Lessons Learned from Week 6 of Fall Quarter

Ethics

• Corporation can have a conscience. Maximizing profit not always right or sufficient.
• Written beliefs + implementation
• Responsible use of bankruptcy as a tool in business

Behavioral finance

• You can get rich trading on irrational signals by simply being lucky and trading before others to whom you sell out to later (and who are more naive than you).
• Behavioral corporate finance perspectives: biased managers/rational markets or sophisticated managers/emotional markets
• Overconfident CEOs (as measured by holders/non-exercisers of options whose price is 167% in the money) prefer to finance corporate investment with internal cash.
• After a CEO wins an award, the recognition distracts from their jobs (e.g., writing books) and do poorly thereafter (and are more likely to manipulate earnings).
• Overconfident CEOs initiate too many mergers, and most mergers fail to produce synergies. Ego battles lead to overpayment.

Doing deals

• Medical device acquisition by lower middle market PE firm
• Securities Purchase Agreement vs. Asset Purchase Agreement (Reps & Warranties, Indemnification, Dispute Resolution)
• Earnouts: pros and cons
• Be skeptical of management financial statements
• Rollover equity: pros and cons
• LOIs, exclusivity, control