PappaHippos Blog

M&A Case Study - Selling a Troubled Company

2005-08-22T06:32:00.000-07:00

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)

Can Equity Swaps Reduce Country Risk?

2005-03-18T10:14:00.000-08:00

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

2005-03-07T12:19:00.000-08:00

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

2005-02-28T13:48:00.000-08:00

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

2005-02-02T04:31:00.000-08:00

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

2005-02-02T04:13:00.000-08:00

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

2005-01-27T14:02:00.000-08:00

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

An Excellent Collection of Case Studies

2004-12-12T04:36:00.000-08:00

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!

2004-11-28T07:20:00.000-08:00

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

2004-11-14T09:31:00.000-08:00

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?

2004-11-01T13:48:00.000-08:00

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!

Ratios in Corporate Finance

2004-10-05T11:13:00.000-07:00

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...

Group Work at School and Universities

2004-10-01T13:26:00.000-07:00

What is the purpose of group work at universities and schools? Well, in my opinion it is a way to prepare students for real life work situations where they have to work with people they don't know and may not like. Unfortunately, I always see the same mistake made by teachers and professors: Students are not divided by the professor but are simply said to form groups. That is wrong!!! This way, the whole idea of group work becomes negligible. Everyone works with people he already knows and probably likes. Conflicts and compromises are much less likely than with unknown group members and a real life situation is not simulated at all. Of course it may not be very popular to divide students by the professor's authority but a small explanation why this is done should be more than convincing...

First Week at CERAM

2004-09-27T13:04:00.000-07:00

I finished my first week at CERAM. It was quite an intensive seminar week with Quantiative Finance every day. Althogh being a bit stressing, it was really interesing, I might start some financial prediction modelling in the future. Probably the most important thing I learnt is that you should never invest in stocks when you rely on financial prediction. It's much better to invest in interest rates or currencies which are partially predictable.
My social life is also quite interesting right now with a lot of new people I met here. Everyone is really friendly right now and I hope that it will be like this for the whole year.

A Daytrip to Cannes

2004-09-12T08:39:00.000-07:00

After a thunderstorm passed by Juan les Pins last night I thougt it wasn't a good idea to go to the beach today. So I decided to go to Cannes, the city of the famous film festival, which is a 20 minutes bus ride away from my home. It was quite nice there, better than expected. The old part of the town has some nice small streets and if you take a walk to the top of the city you have a good view on the marina and the bay. Taking a look at the beach was also funny as all the German and British tourists were swimming and the Italians, Spanish and French people were crowding the coffee shops in long trousers. Of course I was also wearing a long trouser!

Two pictures from Cannes, the first is from the top of the city, the second shows the famous film festival centre.

Je ne cherche pas, je trouve...

2004-09-10T02:42:00.000-07:00

...that's what was written on one of the postcards with a Picasso self-portait I found in Antibes, the town next to the place where I live now. Somehow it reflects how I feel right now after having arrived in France last week. It's a wonderful place here at the Côte d'Azur in France and it still feels like a dream when I think that I am here for my studies the whole year now.

EuroScience Open Forum

2004-08-30T23:59:00.000-07:00

The EuroScience Open Forum 2004 (http://www.esof2004.org) in Stockholm ended this weekend. Being the first pan-European scientific meeting, I think it really was a success with 1.800 participants.
So, what's the importance of this forum? In my view, it's a first step to push Europe in a direction it should have taken long before: Becoming the leading scientific region in the world. OK, OK, it's still a very long way to go! The US right now maybe leads 20:1 if you would count is as a football match. If I take Germany, my home country, as an example I can find a lot of shortcomings of the scientific area like underfinanced institutions, slow carrer paths, non-competetive student admission and an immigration policy that does not take account of talented researchers in any way.
One thing, I especially dislike about Germany is that research often happens in laboratories like the "Max Planck Institutes" that are independent of universities and that do not teach students. Research can only be successful in the long run if you teach and research at the same place and you can spread your knoweldge to new motivated students. Remember, knoweledge is still very, very intangible!

A Finance Book for free!

2004-08-29T00:53:00.000-07:00

Some people do innovative, wonderful things! One of my favourite researchers right now is Ivo Welch from Yale. He's working on a finance book and publishes the preliminary version for free. Not only is the book for free, it's also one of the greatest finance books I've seen so far. All you have to do is sign in and download the book as PDF. Check it out: http://welch.som.yale.edu/book/

P.S. Ivo really seems to favour open source and free projects. The book has OpenOffice examples and graphics are prepared with GNU's R

OpenOffice: http://www.openoffice.org/
GNU R: http://www.r-project.org/

[Update: The new link to the book is http://book.ivo-welch.info/]

Blanchflower on Money, Sex and Happiness

2004-08-29T00:43:00.000-07:00

Just found an interesting paper from our friends of the National Bureau of Economic Research (NBER).
Relax, take a deep breath and read the first lines:

This paper studies the links between income, sexual behavior and reported happiness. It uses recent data on a random sample of 16,000 adult Americans. The paper finds that sexual activity enters strongly positively in happiness equations. Greater income does not buy more sex, nor more sexual partners.

Quite impressing, isn't it...
Get the paper at http://www.nber.org/papers/w10499 (Hint: You need an NBER Account! Check it out from a university network, most universities should have access and if you're at one who doesn't have access think about the research capabilities of your university!!!)