Tuesday, June 23, 2009

Greed , for the lack of better word , is good

If you are one among those who are very serious about trading, or fascinated by the concept of corporate takeovers then the movie ‘Wall Street’ which released couple of decades ago would be a perfect recipe...

This article is about some of the interesting aspects of finance that I learnt through the movie. The movie revolves around two characters: One, a trader who wants to desperately succeed in life and other a shrewd corporate raider.

‘Gordon Gekko’, the screen name of the corporate raider, was an immediate sensation, and as quoted by the directed it drew inspiration from lot of real life corporate raiders like Carl Ivanch, Porson (who coined the term Leveraged Buyout), and Goldsmith etc. This character won lot of critical acclaims for Michael Douglas and he also won an academy award for the best actor.

Corporate Raider:
It was a term introduced in the 70’s and it was used to describe investors who used to observe some opportunities in a particular company and hence take over that company by becoming the single biggest shareholder.

Once they take over the company they restructure the company – improve its operations, throw away the existing management and bring about a change in the company, thereby sowing the seeds for better profitability in the future years. If this is one form, the other form is to strip off the assets. This is little unfair from the company point of view. They take over the company through huge debt and start paying off the debt by selling off the assets. One variant of this is LBO where the companies with huge cash on their balance sheet are taken over and then the debts are paid off through the cash from the company’s balance sheet itself!!

Mostly such takeovers happen when the market value of the share does not properly reflect the economic value of the assets that the business own. Mostly the inefficiency will be with the top management and their attitude towards running the business. Hence in most of the hostile takeover the first thing that happens after the takeover will be to replace the current management team.

There is one particular scene where Gordon Gekko addresses the shareholders of the Teldar paper which he takes over , sums up the entire essence of management inefficiency, difference between managements interests and shareholders interest, exploitable business opportunities, golden parachutes etc...Here Gordon Gekko delivers the most famous dialogue of the 1980’s ‘Greed, for the lack of better word, is good’. This was a very powerful scene in the movie and I would request you to have a look at it.

Insider Trading:
We speak about market efficiency, rapid information updates etc...But the insider trading that happens big time in the market screws up the entire market efficiency. This has been beautifully portrayed in the movie. The way traders base their trading on insider information, how they artificially increase the price , and after a particular price level how they sell it off(after which the stock price would spiral downwards) are brought out .A real trading floor is brought before our eyes , the way the traders handle client calls , the way they write out slips …,( That’s a million dollar learning that I had today!!)

Life of a Trader:
‘Money will make you do things which you normally don’t do’ …….Life of a trader has been portrayed to be very risky and seems to consist of volatile fortunes. In the movie a trader who would have worked for more than about 25 years with the firm would make a big loss and immediately he would be fired (Mercy does not find a place in the dictionary of the trading house) …”One big loss and you are gone”
At the same time our protagonist who would be doing a lot of insider trading and hence earning surplus profit would be amply rewarded (Our protagonist would be arrested latter for his involvement in the insider trading)...

Big Bosses:
The way Gordon Gekkos character was portrayed was simply awesome.
When our protagonist keeps on telling a lot of info on companies , Gordon Gekko would simply respond “Tell me something that I don’t know” ..The arrogance about his talent would be clearly visible in the characterization. The shrewdness in completing the deals, the very remembrance of hell a lot of info on his head, the quick response to changing situations made me really awestruck at the capabilities of the Big bosses.
Overall I loved watching the movie and 2 hours of my time could not have been better utilized…

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