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Economics & Finance

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published: 02 May 2019

  • Topic: Economics & Finance
  • Region: Europe

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Abstract:
The case covers events leading to the hostile bid for AkzoNobel by PPG in 2017, the market response that it prompted, and AkzoNobel’s takeover defenses including the divestment of a business area and large cash payout. Various scenarios (as a standalone, after divestiture and after a takeover with synergies) are considered for the valuation of AkzoNobel, as is the rationale behind the various takeover bids by PPG. The role of activists in triggering the takeover process is highlighted. Alternative payout mechanisms (capital repayment, dividend payment, share buyback) are discussed.

Pedagogical Objectives:
Students learn how to value companies under different scenarios (as a standalone, after a divestiture and after a takeover with synergies) and to interpret market responses to various corporate actions. The case illustrates various takeover defenses, the role of activists, and the dilemma of making a hostile bid in countries where “maximizing stakeholder value” is the cornerstone of governance. It provides the opportunity to discuss different payout mechanisms: dividends vs share buyback, and the less common “capital repayment”.

Keywords:
Takeovers, Hostile Bids, Takeover Defenses, Company Valuation, Activists, Payout Policy, Stakeholder Value Versus Shareholder Value, Akzonobel, Ppg

published: 25 Mar 2019

  • Topic: Economics & Finance
  • Region: Global

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Abstract:
Ontario’s basic income pilot was a social policy experiment designed to redistribute income with the aim of reducing poverty and adapting the social safety net in the face of a changing and increasingly precarious labour market. The three-year project, launched in 2017, was described as the largest government-run basic income project to date. It was designed to provide basic income in the form of negative income tax to 4,000 eligible individuals who were assured a minimum level of income regardless of their employment status. The debate about universal basic income (UBI) continues as governments and private entities around the world pilot different projects. How should UBI funded and who should receive the money? How would it change people’s behavior and labor market participation? Could UBI help society address surging levels of inequality?

Pedagogical Objectives:
The case details a guaranteed basic income experiment by a public sector entity (subnational government). It serves as a basis to discuss its potential as a complement or as a viable alternative to existing social welfare and/or social insurance programmes. The case allows for a discussion of some key concepts, including means-tested versus completely universal basic income policies, differences between basic income and traditional welfare programmes, different goals for introducing basic income as a policy, possible funding mechanisms, and the trade-offs associated with the design of the policy.

Keywords:
Basic Income, Universal Basic Income, Negative Income Tax, Guaranteed Income, Demogrant, Cash Transfers, Ontario Basic Income, Income Inequality, Basic Income Debate, Work Incentives, Social Welfare, Income Redistribution, Poverty, Social Policy

published: 23 Jan 2019

  • Topic: Economics & Finance
  • Industry: Technology
  • Region: Europe

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Abstract:
On 30 August 2016, Margrethe Vestager, the European Commissioner for Competition, ordered Ireland to recover €13 billion in illegal state aid that the state had granted Apple over a decade from 2003. In allowing Apple to pay close to zero in taxes, she ruled, Ireland had given the foreign company a selective advantage over other businesses paying the regular corporate tax rate of 12.5%. Tim Cook, CEO of Apple, and Enda Kenny, the Irish Prime Minister, appealed the ruling, a process that is still ongoing. The case explores this event from five analytical pillars: 1) the role of Ireland’s low corporate tax rate in attracting FDI; 2) Apple’s decision to allocate its earnings to a paper company in Ireland with no physical presence in the country; 3) the repatriation of foreign earnings to the United States; 4) the transfer payments that Apple makes to the US to pay for R&D; 5) the Commissioner’s decision to impose a retroactive tax penalty on a foreign company that acted in accordance with the tax arrangements granted by its host country.

Pedagogical Objectives:
The case is designed to encourage students to think about the role of tax policy from the perspective of the company. With the rise of global companies such as Apple whose products are sold all over the world, the question of where they should be taxed becomes a particularly controversial issue. Students will be asked to reflect on tax policy around the following five points: 1) as a national competitive advantage in attracting FDI; 2) on shrewd corporate accounting that renders taxable income to nearly zero sums; 3) on powerful tax disincentives for the repatriation of earnings approaching two trillion dollars to the United States, 4) the political rational behind the current corporate tax principle that states taxes for innovative companies like Apple should be paid in the source country where R&D is carried out; 5) and that supranational entities such as the European Commission should take preventive measures and not corrective punitive measures in dealing with foreign countries who have created thousands of jobs in a particularly vulnerable host country such as Ireland.

Keywords:
Margrethe Vestager, Public Finance, Corporate Tax, Repatriation of Earnings, State Aid, Tax Haven, Ccctb, Apple, European Commission for Competition, Transfer Payments, Enda Kenny, Tax Minimization, United States, International Taxation

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published: 23 Jan 2019

  • Topic: Economics & Finance
  • Region: Asia

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Abstract:
The case focuses on blockchain (and distributed ledger technology or DLT) – a ‘hot’ area of fintech – and on R3 as a fintech consortium that includes some of the world’s largest banks, financial institutions and regulators. R3 started out as a family office in 2014 and evolved into a fintech company focused on the application of distributed ledger technology (DLT). Within three short years it had built a global consortium of 80 members from the financial services industry, including Barclays, J.P. Morgan, Commonwealth Bank of Australia and UBS. The consortium’s efforts resulted in an open-source DLT called Corda, geared towards handling increasingly complex transactions and regulatory oversight. Although Corda was inspired by blockchain, R3 did not view it as a blockchain product. In May 2017, R3’s Series A raised US$107 million in funding to continue the development and implementation of Corda and expand its Lab & Research Center. Barely a year later, speculation arose that R3 was exploring an IPO.

Pedagogical Objectives:
The term “fintech”, coined to describe the use of new technology in the financial services sector, initially applied to the back-end of established consumer and trade financial institutions, has been expanded to any technological innovations in the finance sector, be they related to financial literacy, retail banking or crypto-currencies. The case focuses on blockchain (and DLT) – a ‘hot’ area of fintech – and on R3 as a DLT fintech consortium that included over 80 of the world’s largest banks, financial institutions, and regulators. Blockchain is broadly discussed as a technology with huge innovation potential in all areas of financial services – for fraud detection, pricing, and reducing administrative costs – which could be harnessed by financial institutions facing the prospect of limited growth in mature markets and pressure to reduce costs. However, since its implementation depended on network effects, regulatory conditions, and high costs – the benefits and limitations of the technology were not fully understood or immediately realizable. Most blockchain/DLT platforms had not been designed to meet the needs of the finance and banking industries – hence R3 moved to fill the gap and resolve the inconsistency.

Keywords:
Fintech, Blockchain, Distributed Ledger Technology, Banking, Trade Finance, Data Security, Dlt, Financial Regulations, Corda, Emerging Markets, Digital Strategy, Consumer Banking, Bitcoin

published: 24 Sep 2018

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Abstract:
The case focuses on the ill-fated relationship between the LIA, Libya’s new sovereign wealth fund, and Goldman Sachs, and the ultimately disastrous $1.2 billion derivatives (elephant) trades the LIA entered into in early 2008 on Goldman’s advice. The analysis deals with basic derivative instruments, terminology and concepts (e.g., leverage, counterparty risk) as well as valuation issues both intuitive (e.g., put-call parity, arbitrage-based valuation bounds) and technical (binomial trees, Black-Scholes formula, Monte Carlo simulations, volatility and dividend yield calibration). It also discusses the pricing and hedging of exotic derivatives. Epilogue: In a subsequent lawsuit brought by the LIA, Goldman Sachs was accused of having exploited the lack of finance acumen of LIA staff to lure them into trades whose riskiness they did not understand. In October 2016, a London court ruled against the LIA.
Please visit the dedicated case website to access supplementary material.

Pedagogical Objectives:
The main issues covered: • Basic derivative instruments: forwards, puts, calls, and combinations thereof. • Payoff diagrams, with and without the effect of prices and trade fees. • Key concepts in derivatives (e.g., leverage effect, counterparty risk). • The impact of maturity, strike price and early exercise on a derivative’s value. • The put-call parity relationship. • Arbitrage-based valuation bounds. • The valuation of derivatives using binomial trees, the Black-Scholes formula and Monte Carlo simulations. • Volatility and dividend yield calibration. • Pricing and hedging exotic derivatives Target Audience: • Requiring only a basic knowledge of derivatives, the case is suited to undergraduates, MBAs or executives, as a core course introduction to derivatives or the first session of an elective. Students with a basic knowledge of the binomial model can also learn how to adjust it to handle dividends and exotic options, and how to calibrate parameters using input options. • The case covers both the basics of options (definitions, payoffs, etc.) and valuation (binomial tree, Black-Scholes). It can be taught as part of a longer course in different configurations: • One session: “option basics” at the start of a course as an introduction to options • Two sessions: “option basics” at the start of a course, “valuation” towards the end • One session: “valuation” going quickly over option basics • Two sessions: both “option basics” and “valuation” in practice as a wrap-up on options • It can also be the sole case in a short course on options. Session 1 requires a lecture on option basics and Session 2 a lecture on binomial tree valuation (and possibly one on Black-Scholes).

Keywords:
Derivatives: Forwards, Puts, Calls, Exotic Options, Put-Call Parity, Option Valuation, Binomial Model, Black-Scholes Formula, Dividends, Volatility, Leverage, Risk, Counterparty Risk, Lawsuit, Sovereign Wealth Fund, Derivatives Mis-Selling, Payoff Diagrams, Impact of Maturity, Strike Price and Early Exercise on a Derivative’s Value, Arbitrage-Based Valuation Bounds, Binomial Trees, Volatility Estimation, Dividend Yield Calibration, Monte Carlo Simulations, Hedging, Speculation, Toxic Instruments

published: 30 Jul 2018

  • Topic: Economics & Finance
  • Industry: Natural Gas Transmission
  • Region: Europe

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Abstract:
In April 2010, infrastructure fund Njord Gas Infrastructure AS bought ExxonMobil’s 9.428% stake in Norwegian gas pipelines Gassled. Njord was interested in Gassled’s steady returns and Norway’s regulatory/political consistency and transparency. Once built, pipelines were seen as a relatively safe investment as tariffs to transport natural gas were usually fixed for many years (whether prices rose or fell) and bookings were made years in advance. Others followed Njord’s lead in 2011 and 2012 to buy into Gassled – four infrastructure funds owned 44% of Gassled after the acquisitions. It came as a shock when a year after the transactions went through, the Norwegian government decided that returns were too high and decided to cut the tariffs charged by Gassled to transport gas by 90%.

Pedagogical Objectives:
The case highlights the risks in long-lived assets like infrastructure assets, and the rising political risks even in supposedly stable environments (Western Europe) as governments face rising budget deficits, high energy prices and rising demand, which can lead to regulatory intervention. Political risk has always been associated with emerging markets where the rule of law is less stringently enforced. The case serves to point out that such assumptions will need to be scrutinised in the future and risk-weighted in asset valuations. It underscores the importance of due diligence in today’s increasingly fraught environment. Focusing on the valuation of infrastructure assets, it illustrates how changes in assumptions (e.g. tariffs) affect valuation.

Keywords:
Pipelines, Natural Gas, Infrastructure, Political Risk, Norway, Tariff, Infrastructure Fund

published: 25 Jun 2018

  • Topic: Economics & Finance
  • Region: Global

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Abstract:
This exercise demonstrates one difficulty in distinguishing between luck and skill. Participants individually roll dice to simulate the performance of fund managers. Some fund managers have a greater chance of success than others, but the lower performers are more plentiful. The chance element in observed performance makes it challenging to determine a given manager’s type (a genius or a dart-throwing monkey).

Pedagogical Objectives:
Illustrate in a hands-on way the challenge of distinguishing between skill and luck. Encourage greater skepticism when evaluating the basis for performance.

Keywords:
Chance, Luck, Bias, Skill, Probability

published: 23 Apr 2018

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Abstract:
Private equity firm Clayton, Dubilier & Rice (CD&R) is preparing a bid for leading US car rental agency Hertz. By replacing Hertz’s top managers, improving capital management and driving down operating costs, CD&R sees an opportunity to nearly double EBITDA. However, the turnaround involves significant risks, which CD&R must weigh in preparing its bidding strategy. Students are required to assess and value the business, evaluate a post-acquisition operating turnaround plan requiring new leadership, select a financial structure to mitigate significant cyclicality, and craft a winning bidding strategy in the context of a competitive auction.
Please visit the dedicated case website to access supplementary material.

Pedagogical Objectives:
This case underscores the importance of creating a differentiated investment thesis (no matter how slight the advantage) in a competitive auction setting, inviting students to develop and support their own investment thesis. It demonstrates how the operating capabilities of PE firms (like CD&R) translate into a valuation exercise, investment thesis and operating plan. It explores how the firm’s strategic bent shapes its bidding strategy and willingness to pay for a business that has the prospect of achieving high returns for its fund, as well as identifying sources of advantage in deal sourcing, expertise partnering and turnaround management in the private equity domain.

Keywords:
Private Equity, Winner’s Curse, Auction, Turnaround, Bidding, Rental Car, Investment Strategy, Investment Thesis, Due Diligence, Hertz, Ford, Valuation, Synergies, Operating Efficiency

published: 26 Jun 2017

  • Topic: Economics & Finance
  • Industry: Truck manufacturing
  • Region: South America

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Abstract:
When Volkswagen and Ford combined their Argentinian and Brazilian automotive subsidiaries in 1987, it was very much a marriage of convenience. Operating in an environment of hyperinflation, weak growth and an import ban, the combined company took advantage of economies of scale, closed surplus Ford and Volkswagen (VW) plants and produced inexpensive models of cars and trucks. Yet, when the 1990s brought trade liberalization, an end to Brazil’s debt crisis and soaring growth, Autolatina was not prepared for the resulting competition. By early 1995, Ford and VW have split their venture, and both have decided to maintain Brazilian subsidiaries. VW faces a tough decision. Truck transport is the main way goods are moved in Brazil and VW wants a piece of this lucrative market, but unlike Ford, it has no plant in Brazil. Looking at the unique needs of the truck market, burgeoning competition, and the product development and assembly process, VW’s board commissioned several teams to develop a proposal on how to build a truck for the Brazilian market. They must decide how best to organize production to succeed in Brazil?

Keywords:
Outsourcing, Boundaries of the Firm, Modular Consortium, Vertical Integration, Volkswagen, Trucks

published: 29 Mar 2017

  • Topic: Economics & Finance
  • Region: Global

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Abstract:
The world is currently seeing a rise of populist leaders in both Europe and the US (Donald Trump), as well as in some emerging markets. Is this linked to the rise in inequality over time, whereby many of the gains have accrued to the richest 1%? This short case provides the background and statistics underpinning the rise in income and wealth inequality in advanced economies, and sets up a discussion on why we should care about inequality. Subsequently, it explores the link between inequality and equality of opportunity, political instability, financial crises and economic growth. It closes by highlighting where businesses are truly a force for good and the circumstances in which a greater focus on distribution is warranted.

Pedagogical Objectives:
The objective is to facilitate an understanding of the interlinked issues of politics, economics, distribution and growth. The case highlights the rise in income inequality and whether this is linked to political shifts in Europe and the US. It facilitates understanding of when and where inequality matters, the consequences of rising inequality, and the circumstances where business leaders must pay more attention to distributional aspects.

Keywords:
Inequality, Income Distribution, Gini Coefficient, Populism, Donald Trump, Inequality and Political Instability, Inequality and Financial Crises

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