M&A Case Study - Selling a Troubled Company

Ever wondered how the Mergers & Acquisitions business works in practice? Well, I know because I worked in it but I'm too lazy to write an own case study right now.
But Houlihan Lokey Howard & Zukin, an investment bank that is specialised on distressed companies, wrote an excellent case study about selling a company. Although it's a specialised case of a distressed firm, much of the text applies to general M&A deals. You'll see what a teaser is, how valuation typically is done and how a bidding process works. Very interesting!

http://www.hlhz.com/library/bsttcacs.pdf (1.3 Megabyte)

Volatility Modelling - From ARMA to ARCH

Here's another paper that I wrote last semester with two of my fellow students who became good friends of me as well. This one is about different approaches to volatility modelling. After a general introduction to heteroskedasticity in economics the paper introduces the different models available for volatility modelling such as autoregressive procedures and more advanced ARCH/GARCH models. In the third part, an example of modelling volatility is provided by analyzing the volatility of General Electric since 1990 and forecasting the future volatility of the firm.

Volatility Modelling [PDF]

Is the Financial World Becoming Riskier?

Another paper I wrote deals with the question if the world is becoming riskier. I examine this question from a company's point of view, from the market's point of view and from a coutry's point of view and draw some general conclusions. Although a short paper is probably not enough to fully answer the question asked, it still might give the interested reader some new ideas.

Have a look at it here

Hedge Fund Strategies

I wrote a small paper about Hedge Funds last semester that I put online now. Contrary to the common perception that Hedge Funds are very risky, I provide an illustration of a fund strategy that is risk reducing compared to mutual funds. Afterwards, I assess various Hedge Fund strategies with respect to their risk-return profile before I design a small multi-strategy Hedge Fund in the end.

Have a look at the paper.

China - An Assessment in the Light of the Asian Crisis

I just remembered that I never published the link to an interesting presentation I did last semesters with three other students. It tries to assess the similarities between today's China and the problems countries had before the Asian crisis.

Have a look at it: china_asian_crisis.pdf

Bubbles - A Psychological View

As the end of the semester arrives in France some more assignments are in the pipeline right now. I will start today with the publishing of a presentation about the psychological view of bubbles, a presentation I prepared with three other students who became very good friends of mine here at CERAM. It was big fun working with you guys and I really enjoyed the time! There will soon follow more stuff, for example a very nice presentation about volatility modelling...

Have a look at the presentation here: http://mitglied.lycos.de/deutschlandag/psych_bubbles_published.pdf

Can Equity Swaps Reduce Country Risk?

Wow, what a great idea I read about on Forbes.com right now! Harvard's Robert Merton is proposing countries to enter into equity swaps, thereby reducing the country's exposure to a given industry. Instead of trying to build "national industry champions" and wasting a lot of inefficiently allocated money, Merton proposes that two countries enter an agreement to swap part of the returns of their industries which makes both countries less dependent on one industry.

From the article:

Suppose, for instance, that country A has a flourishing automotive industry and a nonexistent electronics industry, while country B has a flourishing electronics industry and a nonexistent automotive industry. (...)

Country A would agree to pay returns on a world automotive portfolio--the industry for which it has an advantage--in exchange for returns on a world electronics portfolio. In so doing, country A would effectively eliminate its exposure to the world automotive market, over which it has practically no control.

Read the whole story at http://www.forbes.com/home/business/2005/03/18/cz_0318oxan_riskswaps.html

Economics & Happiness

Over the weekend I read an article in a German newspaper (Frankfurter Allgemeine Sonntagszeitung) about new research on happiness. Scientists are now able to determine more precisely which regions of the brain react to different feelings. This allows scholars to refine the research results on happiness.
So how is this related to economics? Well,economics normally starts with the assumption that money makes happy. Consequently, governments' main goal is to increase the wealth of the citizens i.e. to increase the country's GDP. So, does getting money really make happy? Yes, says the article, but only if the neighbour gets less money than you. Basically, people seem to define their wealth not compared to the whole country but rather compare themselves to a peer group. In an experiment, people were asked if they would rather like to earn 50.000 if everyone else earns 10.000 or 250.000 when everyone else earns 100.000. Most people chose for the first option as it gave them more relative income but of course less money in absolute terms.

There is definitely more to say about this topic but as I decided to keep the entries in this blog below the one-minute read barrier, I will stop here by pointing out to the webpage of Richard Layard, a London School of Economics professor, who has an interesting lecture about the topic on his webpage: http://cep.lse.ac.uk/layard/

The Best Finance Blog I Found So Far

The best Blog on academic finance topics I found so far is published by Jim Mahar at http://financeprofessorblog.blogspot.com. Really a lot of good information about new papers, conferences and much more from the world of finance. Definitely worth checking out!

The (Mis)Behaviour of Markets

I read a very interesing book last week. It's written by Benoit Mandelbrot, one of the star professors at Yale's maths departement and Richard Hudson and called "The (Mis)Behaviour of Markets". While Mandelbrot's theories of fractal geometry are probably debatable, the book offers much more. A very interesting introduction to the history of modern finance, the problems that banks face today with their risk models and a feeling of how little we know about finance today. I think Mandelbrot is absolutely right when he states that we need basic research in the field of finance, similar to the basic research undertaken in sciences such as physics or nanotechnology.

A Finance Paradoxical

Well, this BLOG entry is only for finance students I guess. And even these students will find it hard to understand the paradoxical that came to my mind last week. Here is the story:

It's about stock market analysts and the Capital Asset Pricing Model (CAPM). Analysts use this model to estimate costs of capital for discouning future cash flows which they use in turn to value a company. If they, however, believe that the CAPM is true, they acknowledge that their own jobs are a waste of money. According to the CAPM the best portfolio you can hold is a portfolio that includes all assets of the world. That was one of the fundamental ideas of Sharpe when he developed the model. So, there's no use of picking individual companies and in turn no use of analysts. Quite funny that they still exist and use the CAPM...

Howto Start a Thesis

I prepared a "quick'n'dirty" guide of how I would start writing a thesis. It's not supposed to be sophistiacted, the text is simply a small tool about questions that people asked me in the last weeks. Check it out at http://mitglied.lycos.de/deutschlandag/starting_thesis.html

The Economist online subscription for students

As the discounted student subscription for students is a bit hidden on the Economist's website I'd like to mention it here. Students can get an online subscription that includes the content of the printed edition for $15 with a duration of 4 month. A very good offer in my opinion! Go to www.economist.com and click on "Academic Offers" in the left navigation menu.

An Excellent Collection of Case Studies

As a big proponent of case studies for teaching purposes I can only recommend every teacher and professor to have a look at the Thunderbird Case Studies. The studies are ordered by topic and provide excellent teching materials for a bunch of topics.

Please read the copyright information on the Thunderbird site.

Sorry McKinsey, you got the productivity story wrong!

Some weeks ago the McKinsey Quarterly wrote a story on German and French productivity growth where the weak growth was compared to the better US growth. The article Reviving French and German productivity argues that excess regulations in France and Germany are the main problem. Although McKinsey Quarterly is a relatively good source to educate managers with at least some economic knowledge, I am afraid that the Mekkies' story is fundamentally flawed this time!
A paper of Marcello Estevao that was summarized in the IMF's Survey (November 8, 2004) tells the real story: "This phenomenon (of lower productivity growth), he says, can be explained by labor market reforms in many euro area economies that - combined with wage moderation - has made it advantegeous for companies to hire new workers rather than invest in new technology to improve productivity of existing workers".
The bottom line is simple: When an economy creates new low-wage jobs, these jobs tend to be less productive, i.e. less output per hour. Take a dish washer and compare his value added to an IT engineer. So contrary to McKinsey, less regulation has the potential to lower productivity growth when labour participation is increased! It's not a story about the evil policy makers in good old Europe, sorry McKinsey...

Taking the GRE Test

I was in Milan in Italy this week to take the GRE test, a test necessary for applying to American PhD programs. I received 780 of 800 points in the quantitative section which is the only important section for me applying to economic PhD programs.
Here are some things I learned while studying for the test:

- I used the Princeton Press Book for preparation which is quite good. However, the tests on the CD tend to be a bit easier than the real test in my opinion.
- Take the POWERPREP tests of ETS at the end of your preparation, they are the most realistic preparation for the real test.
- Buy the book with additional tests from ETS. You can't practice enough and the four tests of the Princeton book are not enough.
- If the test is not at the city where you live, spend one night at the city of the test location. Nothing makes you more tired than driving a long distance.
- Be at the test location early. I was able to start at 8.30 instead of 9.00 which was perfect for me.
- Practice, Practice, Practice...

Should Wrong Approaches Be Included in Undergraduate Books?

I read a bit about capital budgeting in the Fundamentals of Corporate Finance textbook of Ross/Westerfield/Jordan yesterday and stepped over an interesting question: Should wrong approaches that are used in corporate practice be included in an academic undergraduate textbook? Ross et al. most notably introduce a capital budgeting rule known as average accounting return that is defined as average net income over average book value, one of the most stupid budgeting rules I ever heard! At least they acknowledge that the only theoretically right budgeting rule is the discounted cash flow method. But back to the question if it makes sense to include wrong approaches. I don't think so! At least not to the extent, Ross et al. opt for. Maybe I would write half a page about these approaches but for a textbook with 776 pages almost 20 pages for wrong approaches is a bit too much for me!

Top 5 Brightest People I Know

I just had an interesting idea and thought two hours about it. Who are the brightest people I met so far in my life. Finally, here is my ranking. I came up with six people who I rank on 5 places. Of course this ranking is very subjective and I only included experienced people. Some of my friends might also be as bright as the people mentioned here but they simply have a way to go until they reach the level of these 6 men. Anyway, here is the list:

1. Lex Hoogduin - Head of the Research Department of the Dutch Central Bank

2. Bart van Ark - Professor in Economic Development, Technological Change and Growth at the University of Groningen

3. Michel Henry Bouchet - Professor in Finance at the Grande Ecole CERAM Sophia Antipolis

4. Ruediger Grube - Vice President Corporate Development at the DaimlerChrysler AG

5. Harald Hagemann - Professor of Economic Theory at the University of Hohenheim

5. Fred Reinig - Head of the Competitor Analysis Departement at the DaimlerChrysler AG

A Great Thinker of Our Time

Today it is an honour for me to introduce the BLOG of one of the gratest thinkers of our time: Anselm Mattes. Visit his BLOG at http://wahrheiten.blogspot.com. To my greatest regret he startet the BLOG in German but there is still hope that he might change his mind.

Ratios in Corporate Finance

I just went through the 2nd Chapter of "Fundamentals of Corporate Finance" written by Ross/Westerfield/Jordan. The chapter talks a lot about ratios, in fact it explains 24 (!) different ratios. As this BLOG is unbalanced in its opinion I clearly state here that I think this most of the ratios are a waste of paper in the book. Most of the ratios are too easy to manipulate so there is no sense at all in using them. Take the popular Return on Assets (ROA) ratio as an example. If I were a CEO and I knew that analysts rate my company based on this ratio, I would sell all my assets and lease back everything. No matter if that generates less profit for me, it will definitely incrase my ROA figure. Of course there are some ratios that make sense. I like the Enterprise Value over EBITDA ratio because it is hard to manipulate and it is widely used as far as I know from Investment Banks. For some strange reason it is not part of Ross/Westerfield/Jordan's 24 ratios...