Lessons Learned from Week 2 of Fall Quarter

Ethics

• Interesting discussions and analyses of when bluffing is ok in business (versus poker). Does it make a difference when everyone knows the rules of the game or expects bluffing to happen?
• How to deal with doing business with someone when you don't agree with their end cause. One possible answer: do the business at cost so that your company and employees don't suffer from refusing the business but don't take profit in order to stay true to morals.
  

Behavioral Finance

• Glamour stocks (high price to cash flow, price to earnings, price to book) under-perform value stocks (and this has nothing to do with risk factors).
  
• High monthly trading volume and high variability in trading volume both predict low expected return in the following month. These effects are even stronger than the size and book/market effects.
  
• Irrational investor optimism causes high volume and is reversed out in the following month.
  
• Investors can't short sell equities as easily as buying, so negative opinions aren't as easily/quickly traded (priced in) as much as positive opinions.
  
• Retail Segment Effect (volatility from retail investors makes return reverse itself from overoptimism)
  
• "Naive Asset Pricing Model": No CAPM. No APT. Naive investors transfer wealth to sophisticated investors.
  
• It's possible to identify the most important characteristics for predicting returns, and these predictions beat the market considerably and work quite well on out-of-sample tests over a long period of time.
  
• Best-performing stocks have a relatively low level of risk.
  

Doing Deals

• TV economics: huge land-grab for channels
  
• All countries have followed the same path in TV adoption as the US did (going to 80-90%)
  
• To consolidate income, you must own economic majority and have control over management and CEO.
  
• To bridge gap in valuation negotiations, pay low multiple on initial income and then high multiple on rest, so if able to pull off growth, will pay more.
  
• Most acquisition failures due to post-merger integration (PMI) problems.
  
• Corp dev must fit with overall business strategy. What must we buy to succeed? Companies? People? IP?
  
• Keep a wishlist of companies you’d like to own.
  
• Track previous deals and how they performed compared to forecast when considering new deals someone brings.
  
• Companies really good at PMI: Cisco, GE
  
• Filter for culture meshing well with acquirer to prevent PMI problems
  
• A good M&A lawyer is a business-enabler; a bad M&A lawyer over-lawyers and puts in way too many clauses.
  
• LOIs are for the business people, not lawyers.
  
• In international business, people make deals with you as a whole person. They watch how you interact with their family, how you drink tea, how you spend days just socializing, golfing, and not talking about the business.
  
• The fewer warranties or hold-backs the seller wants, the more due diligence time will be required.
  
• Structure non-competes to cover payback period.
  
• Share Purchase Agreement does the acquisition, but Shareholder Agreement is the most important document after the deal is done.
• Shareholder Agreement determines who will run it post-purchase, what requires majority versus unanimous decisions, etc.
  
• Standard minority protections: sale of company, issuance of new equity, dissolution of company, related party transactions.
  
• Must discuss how to get out of the deal/terminate/carve out/divorce
  
• But divorce procedure rarely followed; so difficult that forces parties to talk and figure out some better plan.
  
• Clawbacks over 1-2 audit cycles (2 years of holdbacks to discover things not paid or not accounted for right)
  
• It's usually better to build than to buy.
  
• Leverage specialists and be an orchestra conductor.
  
• Have a PMI plan. Be honest with those who will get fired.
  
• Avoid joint ventures at all costs. If required, focus on the Shareholder Agreement (exit clauses and paths to full ownership)
  
• Models can be made to say anything.
  
• Know when to walk away from a deal.