMCap now owns a smaller slice of a larger pie, not even including things like "and now the projected growth is much bigger to blah blah blah" which is the usual story. There's a thing called a Balance Sheet which you can look up.

There are some odd corner cases. For example, if DJI actually loaned Hasselblad the money, but the loan was collateralized with either newly issued H stock, or paper which can be turned in to newly issued H stock (warrants, I think these things are called). This might actually have happened, and been misinterpreted by Kevin Raber's sources. In a case like this DJI would not be a majority owner, yet, but would be in a position to become one if the loan doesn't get repaid.

Ok, with that background, let us now quote the Marvelous Mr. Thein:

One thing I haven’t yet seen postulated is that the DJI investment was not necessarily a buyout: it may well have been an expansion with issue of new shares (Note: I don’t actually know if this is the case). This makes quite a bit of difference to the interpretation, because buying something over implies that the other party has decided there are better uses for their capital, as opposed to perhaps having to maintain portfolio diversification, or not having more to invest being a closed fund. This kind of corporate action is quite common when companies have to raise more capital for expansion.

Now, I don't actually know what the second sentence really means, it appears to be word salad with a hint of VMCap maybe thinks there are better uses for their money, or maybe they ran out of money in that pot which is frankly self-evident, since they chose not to infuse the cash. Given the background that you and I now both have, this whole paragraph a ludicrous statement. Of course H issued new shares (or, possibly, doled out some shares they had issued but not sold in the past which is functionally identical). Of course it was not a buyout, that would give H $0 in new capital, thereby quite missing the point. I think this is a remarkable statement from someone who has, well, let's quote him again:

I did work in M&A, private equity and at senior operational positions for the better part of 10 years

Mmm hmm.


  1. But isn't VMcap strategy more like:
    1 buy a company for cheap
    2 make that company increase profits
    3 sell the same company for a lot more money?

    If the X1D is as successful as I read (10 times the amount of orders, or 30000 units, which is a lot for medium format), then VMcap is selling with a huge profit. Kevin Rabber did not say how much DJI paid for the shares.

    1. VMCap isn't selling any of their shares, VMCap isn't making a nickle on this transaction, which is kind of the point of my remarks..

      There might be a SEPARATE transaction, in which VMCap sells their shares to DJI, at some point. That transaction will generate zero cash for Hasselblad. VMCap has not issued any press releases on this point, and still includes Hasselblad in their portfolio, so I do not think this happened.

    2. We don't have the details, but I think the deal could be the following:
      1 vmcap sells shares to dji
      2 both, as shareholders, agree to recapitalize Hasselblad to pay for an extra factory
      3 the money that vmcap brings into that recapitalization comes from the sales of shares

      It works because the value of the shares have increased considerably because the X1D sells so well. That is what vmcap and dji get out of the deal: the firm they own is worth a lot more money. It needs some investment (the factory to build the extra X1Ds), and that money comes from dji who have been doing great business in 2016. You can simply see the deal about the shares as a way to acknowledge that dji brought that money in the common pot.

      vmcap will probably sell the rest of their shares at some point. vmcap is not in the business of building cameras, they are in the business of buying companies for cheap and selling them for a lot more. If the X1D sells as much as the rumors say, Hasselblad market value has been increased 10 fold and vmcap have done a royal investment.

    3. With respect, your 3 steps strike me as a very unlikely and overly complicated scenario. It is much more likely that Hasselblad (which, for these purposes, IS its Board of Directors which is, for these purposes, some business guys from DJI and VMCap) issued a bunch of shares and sold them to DJI. It's just bookkeeping, but that's the simple way to perform that bookkeeping step.

      Now, all things are possible and corporate finance moves in mysterious ways.

    4. Yes, you are probably right. But what I wanted to say is that whatever dji is paying does not directly go to vmcap, it goes into new production lines. Vmcap gains, but only indirectly via the increase in the value of the shares they own. Does that make sense?

  2. This is classic Thein. He uses the word salad (as you aptly put it) to imply that he has a lot more expertise than he does in reality, but instead he just comes across as using words and concepts that he barely understands.

    I think it's been discussed here before, but his experience in "M&A, private equity and senior operational positions" has always been described in the vaguest of terms, making me wonder how much of it is yet another overstatement of his abilities.

    Between his dull pictures and the sophistry that permeates his writing, I've given up visiting his site except when something like this comes up to point out what a silly little man he is.

  3. It isn't clear to me why you think Hasselblad is getting any money here. One simple explanation is that the VM guys sold a bunch of their shares at a profit to the drone boys. The drone boys are now majority owners but I didn't see anywhere any info that Hassleblad was getting any new money This would fit with the general mode of how private equity works.

    1. I think that because Kevin calls out it specifically as the reason for whatever transaction it was that left DJI with a majority stake.

      H needed money, Oosting went and got it by engineering the deal in question.

      All is subject to confirmation, of course, but a we have to work with us Kevin's piece.