Where does the money go?
In my last blog-posts, I showed that our very big (and respectful) competitor, “BigRazCo” clearly was making a fool of you by claiming extremely high margins for their Razor and Razor blades.
But, in these time of social protest and implementation of austerity measures, where too high profits taken on the back of the consumers puts the culprit company in the spot light, it might be useful to tell you where the money, taken out of YOUR pocket, goes. No surprise: in the pocket of the shareholders.
Let’s be clear: I have no problem with that, as I am also myself a shareholder and as all employees and my partners at Raz*War are shareholders too. But, you would certainly agree that, sometimes, company profits could be too large and, in some case, even indecent. On my side, instead, I feel being a “social” shareholder (This is very “Raz*War” :-)) and... I have my doubt about "BigRazCo” being it too...
You, dear readers, are the sole judge of how we could qualify BigRazCo profits. The Shaving MATHS exercise of today will help you.
BigRazCo was swallowed by a well known (and well respected. FYI, I am an alumni of this company) bigger fish that we will call “BigShark” for the stake of facility (we have the policy to not name our competitors). This deal was made for 57 billion USD, in 2005, placing this deal in the top 10 among biggest ever mega purchasing deal at this time. Looking at BigRazCo, in 2004 (the year before the acquisition), the company Razor and Razor Blades division made 4,43 billion USD in sales, with an unbelievably high 1,63 billion USD in operating profit (A 38% profit margin:by itself, already a message). BigRazCo had (and still have) two other division; one for cell batteries and one for electrical toothbrushes. But, in 2004 and 2005, the two others divisions were operating moderately well: Hence, The Razor and Razor blades division made 68% of the operating profit. It was notorious, also, that BigShark was interested by BigRazCo for the Razor & Razor blades business, and not by the other divisions (that they intended to sell).
Let’s start the math:
We could assume (despite I just said it is somewhat false) that 68% of the purchase price concerned the Razor and Razor blade business, as this division accounted for 68% of the operating profits (Hence, I undervalue the Razor and Razor blade business). This would mean that the Razor and Razor blade business was worth 37 billion USD. At this time, BigRazCo had 415 million razor and razor blades consumer.This means that BigShark paid 93 USD per consumer. You can now compare that to other deals. Take, for example, the purchase of “Alberto Culver” by Unilever, just finalized last week, on Sept 27. Unilever paid 3,5 billion USD for a company active in hair & skin care (hence: comparable to BigRazCo). And the company had an estimate 200 million consumers (Just for information: the stock-exchange analyst Morningstar said Unilever overpaid Alberto Culver..). This means that Unilever paid an estimate 17 USD per consumer.
It is clear that Big Shark paid an incredibly high sum for BigRazCo, just because BigRazCo captures incredibly high margins on their razors and razors blades. Now imagine what BigRazCo is worth in the hands of BigShark: since the retail prices of the blades further increased, by at least 35% (vs 2005), and since the brand claims (in its advertising leaflets) having now 600 million consumers… Probably, with the same valuation metrics, BigRazCo would be valued in the 100 billion dollars range...
It is quite clear, when you buy a BigRazCo razor or razor blades, that a large part of the price is, simply, profit. Hence, if you buy a razor of, say, 20 USD, be aware that 8 USD will go into the wallet of the shareholder (before taxes). One advise, if you would like to keep buying BigRazCo blades: buy “Big Shark” stock shares too, at least you would have the feeling to recuperate some of the money taken out from your consumer wallet. Another, better, advise: switch to Raz*War…And do it now, by clicking on this link http://www.razwar.com
CQFD. More shaving maths later.