Investors Picking Fights Enhance Value Flashcards
1
Q
SHAREHOLDER
A
- Any person, company, or other institution that owns at least one share of a company’s stock.
- Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation.
- If the company does poorly however, the shareholders can lose money if the price of a stock declines.
2
Q
ACTIVIST HEDGE FUNDS
A
- The job of the activist hedge funder is to make money.
- Activist hedge funds make a large enough investment in a company to be able to participate in the management and firm decision making.
- Taking a private equity approach to PUBLIC MARKETS
- Long term oriented.
- Differ from traditional funds by having a less diversified portfolio.
- They like to make investments in companies where management lacks the proper incentives to maximize shareholder value.
- Without proper incentives, management can make excessive compensation and perks and suppress free cash flow.
3
Q
PUMP AND DUMP
A
- Scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements.
- Perps of this scheme, who have already an established position in the company’s stock, sell their positions after the hype has led to a higher share price.
- This practice is illegal based on a securities law and can lead to heavy fines.
4
Q
HEDGEFUND
A
- Investment vehicle that somewhat resembles a mutual fund, but with a number of important differences.
- Off-shore (does not have to adhere to SEC–Securities and Exchange Commission-regulations and can only sell to non-US entities).
- Employ/involve different strategies not found in mutual funds.
- Hedge funds are actually hedged (there is a protection against possible financial loss).
- There are funds that are long-biased and short-biased.
- There are funds that try to capitalize on merger/acquisitions.
- 2 types of fees: fixed and variable.
- A variable or performance fee is a percentage of the profit of the fund.
- There are also funds of funds, which invest primarily in a portfolio of hedge funds.
- There is a minimum investment required, which is usually quite large and minimizes the participation of retail investors.
5
Q
PROXY FIGHT
A
- When a group of shareholders are persuaded to join forces and gather enough shareholder proxies to win a corporate vote.
- Proxy battle.
- Usually mainly in context of a takeover, the term means the acquirer will persuade existing shareholders to vote out company management so the company will be easier to take over.
6
Q
PRICE CHANGE
A
-Increase or decrease in the closing price of a security compared to the previous day’s closing price.
7
Q
MARKET CAPITALIZATION/MARKET CAP
A
- The total dollar value of a company’s outstanding shares.
- Simple way to measure a company’s size.
- One of the many characteristics that help determine investment risk.
SHARES OUTSTANDING x CURRENT STOCK PRICE= MARKET CAP
- Small cap: high risk, high return-3 mil to 2 bil
- Med cap: 2 bil to 10 bil
- Large cap: low risk, low return- 10 bil
8
Q
POISON PILL
A
- Tactic utilized by companies to prevent or discourage hostile takeovers.
- Company targeted for takeover uses poison pill strategy to make shares of company’s stock look unattractive or less desirable to the acquiring firm.
FLIP-IN
- Permits shareholders, except for acquirers, to purchase additional shares at a discount.
- Instantaneous profits for investors.
- Will dilute shares held by acquiring company, making takeover more expensive, more difficult
FLIP-OVER
- Enables stockholders to purchase the acquirer’s shares after the merger at a discounted rate.
- I.e. shareholder may gain right to the stock of its acquirer, in subsequent mergers, at a 2-for-1 rate
- Hedge fund activists don’t always consider how an activist’s campaign might push a company to take short-term steps that sacrifice long-term objectives.
- Stock buyback-could lead to debt or less spending on researching/development, hurting its prospects
9
Q
BUYBACK
A
-Corporation’s purchase of its own outstanding stock, usually in order to raise a company’s earning per share.
10
Q
MERGERS AND ACQUISTIONS
A
- Refers to consolidation of companies or assets.
- Mergers, acquisitions, consolidations, tender offers, purchase of assets, management acquisitions»in all cases two companies are involved.
- Also refers to department at financial institutions that deals with mergers and acquisitions.
11
Q
HOSTILE TAKEOVER BID
A
- An attempt to takeover a company without the approval of the company’s board of directors.
- When vying for control of a publicly traded firm acquirer attempting takeover may bypass board approval in one of two ways:
1. Buy enough shares to acquire controlling interest
2. Acquirer may instead try to persuade existing shareholders to vote in a new board, which will accept the takeover offer.
12
Q
TURNAROUND
A
- Financial recovery of company that has been performing poorly for extended time.
- Company must acknowledge and identify its problems, consider changes in management, and develop and implement a problem solving strategy.
- In some cases, best strategy may be to cut losses by liquidating company rather than turning it around.
13
Q
FINANCIAL ENGINEERING
A
- Use of mathematical techniques to solve financial problems, issues.
- Also used to devise new and innovative financial products.
- Also known as: qualitative analysis.
- Used by commercial banks, investment banks, insurance agencies, hedge funds.
14
Q
SUBSIDIARY
A
-Company with a voting stock that is more than 50% controlled by another company, usually referred to as the parent company or holding company.
15
Q
CONGLOMERATE
A
- A corporation made up of a number of different seemingly unrelated businesses.
- In conglomerates, one company owns a controlling stake in a number of smaller companies which conduct businesses separately.
- Each of a conglomerate’s subsidiary businesses run independently of other business divisions, but the subsidiaries management teams report to a senior management at the parent company.
- Largest conglomerates diversify business risk by parts.
