fin-markets

[fin-markets]

What are Bollinger Bands?

A series of trendlines serve as the definition of a Bollinger Band®, a technical analysis tool. They are represented as two standard deviations away from a simple moving average (SMA) of a security's price, both favorably and negatively, and can be customized to the user's preferences.

Technical trader John Bollinger created Bollinger Bands®, which are intended to increase the likelihood that investors will recognise when an asset is oversold or overbought.

Computing the security's simple moving average (SMA), often using a 20-day SMA, is the first step in computing Bollinger Bands®. The initial data point for a 20-day SMA is the average of the closing prices for the first 20 days. The following data point subtracts the price from the first data point, adds the price from day 21 and calculates the average, and so on. The security price's standard deviation will then be ascertained. The standard deviation calculates the deviation of a group of numbers from an average value.

Many traders hold the view that the market is more overbought or oversold the closer prices move to the upper band or the lower band, respectively. Since Bollinger Bands® are calibrated to use +/- two standard deviations around a SMA, we may anticipate that the observed price action will largely fall within these bands 95% of the time.

~Lakshya Kapoor

[fin-markets]

Barclays Trading Strategy

The following two strategies were published by Barclays in their "U.S. Equity Trading Strategy- Impact of Retail Options Trading' report in September 2020 to capitalize on new retail options trading volume.

The Straddle Purchase a call and a put with the same strike and expiration, providing the closest thing to a perfect price hedge conceivable. Doing so covers your risk whether the price increases or decreases; you would be taking either a long or short position on volatility. Barclays chooses which stocks to employ this approach on based on their VolScore statistic, or the volatility spread between a stock's volatility and the volatility of the industry in which that firm operates.

Long Call Spreads Unlike Strategy #1, where you're merely making a volatility play, in Strategy #2 you're genuinely betting on a stock. Barclays purchases a long call and then sells a call that is even more out of the money. An OTM call option will have a strike price that is higher than the market price of the underlying stock.

An informed investor can make above market average gains by using these strategies, but a thorough knowledge is advisable before committing hard earned sums of money in options trading. I will expand on these two strategies in my coming articles :)

~Lakshya Kapoor

[fin-markets]

Useful Ratios for Stock Analysis

An informed investor can make smart investment decisions with the help of ratio analysis. Here are 5 such ratios to keep in mind while considering a stock for investment.

Return on Equity (ROE)- This ratio gauges how well a business uses shareholder equity to produce profits. Consider a good ROE as one that grows consistently over time. That can be a sign that a business does a good job of using shareholder money to boost earnings. This could ultimately boost shareholder value. For common stockholders, ROE is computed by dividing total shareholders' equity by net income, which is defined as income less expenses and taxes, before paying common share dividends and after paying preferred share dividends. The higher the ROE, the better the company is at generating profits using shareholder equity.

Price-Earnings Ratio (P/E)- Investors use this ratio to assess the growth prospects of a firm. It displays how much they would fork out in exchange for $1 of earnings. It is frequently used to contrast the potential values of several stocks. This ratio is computed by dividing the current stock price of a company by earnings-per-share. For example, If a company closed trading at $50.75 a share and the EPS for the past 12 months averaged $5.10, then the P/E ratio would be 9.95 ($50.75/$5.10). Investors would spend $9.49 for every generated dollar of annual earnings. 

Debt-to-Equity Ratio- The debt-to-equity (D/E) ratio, which measures a company's financial leverage, is determined by dividing its total liabilities by its shareholder equity. It gauges how much debt a business is using to fund operations as opposed to using cash on hand. In the event of a default, debt must be repaid or refinanced, incurs interest costs that are often not deferrable, and could diminish or eliminate the value of equity. Therefore, a high D/E ratio indicates that a company relies heavily on debt funding and is frequently linked to high investment risk.

Price-to-Book Ratio- The P/B ratio illustrates the value that the market places on a company's stock in relation to the stock's book value. The P/B ratio is a popular tool for finding inexpensive stocks. By investing in an undervalued stock, investors are hoping to profit when the market recognizes the worth of the business and raises its price to reflect the investor's judgement. What constitutes a "good" price-to-book ratio will vary depending on the industry and general market valuation conditions. In contrast to an investor looking at a company's stock in an industry where lower price-to-book ratios are the norm, an investor evaluating the price-to-book ratio of a stock may decide to accept a higher average price-to-book ratio. Since the accounting value of the company's assets, if sold, would be higher than the market price of the shares, if the P/B is less than 1.0, it is assumed that the stock is being underpriced by the market.

Volume-Weighted Average Price (VWAP)- On intraday charts, the volume-weighted average price (VWAP) is a technical analysis indicator that resets at the beginning of each new trading session. It is a benchmark for trading that shows the average price a security has traded at during the course of the day, taking into account both volume and price. VWAP often serves short-term traders best. VWAP can be used by traders as a trend confirmation tool and as the basis for trading rules. For example, they might view equities as being undervalued and overvalued depending on their price relative to VWAP.

~Lakshya Kapoor

[fin-markets]

Cryptocurrencies

Almost everyone who uses the internet is now familiar with the term "Cryptocurrency". Today we're going to look deeper into this asset class and understand its properties.

A cryptocurrency, crypto-currency, or crypto is a digital currency that does not rely on any central authority to uphold or maintain it. Instead, transaction and ownership data is stored in a digital ledger using distributed ledger technology, typically a blockchain. This virtual currency is secured by cryptography, which makes it nearly impossible to counterfeit it or double-spend it. Cryptocurrencies enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Bitcoin has been the most popular and valuable cryptocurrency in the recent times. It was made available to the public in 2009, and it remains the most widely traded and covered cryptocurrency. As of May 2022, there were over 19 million bitcoins in circulation with a total market cap of around $576 billion. 

Due to the success of bitcoin, many other cryptocurrencies have been developed in the recent years. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litcoin Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion, of which 41% was contributed by Bitcoin.

Some of the interesting usages of cryptocurrency are as follows-

A censorship-resistant alternative store of wealth: Cryptocurrencies like Bitcoin act as a censorship-resistant alternative store of wealth that only the individual with the private keys to the wallet has access to. Hence, no personal Bitcoin wallet can ever be frozen by authorities.

Make private transactions: Cryptocurrencies such as- Monero (XMR), Zcash (ZEC), and PIVX (PIVX) enable users to make anonymous financial transactions. This enables users to avoid the hassle of explaining to the bank or other authorities the source of their funds, reasons behind the transaction, and to whom are they paying money.

Rent out your spare hard drive space to the cloud: Decentralized blockchain-based cloud storage solutions such as Storj enable users to earn cryptocurrency in exchange for renting out their hard drive storage space to those who need it on a peer-to-peer basis.

To understand the underlying properties of cryptocurrencies, it is important to have some understanding of the blockchain technology.

Blockchain Technology Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. Financial institutions like JP Morgan have been testing the blockchain technology to lower transaction costs.

~Lakshya Kapoor

[fin-markets]

The Future of IBs

The pandemic has changed a lot, especially the way people conduct business. Naturally, the Investment Banking industry is not immune to the changes. Today we'll discuss about the expected changes that IB firms are expected to make in order to adopt to the new normal.

According to Deloitte, an international professional services network headquartered in London, the investment banking industry is expected to undergo a bifurcation of broker archetypes: “flow players” that focus on middle- and back-office functions and “client capturers” that specialize in front-office functions. This bifurcation will result in an interconnected ecosystem of various players. Banks likely will need to determine which role they want and, depending on internal and external factors, are able to play within the ecosystem. They also will likely need to redesign their service delivery around a connected flow model—moving capacity and processes to the ecosystem of market providers—and optimize the use of financial technology, data, and analytics to generate differentiated insight and added value.

With these changes, it is likely that new opportunities will be created for investment bankers to earn higher returns. But in order for this to happen, firms may need to dramatically retool their business models and organizational structures to prioritize client-centricity, disruptive technologies, regulatory recalibration, and workforce and workplace evolution.

~Lakshya Kapoor

[fin-markets]

Human resources and Economic flourishing

  In the context of the ongoing economic crisis caused by the conflict between Russia and Ukraine, I thought I want to share my point of view about the situation and how a certain country can stand against the disadvantages of such problem, of any kind of crisis and all what comes with it of economic hardships. Digging into this subject, I will break down the topic into three important parts that turn around the human resources, considering they are the ones with the biggest potential to change things: Basic needs, desire control and scientific research.

  To empower a country’s economics, humans need first to survive, and that’s by affording their vital needs from good nutrition to appropriate education. We are physically weak creatures, spending few days without having a source of drinkable water and eatable food can bring so much harm to a our physical and mental health, that’s if it didn’t kill us. A good health service and social security are also very important, because if missing, that would bring humans to the same previous consequences. And finally, a life component that I think is as much vital is education, if not educated we would live like animals in a forest, the strongest physically gets it all, as Nelson Mandela said: “ Education is the most powerful weapon which you can use to change the world”.

All these survival components match to economic development in the way that the countries, mostly those they belong to the third world, struggle only with such basic things, which actually prevents them from thinking of their own home’s economic improvement and fixing.

  To proceed, We are creatures that never get satisfied, we always wish for a better life, and our desires fulfillment can play for and against us. A lot of scientific researches proved for example that practicing sports have a positive impact on one’s intellectual and physical capacities, according to Harvard University :“Exercise improves mood and sleep, and reduces stress and anxiety”, and that’s by controlling hormones and chemicals in the brain. In the other hand, stopping the human beings from satisfying some of their own cravings or necessities improve their adapting capacities, according to Oxford university, creativity is related to effective problem solving and adaptability.

Improving the skills of thinking and creativity are a key component to economic flourishing, because it’s the tool by which people think of new marketing strategies for example.

  To finish, scientific research is a sign of economic blossom, take for example the United States of America, one of the strongest economies of the world, this one has the most noble prizes, she has about 400, ranking first in the world. Research is a very effective way to boost the economy, considering it is the meeting point of different fields, take for example building an advertisement, we need to be provided by the latest technology, engineering, psychological theories… To create an impacting publication for the viewers. With that being said, the government has to take in consideration offering tools and atmospheres to enable scientific learning.

  To sum up, the best investment a country can bring to its economy is giving humans biological necessities, a balanced fulfillment of desires and tools to open up about knowledge and what science hides of wonderful secrets.

[fin-markets]

 What is Venture Capital?

Venture capital (VC) is a sort of private equity and financing provided by investors to start-up enterprises and small businesses with the potential for long-term growth. The majority of venture capital is often provided by wealthy individuals, investment banks, and other financial organizations. However, it is not always in the form of money; it can also come in the form of managerial or technological know-how. Venture capital is often given to startups with outstanding growth potential or to businesses that have had rapid growth and seem well-positioned to keep growing.

Large ownership stakes in a company are developed and sold to a select group of investors in a venture capital deal through independent limited partnerships that are set up by venture capital firms. These partnerships can occasionally be made up of a group of related businesses.

Types of VC Funding

Pre-Seed VC- Pre-seed funding usually refers to the time when a company's founders are just starting to run their business off the ground.

Seed Funding- At this stage the company is about to launch its first product and might need external funding to do so. VCs provide such funding.

Early Stage Funding- Before a company can become self-supporting, it will need more funding to increase manufacturing and sales once a product has been established. The company will thereafter require one or more investment rounds, which are often identified progressively with Series A, Series B, etc.

It is important to note a difference between a VC funding and a bank loan: VC usually does not require a cash flow or assets to secure the funding, on the other hand- a bank usually does. VCs also provide mentoring and networking services to help a new company secure talent and growth. Though it is also notable that VCs tend to demand a large share of company equity.

~Lakshya Kapoor

[fin-markets]

Options Trading Mini-Guide

Firstly, it is important to understand what Options exactly are. Options are contracts that allow the holder the choice to buy or sell a specified amount of an underlying asset at a predetermined price at or before the contract expiration date. Options can be purchased with brokerage investing accounts, just like the majority of other asset classes. Options have great power because they can improve a person's portfolio. They accomplish this via leverage, protection, and even more income. There is usually an option scenario suitable for an investor's objective, depending on the circumstances. An example that is frequently used is hedging against a declining stock market with options to prevent further losses. In reality, hedging was the main reason options were created. Options hedging aims to lower risk at an affordable price. We can consider employing alternatives like an insurance policy in this case. Options can be used to protect your investments against a downturn in the same way that you insure your home or automobile. Some traders find it appealing to speculate using a call option rather than purchasing the stock outright since options offer leverage. Compared to the entire price of a $100 stock, an out-of-the-money call option may only cost a few dollars or even cents.

There are two types of Options: Call Options and Put Options. The right to acquire a stock is granted to the holder of a Call option, while the right to sell a stock is granted to the holder of a Put option.

A Call Option provides the right, but not the obligation, to purchase the underlying securities (Stock) at the strike price on or before expiration. As the price of the underlying security increases, a Call Option will consequently increase in value.

On the other hand, a put gives the holder the opportunity, but not the obligation, to sell the underlying stock at the strike price on or before expiration, in contrast to a call option. Therefore, a long Put Option is a short position in the underlying asset because the put increases in value when the underlying security's price decreases. As a form of insurance, protective Put Options can be acquired, giving investors a price floor to hedge their positions.

These were the basics of Options; I'll discuss some examples of their uses in my next blogs.

~Lakshya Kapoor

[fin-markets]

Twitter vs Elon Musk (update)

Back in April 2022, Musk had offered to buy twitter @ $54 / share, the offer was accepted and made public in April itself. Surprisingly, by July 8, Musk wanted out of the deal, leading to him getting sued by Twitter. The reason cited by Musk to back out of the deal was the number of spam accounts in the social media giant; he also accused the company of not giving him enough information and misrepresenting itself. Musk tweeted, "My offer was based on Twitter’s SEC filings being accurate," referring to Twitter's frequently quoted statistic that less than 5% of accounts on the network were spam or false. "Yesterday, Twitter’s CEO publicly refused to show proof of <5%. This deal cannot move forward until he does."

Musk and his team also attempted to use Zatko's Twitter revelations as an opportunity to potentially back out of the agreement. According to Peiter "Mudge" Zatko's Senate testimony, Twitter executives lied to the general public, government officials, and the board of the business about its fundamentally flawed anti-hacker measures. He gave an example of a leadership team that was financially motivated to ignore underlying issues such as employees having excessive access to data. He asserted that the business was unable to respond to crucial concerns to national security, such as access obtained by prospective foreign agents on its payroll, since it wasn't adequately managing data access. On August 29, Elon's attorneys submitted a fresh "Termination Letter" to the SEC, citing Zatko's testimony as proof that Twitter misled Musk in the parties' merger agreement. Musk argues that Twitter's claim that it had not misled the SEC in the merger agreement is untrue. In essence, Twitter's response was -nope, we haven't broken any of our agreements.

Musk's legal team wants extra time to prepare and a February 2023 start date for the trial. Twitter was eager for it to begin right now. The trial, which will be presided over by Chancellor McCormick, will begin on October 17 and last for five days.

~Lakshya Kapoor

[fin-markets]

The Split-Strike Conversion Strategy

Although there is no evidence that Bernie Madoff ever used the Split-Strike Conversion strategy to produce the consistently high returns that he claimed to make, the Split-Strike Conversion is a real, well-known strategy used by both institutional investors and individual investors. This 'options' strategy is used to reduce both positive and negative returns of an underlying asset. It can protect a position against potential underlying asset volatility and restrict the portfolio's return to a given range. Using a protective put and covered call option together results in a 'Collar position'. More specifically, it is made by holding an underlying stock, purchasing a put option that is out of the money, and selling a call option that is out of the money.

A call option gives the holder the right to buy a stock and a put option gives the holder the right to sell a stock. Consider a call option as a deposit for a future purchase.

Collar Position = Long Underlying Asset + Long Put Option + Short Call Option

To simplify, think of the execution of this strategy in three steps:

NOTE: This strategy is advised to be used only by experienced investors. I'm not a financial adviser. Consult a financial advisor before indulging into this practice. The following steps are for learning purposes only.

Purchase an Asset: A stock or an ETF, for example, at $1000. Bernie Madoff claimed to ETF funds such as the S&P 500 ETF Trust SPDR.

Purchase an out-of-the-money put. This is done in order to provide downside protection- In case the market goes down, the put is exercised to limit the loss. Continuing the example from the previous point- Buy a $960 put at $20. Follow the next step to pay for the put.

Sell an out-of-the-money Call. This limits the profit that may be made should the market increase. Say, you sell a call at a strike price of $1040, this pays for the put.

This strategy is repeated every month in order to generate limited returns as If the stock (or the ETF) price goes up in market value, you can profit only $40 (as per our example), since the stock will be called away from you if the price is higher than $1040.

~Lakshya Kapoor

[fin-markets]

The Ponzi Scheme

The term 'Ponzi scheme' comes from Charles Ponzi, the guy who invented the scheme. A Ponzi scheme is a fraudulent investment scheme that entices investors with high rates of return and little risk. It is a fraudulent investment operation in which money is collected from later participants to pay returns to earlier investors. This is comparable to a pyramid scam in that both rely on new investors' money to reimburse the previous funders.

Charles Ponzi created this kind of a racket in the 1920s. He assured investors that his plan to purchase US postage stamps at a discount in one market and sell them at full price in a another market would result in a 50% profit. Although his arbitrage plan partially succeeded, it fell well short of the expected 50% profit. Ponzi made up the shortfall with funds from new investors, rewarding early investors until an overwhelming number of investors claimed their money at once, causing the entire scam to collapse.

Bernie Madoff is known to be the creator of the largest Ponzi scheme, worth around 64.8 billion USD, known to man. He founded the Bernard L. Madoff Investment Securities LLC in 1960.

He started to establish himself as a tenacious market maker, claimed Madoff. In an interview, he gave the example of a client who wanted to sell eight bonds; a larger firm would reject that kind of transaction, but Madoff's would accomplish it. "I was absolutely glad to take the crumbs," he said. Finally, success came when he and his brother Peter started to develop electronic trading capabilities, or, in Madoff's words, "artificial intelligence," which drew a significant amount of order traffic and bolstered the company by offering perceptions into market activities. Madoff told an interviewer, "I had all these big banks coming down, entertaining me." Madoff became chair of the Nasdaq in 1990, and also served in 1991 and 1993.

At some time, Madoff drew in investors by promising to make significant, consistent profits via a trading tactic known as 'split-strike conversion'. However, Madoff put client money into a single bank account, which he then used to pay returning customers. When the market drastically declined in late 2008, he was unable to continue the fraud. He paid redemptions by luring new investors and their capital. He admitted his crime to his sons, who worked at his company, on December 10, 2008. They handed him over to the police the next day.

I'll discuss the 'split-strike conversion' trading tactic in my next blog.

~Lakshya Kapoor

[fin-markets]

First-Ever Framework for Cryptocurrency Regulation by the White House

The Biden White House just unveiled the first-ever framework for crypto regulation in the United States, outlining how the financial services sector should develop to facilitate borderless transactions and how to combat fraud in the digital asset market. Although no laws have yet been mandated, the new instructions use the power of already-existing regulators like the SEC and the Commodity Futures Trading Commission. However, investors in this emerging asset class as well as the entire crypto business have been interested in the long-awaited direction from Washington.

The framework comes after President Joe Biden called on federal agencies to investigate the advantages and disadvantages of cryptocurrencies and publish public reports on their findings in an executive order released in March.

Government agencies have been working to create their own frameworks and policy recommendations for the past six months to address the half-dozen priorities listed in the executive order, including financial inclusion, responsible innovation, countering illicit finance, promoting financial stability, and protecting consumers and investors. These suggestions make up the first "whole-of-government approach" to business regulation.

The new regulations are intended to establish the nation as a leader in the administration of the digital assets ecosystem at home and abroad, according to national security adviser Jake Sullivan and head of the National Economic Council Brian Deese in a joint statement.

The framework also points to the potential for “significant benefits” from a U.S. central bank digital currency, or CBDC, which you can think of as a digital form of the U.S. dollar.

Right now, there are several different types of digital U.S. dollars.

Sitting in commercial bank accounts across the country are electronic U.S. dollars, which are partially backed by reserves, under a system known as fractional-reserve banking. As the name implies, the bank holds in its reserves a fraction of the bank’s deposit liabilities. Transferring this form of money from one bank to another or from one country to another operates on legacy financial rails. There are also a spate of USD-pegged stablecoins, including Tether and USD Coin. Although critics have questioned whether Tether has enough dollar reserves to back its currency, it remains the USD coin is backed by fully reserved assets, redeemable on a 1:1 basis for U.S. dollars, and governed by Centre, a consortium of regulated financial institutions. It is also relatively easy to use no matter where you are.

[fin-markets]

RBI: Tokenisation Norms

To begin with, tokenization entails that a token will now take the place of the card details that you previously saved for use in future payments, such as the 16-digit number, names, expiration dates, and codes. The merchant's website uses the token to complete the transaction. To protect the security of the customers' credit card information, the RBI (Reserve Bank of India) is putting these tokenization standards into practise. Currently, a retailer's website (for example- Netflix) saves the bank card information during a transaction. The information of the customers could be made public if the retailer's website is breached.

Following the implementation of these regulations, all customer information will be stored by the bank rather than the retailer's website. The customer can also avoid the headache of repeatedly entering your whole card details by using tokenization. Customers are not required to pay any fees in order to use this service. Following the adoption of these regulations, customers must take the actions listed below in order to tokenize their cards.

Step 1: Initiate a transaction by going to your preferred online store or website to buy groceries, make a payment, or order food.

Step 2: Choose HDFC Bank Credit/Debit Card on the checkout page, then enter the CVV.

Step 3: Tick mark the check box "Secure your Card" or "Save Card as per RBI rules" from the drop-down menu.

Step 4: Key in the OTP that was sent to your registered cell phone number.

Your card information is now protected.

~Lakshya Kapoor

[fin-markets]

What is Bloomberg Terminal?

'Bloomberg Terminal' is Bloomberg L.P.'s core product. It is a computer software system that enables professionals to access Bloomberg Professional Services which allows users to monitor and analyze real-time financial market data and execute transactions on an electronic trading platform. Over its private, secure network, the system also offers messaging, price quotes, and news. The software is easily recognized by its distinctive black interface, which is well-known among professionals in the financial industry. In December 1982, the software's initial iteration was released.

It is not cheaply accessible and its subscription is generally shared by many professionals within a single organization. Currently, the Bloomberg Terminal would cost you around $2000 per month. Not so surprisingly, the subscription fees contribute to around 85% of Bloomberg L.P.'s total annual revenue.

The keyboard is typically the first thing users notice when they sit down in front of a Bloomberg terminal. The terminal's keyboard layout was created with novice computer users—traders and market makers—in mind. The Bloomberg keyboard has a similar appearance and feel to a standard computer keyboard, but it has a few additions that make it easier for users to navigate the interface. For the majority of its operations, Bloomberg employs tickers and acronyms. For instance, to get a quote on Apple Inc's stock, one would enter the key, the symbol for Apple (AAPL), and then the key. A menu of alternatives pertaining to Apple shares would appear as a result. These menus offer a great way to see what kind of analytics are available for a certain security or market because relatively few people are familiar with more than a small portion of the nearly infinite number of Bloomberg possibilities.

A typical application of the Bloomberg terminal is to keep track of news updates and changes in the financial markets, in addition to evaluating specific stocks. There are countless options available here as well.

~Lakshya Kapoor

[fin-markets]

M&A: Tender Offer

A tender offer is when one company publicly approaches the shareholders of another company and offers to buy their shares at a specific price during a specific window of time. Such an offer is called a "Tender" Offer because the shareholders are being asked to 'tender' or 'give-up' their shares. Typically, the offer is at a premium price to what the current value per share is in the stock-market. The tender offer is, generally, contingent on a minimum number or percentage of shares being tendered: for example, company X offers to buy shares from shareholders of company Y at 'q' dollars per share only if 'z'% of shareholders accept the offer.

In a tender offer, cash is offered in exchange of the stock; if shares are offered in exchange of shares, then such an offer is called an "Exchange Offer".

Tender offers are often part of hostile takeovers or acquisitions; although in most cases, a tender offer might be an expensive way to complete a hostile takeover due to premium paid over the purchased stock, legal fees, SEC filing charges, and other costs that could come up.

However, a tender offer could include 'escape clauses' that allow the purchasing company to refuse to buy the shares even after the offer has gone public and met the contingencies. On the other hand, tender offers are also beneficial to shareholders as they generally get a good return on their investment- due to the premium offered.

~Lakshya Kapoor

[fin-markets]

Types of Mergers and Acquisitions

Here are five business endeavors that are generally considered as M&A transactions

Mergers- In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. For example, Exxon Corp. and Mobil Corp. - the first and second largest oil producers in the United States - made headlines when they announced their merger in 1998. This type of merger is a classic example of a horizontal merger. The megadeal closed at $80 billion, with investors quite literally quadrupling their money in the process. 

Acquisitions- In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.

Tender Offers- In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors.9 For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million.10 The company agreed to the tender offer and the deal was settled by the end of December 2008.11

Acquisition of Assets- In an acquisition of assets, one company directly acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcyproceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.

Consolidations- Consolidation creates a new company by combining core businesses and abandoning the old corporate structures. Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm. For example, in 1998, Citicorp and Travelers Insurance Group announced a consolidation, which resulted in the Citigroup.

I'll elaborate on these kinds of deals in my upcoming blogs, stay tuned :)

~Lakshya Kapoor

[fin-markets]

Mergers & Acquisitions (M&A)

I've mentioned M&As in my previous blogs and have discussed the role played by investment banks in this business endeavor.

Mergers and acquisitions (M&A) is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers,  purchase of assets, and management acquisitions.

The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning. In an acquisition, one company purchases another outright. A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. A company can be objectively valued by studying comparable companies in an industry and/or by using metrics. Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions. A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors, employees, and shareholders.

It is important to understand why corporates engage in these kind of endeavours. Here are some of the factors that make M&As attractive-

Larger Market Share- In a horizontal merger the resulting entity will attain a higher market share and will gain the power to influence prices. Vertical mergers also lead to higher market power, as the company will be more in control of its supply chain, thus avoiding external shocks in supply.

Higher Combined Worth- The common rationale for mergers and acquisitions (M&A) is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues. Cost synergies are created due to economies of scale, while revenue synergies are typically created by cross-selling, increasing market share, or higher prices. Of the two, cost synergies can be easily quantified and calculated.

Higher Growth- A company can gain by acquiring or merging with a company with the latest capabilities without having to take the risk of developing the same internally.

Diversification- Large corporates that function within only one industry often acquire companies that do not operate in their industry in order to diversify their income sources and hedging against any operating losses in their own industry.

~Lakshya Kapoor