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Mergers, Acquisitions, and Joint Ventures

admin — Thu, 01 Dec 2011 13:52:55 +0000

Most senior executives will be involved in at least one major strategic transaction during their careers, and perhaps many. Even if they never complete a transaction, they can expect at a minimum to receive an overture from another company, bid on a business offered for sale by a persuasive investment banker, or debate with business colleagues the merits of a deal.
Mergers, acquisitions, divestitures, joint ventures, and the like have long been features of the corporate landscape. They became notorious in the late 1800s in the United States with the activity of the ”robber barons” and the consolidating activities of J.P. Morgan and others in the early 1900s. Since then, there have been several waves of activity in the United States—first in the booming economy of the late 1960s, then in the controversial restructuring wave of the 1980s, and most recently with the mega-deals at the close of the 1990s. Europe is also experiencing drastically increased merger and acquisition activity driven by the introduction of the Euro, overcapacity in many industries, and steps (albeit halting) to make its capital markets shareholder-friendly. European acquirers have also been active in international transactions. Asian markets have seen less mergers and acquisitions for a variety of reasons; Japan, however, is likely to witness increasing activity as it begins to recover from a decade-long economic slump.
Mergers and acquisitions (M&A) have become an increasingly important means of reallocating resources in the global economy and for executing corporate strategies. For some firms, such as private equity shops and publicly traded industry consolidators like Starwood, pursuing acquisitions and divestitures is the corporate strategy. A large—and seemingly insatiable—infrastructure has grown up to facilitate such transactions, including investment bankers, lawyers, consultants, public relations firms, accountants, deal magazines, private investors and private investigators. Considering that most investment banks did not even have M&A departments in the late 1970s, the transformation is remarkable.
In this series of articles we focus mainly on the buy side—mergers and acquisitions—because an understanding of how to buy a company provides a foundation for the related activities of divesting and arranging joint ventures. We attempt to provide a general perspective and share our thoughts about some of the lessons we have learned.

Develop the Fine Art of Patience

admin — Thu, 24 Nov 2011 13:50:53 +0000

Patience is one of the most difficult aspects of trading and investing and extremely hard to teach. I have to work at applying patience conscientiously each and every day, even after years of trading.
As a professional trader and investor, I have the opportunity to sit in front of computers all day long, day after day. This is another double- edged sword. Yes, I have the ability to look for promising trading opportunities because I have lots of information in front of me; however, I also have the opportunity to second-guess great trades due to fluctuations in the market that may be unimportant. Therefore, I have learned that the best investments are those in which I have thoroughly studied the risk and reward and have developed a time frame for the trade to work. For example, if I place a trade with options six months out, I try to stay with the trade for that period of time. This takes patience. Of course, if I reach my maximum profit level before that time, I take that profit and get out.
Do not feel that you are at a disadvantage if you cannot trade and in- vest full-time. This allows you to avoid the “noise” in the market that occurs each and every trading day. Many of my successful students make more money by not watching the markets too closely.

Setting Aspirations and Targets

admin — Mon, 21 Nov 2011 13:49:56 +0000

The principles of making value happen can be powerful tools to help a company achieve its goals— provided it knows what these goals are and how they link to value creation. All too often, a company’s externally communicated goals represent just an incremental increase over historical performance, and may link more to accounting measures such as earnings per share than to more economically based measures. Equally, its internally communicated goals, as embodied in a mission or vision statement, may have nothing to do with what people actually try to achieve on a day-to- day basis.
A company wishing to make value happen needs to develop an aspiration that combines two dimensions: an inspirational statement of intent and value-linked quantitative targets.

How will cost influence supply?

admin — Sat, 12 Nov 2011 14:46:14 +0000

Economists are interested in cost because they seek to explain firms’ supply decisions. A strictly profit-maximizing firm will compare the expected revenues derived from a decision or a course of action with the expected costs. If the expected revenues exceed costs, then the course of action will be chosen because it will expand profits (or reduce losses).
For short-run supply decisions, the marginal cost of producing additional units is what should be considered. To maximize profits, the decision maker should compare the expected marginal costs with the expected additional revenue from larger sales. If the latter exceeds the former, output (the quantity supplied) should be expanded.
Marginal costs are central to the choice of short-run output, whereas expected average total cost is vital to a firm’s long-run supply decision. Before entering an industry (or purchasing capital assets for expansion or replacement), a profit-maximizing decision maker will compare the expected market price with the expected long-run average total cost. Profit-seeking potential entrants will supply the product if, and only if, they expect the market price to exceed their long-run average total cost. Similarly, existing firms will continue to supply a product in the long run only if they expect that the market price will enable them at least to cover their long-run average total cost.

Overnight index swaps

admin — Sat, 12 Dec 2009 13:55:12 +0000

One interesting variant of an interest rate swap is an overnight index swap (01s). This instrument commits one party to paying a fixed rate as usual. The floating rate, however, is the cumulative value of a single unit of currency invested at an overnight rate during the settlement period. The overnight rate changes daily. This instrument is used widely in Europe but not in the United States.

Build a Strong Respect for Risk

admin — Fri, 04 Dec 2009 13:54:03 +0000

You must respect risk if you are to survive as an investor or a trader. Be- fore you ever place an order with your broker, make sure you calculate the maximum potential risk and reward as well as the breakeven(s) of the trade. This will help you stay in the game so you can achieve your goals. Risk graphs, which are explored in later articles, are important tools for assessing risk and reward.

Constant matirity swap

admin — Fri, 27 Nov 2009 13:51:47 +0000

In a constant maturity swap, one party pays a fixed rate, or a short-term floating rate such as LIBOR, and the other party pays a floating rate that is the rate on a security known as a constant maturity treasury (CMT) security. The transaction is also sometimes known as a CMT swap. This underlying instrument is a hypothetical U.S. Treasury note, meaning that its maturity is in the 2- to 10-year range, with a constant maturity. Obviously the reference to a particular CMT cannot be referring to a single note, because the maturity of any security decreases continuously. As mentioned, the note is hypothetical. For example, for a two-year CMT security, when there is an actual two-year note, that note is the CMT security. Otherwise, the yield on a CMT security is interpolated from the yields of securities with surrounding maturities. The distinguishing characteristic of a constant maturity swap is that the maturity of the underlying security exceeds the length of the settlement period. For example, a CMT swap might call for payments every six months, with the rate based on the one-year CMT security. In contrast, a standard swap settling every six months would nearly always be based on a six-month security. Otherwise, however, a constant maturity swap possesses the general characteristics of a plain vanilla swap.

Basis swap

admin — Tue, 17 Nov 2009 13:48:42 +0000

We briefly referred to the basis swap, in which both sides pay a floating rate. A typical basis swap involves one party paying LIBOR and the other paying the T-bill rate. As we learned before, the term basis refers to the spread between two prices, usually the spot and futures prices. Here it is simply the spread between two rates, LIBOR and the T-bill rate. Because LIBOR is always more than the T-bill rate, the two parties negotiate a fixed spread such that the party paying LIBOR actually pays LIBOR minus the spread.2′ LIBOR is the borrowing rate of high-quality London banks, and the T-bill rate is the default-free borrowing rate of the U.S. government. The difference between LIBOR and the T-bill rate is thus a reflection of investors’ perception of the general level of credit risk in the market. Basis swaps are usually employed for speculative purposes by end users who believe the spread between LIBOR and the T-bill rate will change.” A basis swap of this type is, therefore, usually a position taken in anticipation of a change in the relative level of credit risk in the market. As noted, both sides are floating, and typically both sides use 360-day years in their calculation.

Be Alert for Trading Opportunities at All Times

admin — Fri, 13 Nov 2009 13:47:35 +0000

By opening your receptivity to opportunity, you will be able to find many more promising trades than you thought possible. Where do you find opportunities? Everywhere. When you begin to train yourself to automatically look for trading opportunities in everything you do, you are on your way to being an up-and-coming successful trader.

Establish a Systematic Approach to the Markets

admin — Thu, 12 Nov 2009 13:46:08 +0000

A key to successful moneymaking in the markets is to develop a systematic approach that combines all the weapons in your arsenal to compete effectively in the marketplace. Then, and only then, will you be able to reduce your stress enough to believe in the plan and stick with it. A systematic approach diffuses the inherent madness of the marketplace, allowing you to make insightful trading decisions.