Rick--In the BT deal,it would NOT finance more than the 1st stage.
Your assumption that BT should be willing to fully finance the CCEE deal is not in accordance with what I have observed in my practice. Moreover, I do not believe CCEE should even desire to have BT, the customer, provide CCEE's full financing, as I explain below.
In every deal that my clients participated in with a giant such as BT, it was necessary to prepare business plans and performance data to prove that my client, the vendor, would be able to withstand the rigors of performance. This alone limited our negotiating leverage, regardless of how badly my client's services or products were needed by the buyer. My hunch is CCEE had a similar problem here, and while trying to convince BT it was capable of performing this massive project, it probably did not want to beg for the financing to do allow it to do the work.
Your post describes CCEE's burden of performance under the assumed BT contract as if this is a simple licensing deal. I think it will be far more taxing and exacting. CCEE will be obliged surely to create millions of codes and data entries to test its programs, and thereafter to continuously establish the reliability of its results. Since CCEE has never tried to actually use DB Express to manipulate a gazillion records before, CCEE will not know in advance where, and if, bugs will thwart the mission.
On the other hand, BT would be both a final-product user and a beta version tester. This will put great pressure on CCEE to not run out of financial resources if it needs to create patches, re-code the programs or deal with glitches. Lets face it, the margin of error and forgiveness would seem to be slim, but the stakes are monumental. A big screw up means sayanora to DB EXPRESS and CCEE. On the other hand, success with BT could mean the transformation from a company with a theoretical product to a leader in an new industry that CCEE may itself define. With so much on the table, it would appear to be sensible to have a reserve of millions of dollars in the bank just in case the money estimated to complete the start-up of the project turned out to be insufficient to cover problems. On the other hand, if BT fully financed the project itself, it could not be expected to also finance the rainy day fund CCEE could anticipate it would need.
(If in the discussion above I have hit upon the reason why CCEE prefers to do its own financing through the sale of new stock, it would appear that CCEE picked the right course. Admittedly I am not sanguine that I have hit the target though because I am just speculating about the reason since nobody from CCEE has confided in me.)
If as you suggest, BT normally would be expected to finance its own DB Express project (which is an assumption arguendo that is bereft of any factual support), the financing BT would provide would not be free. In the usual case, when the customer finances fully the work performed by the vendor, the vendor's profit margins are rendered nugatory, yet the risk of loss and the burden of paying the overhead to perform the contract the vendor must suffer, remains the same. The result in a customer financed deal usually is hasta la vista to the independence of the vendor. (Just look at the many vendors Microsoft captured for peanuts after financing the projects where Microsoft was the customer or look at those vendors that were never seen again after Microsoft financed their deals but no longer needed them).
Actually, contrary to what you imply in your post, there not only is nothing sinister that must be read into the lack of full financing by BT hypothesized in my earlier submission to this thread, it could very well turn out to be a raw deal for CCEE if it allowed BT to become its banker.. BT would be getting the bargain since it would pay a lower price, but more importantly, it would become CCEE's creditor--with all the power over CCEE such a relationship would be likely to generate.
In a normal vendor deal, BT would provide a purchase order and pay in advance for the portion of the product that would be delivered in the first segment covered by the Purchase Order. However, as noted, CCEE would have still have excess costs in the form of start-up, ramp-up and contingency expenses and reserves that would far exceed the amount of the advance-stage-payment BT would make. Consider this illustration: Lets assume arbitrarily an advance-stage-payment by BT of $5 million for the first segment of work detailed on the P.O., and assume further that this money came to CCEE 6 months before it was obliged to make any delivery. If in actuality it would cost CCEE $15 million to deliver the $5 million worth of work, it would need some source of funding outside of the contract. Hopefully, the contract would allow CCEE to catch up, and to recoup its start-up and ramp-up costs in subsequent segments. (This is normally the way things are done.) The proceeds from the sale of the newly authorized stock would appear to be, in this illustration, a cheap way to finance these costs.
On the other hand, to demonstrate the flaw in your assumption that BT should be willing to offer CCEE full financing, ask yourself how could BT justify to its own shareholders paying (using my hypothetical numbers) the full $15 million needed by CCEE to start up and deliver the first $ 5 million segment of the P.O. when DB Express is still in beta form, and CCEE has no track record of performance? To be deemed reasonable by its own shareholders in providing the full financing you argue is expected from BT, what would BT be obliged to demand as collateral for non-performance of CCEE, the failure of CCEE to pay back the financing or the failure of the product? The answer is that CCEE could offer BT as collateral virtually nothing since CCEE does not have liquidity to offer such collateral.
In short, your thinking is not in accord with some of the factors that I have found to govern similar transactions. |
