...08 Fall 08 Fall Ubid, an Internet auction firm and subsidiary of Creative Computers, a catalog distributor of computer and computer peripherals released its IPO recently. Creative Computers plans to expand its distribution network by opening retail outlets. However, the direct pressure on profits margins in the computer business forces the firm to sell Ubid. SCM, a hedge fund which looking forward to putting the fund and to get positive return, closely monitors and researches the IPO price of Ubid. On December 9, 1998, Creative Computers was trading at $22.75 and Ubid was trading at $35.6875. At that time, Creative Computers had 10,238,703 shares outstanding and Ubid had 9,146,883 shares outstanding. Since stock Valuation equals to stock price times outstanding shares, the stock valuation of Creative Computer equals to 22.75*10,238,703=232,930,493.3 and Stock Valuation of Ubid is 35.6875*9,146,833= 326,429,387.1. After the IPO of Ubid, Creative Computer holds approximately 80% of Ubid’s security. Add an account “Security” in the left side of the balance sheet to reflect the market value of Creative Computer’s stake in Ubid. ((9146883-1817000)*35.6875=261,585 thousands of dollars). On the right side, calculate the market value of Creative Computer’s stock by timing $22.75 with 10,238,703 shares to get 232,930 thousands of dollars. | Consolidated Balance Sheet of Creative Computer | Assets | (thousands of dollars) | Liability & Equity | | Cash and Equilvalent...
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...required that the investors keep their money for a minimum of 2 years. SCM was considering investment in the internet sector. Elena was specifically interested in a recent IPO by Ubid, an internet auction. Ubid and Creative Computers Ubid is a subsidiary of Creative Computers, a catalog distributor of computers and computer peripherals. In 1998, the company began selling computer equipment over the internet. Ubid website was developed to sell factory excess and refurbished goods through an auction format. Buyers could view and bid on computers, peripheral equipment and other consumer electronics. Ubid generated revenues of $2.1m in its 1st quarter. Creative Computers’ management felt that its stock price did not adequately reflect the potential of internet business as other internet players in the market were highly valued. Therefore, with an intention of improving valuation, the company decided to carve-out the internet subsidiary. Inorder to discover the fair price, the company decided to roll out an IPO of 20% of Ubid’s equity. The management also decided to distribute the remaining 80% of Ubid’s shares to the share-holders of Creative Computers in a tax free spin-off six months after the Ubid IPO. Through IPO, the company sold 1.817m shares at a price of $15 per share. On the first day of trading, Ubid shares opened at $38 and reached a high of $60 before closing at $48. The fundamentals of the company looked strong with rapidly growing sales. The growth in sales was 637%...
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...Q2 & 3 What is the current stock market valuation of Creative Computers and of Ubid based on the stock prices as of December 9? Evaluate these valuations with respect to the assets associated with these firms. 09-Dec-1998 Creative Computers Ubid 22.75 35.6875 10,238,703 9,146,883 Market Value ($) 232m 326.4m Book Value 142m 6m 1.63 53.97 Stock price ($) Shares Outstanding Book to Market ratio Creative computer • Due to obtain 80% of Ubid shares six months after its IPO (3-Dec). • 80% x $326.4m = $261m (which is less than the market value of the Creative Computers) Ubid • 1.1m pre tax loss in Q3 1998 Cont… Shows mispricing in the market. Based on how the market prices Ubid, we can see that Creative Computers is mispriced and should go up in price. Or the market is behaving irrationally, and Ubid is overpriced. Which investment strategy involving Creative Computers and Ubid do these valuations suggest? We think Elena should not purchase Ubid or Creative Computers. Due to the fundamental risk of arbitrage, we think that we should stay away from purchasing Creative Computers and shorting Ubid, as the mispricing may exist or worsen longer than the hedge fund can remain solvent. We also wouldn’t want to purchase either stock, as Ubid’s stock is likely to crash when the mispricing corrects itself. In addition, Ubid has still not proven positive earnings and could eventually default on their loans...
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...Merrill Lynch and Mary Meeker of Morgan Stanley, Elena thought that the Internet sector provided excellent prospects for lucrative investments. She was specifically interested in a recent initial public offering (IPO) by Ubid, an Internet auction firm. Strategic Capital Management, LLC Elena became interested in hedge funds when she was an MBA student during the prior two years. A strong believer in portfolio diversification, Elena was enamored with the risk-return profile of many hedge-fund strategies. Like many of her fellow classmates, Elena chose to forgo a traditional career in consulting and investment banking by pursuing an entrepreneurial venture. She was able to convince two of her classmates to join her in launching Strategic Capital Management (SCM), LLC. Against the backdrop of a strong stock market, SCM had little trouble raising $20 million with a mandate of generating annual returns of 10% with little market exposure. SCM would charge its investors a management fee of 2% of assets under management and an incentive fee equal to 20% of profits. SCM also required that investors keep their money invested for a minimum of two years. Ubid and Creative Computers1 During the past week, SCM had been closely monitoring and researching the recent IPO by Ubid, an Internet auction firm and subsidiary of Creative Computers, a catalog distributor of computers and computer peripherals. In an attempt to expand its distribution...
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... I. Case background (0.5 mark) • Create a table with the key dates, events, and decisions to be made. |Keys Date |Events |Decisins to be made | |1998 |Closing of seven retail store of creative computers and |Development of Ubid Website | | |selling of factories excess and other reburised goods through| | | |internet | | |6/07/1998 |Selling of 20% of Ubids equity in Intial public Offerings and|Increasing the market awarness about Ubid | | |remaining 80% to be dustributed among the share holders | | |3/12/1998 |Ubid Intial Public Offerings took place |Sold 1.817 million share at $15 | |4/12/1998 |Ubid recognised as publicly traded company |Market Capitalization | |9/12/1998 |Elena Kings first investment as a hedge Manager |To invest the funds in appropriate internet company for | | | |better returns...
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...tertarik dengan initial public offering yang baru saja dilakukan oleh Ubid, perusahaan yang bergerak dalam kegiatan lelang berbasis internet, yang merupakan anak perusahaan Creative Computer. Creative Computer merupakan perusahaan distributor komputer dan produk sejenis. Disebabkan oleh tekanan terhadap margin profit di tahun 1990an, Creative Computer memutuskan untuk menutup beberapa toko retail miliknya dan mencoba menjual berbagai peralatan komputer melalui internet. Kemudian Creative Computer meluncurkan anak perusahaan bernama Ubid, yaitu sebuah website dengan tujuan menjual barang – barang produksi berlebih dengan sistem lelang dimana para pembeli di seluruh dunia dapat melakukan penawaran terhadap alat – alat elektronik tersebut. Ubid mengalami kesuksesan dengan menghasilkan $ 2.1 juta pada penualan kuarter pertama. Melihat potensi baik bisnis sektor internet miliknya, Creative Computer yang merasa harga sahamnya tidak merefleksikan potensi bisnis sektor internet miliknya tersebut, memutuskan untuk melakukan IPO pada ekuitas Ubid. Pada tanggal 3 Desember 1998, Creative Computer melakukan IPO pada 20% dari total ekuitas Ubid (80% sisanya akan diberikan kepada pemegang saham Creative Computer) dengan harga jual $ 15 per lembar saham. Ubid memiliki kapitalisasi pasar sebesar $439 juta ketika pada 4 Desember 1998, saham Ubid diperjual belikan dengan harga tutup $48. Dari segi operasional juga, Ubid mengalami pertumbuhan...
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...million for her new fund Interested in Ubid, recently had an IPO—lucrative Internet-sector investment? Mandate of generating 10% annual returns charge investors 2% management fee of assets under management an incentive fee equal to 20% of profits. Mandatory minimum investment horizon of 2 years Ubid & Creative Computers creative computers – a catalog distributer of computers and computer peripherals -opened retail markets in 1990s -closed 7/8 of retail stores in 1998 b/c of constant pressures on profit margins in the computer industry -started selling computer equip. on internet via auction format on Ubid website -world-wide exposure -$2.1 million 1st quarter sales **costs? - 7.6.1998 sell 20% equity of Ubid in IPO/ distribute the remaining 80% of Ubid to shareholders of Creative computers in a tax-free spin-off six months after Ubid IPO UBID IPO 12.3.1998 – 1.817 SHARES @ $15/share -Ubid gains $25.4 million after $1.9 mil in underwriting fees -12.4.1998- shares open at $38, traded above $60, and closed at $48 -based on total shares outstanding 9.15 mil, ubid closed 1st day with a market cap of $439 million POST-IPO UBID 3rd Q sales increased to $15.3 million – growth rate of 637% & 127% for 1st and 2nd qrters--- yet earnings remained negative pretax loss of $1.1 million at end of 3rd. with no prospects of positive earnings in the near future. CREATIVE COMPUTERS Record consolidated net sales of $186(170.7 excluding ubid) million in 3rd Q of ’98, a 51% increase...
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... Late submission carries point deduction: 5 marks for 1‐day (or less) overdue, 8 marks for 2‐day overdue, and all 10 marks for 3‐day (or more) overdue. Exception will be considered only for medical reasons. Case Report Structure: I. Case background (0.5 mark) II. III. Create a table with the key dates, events, and decisions to be made. Investing in hedge funds (1 mark) Key differences with mutual funds in terms of investment strategy, risk, and reward. Arbitrage opportunity (2 mark) Was there an arbitrage opportunity on Dec 9? What should be the arbitrage transactions (long or short in each stock, number of Ubid shares for each share of Creative Computers)? Elena is required to post cash collateral for her short position. Should she borrow to purchase Creative Computers (CC)? The initial margin is 50% for both long and short positions. Assume that the arbitrage opportunity disappears when Ubid shares are distributed to CC shareholders. Without considering margin interests on both long and short positions, what should be the minimum rate of return in six months? IV. Risks in arbitrage (1 mark) What are the risks associated with the arbitrage...
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...subsidiary firm Ubid. The analysis deduces arbitrage to be the best investment strategy. Strategic Capital Management (SCM), LLC: SCM is a recent entrepreneur venture founded by Elena King and two of her fellow classmates. The company has currently generated 20 million dollars and aims for annual returns of 10 percent. Its investors are charged a management fee of 2% of assets under management and an incentive fee equal to 20% of profits. Moreover company policy requires investors to keep their money invested for a minimum of two years. Recent meetings with prominent analysts, Henry Blodgett of Merrill Lynch and Mary Meeker of Morgan Stanley have indicated the Internet Sector to hold promising investment opportunities, therefore Creative Computers and its subsidiary Ubid present potential prospects for investment. Analysis: Internet Sector: Dot-com Bubble The dot-com bubble has enabled the Internet sector and its related fields to yield earnings at an above-average rate relative to the market. Hence the expected return on these growth stocks is great (see figure below). However these investments involve an inherent risk that must not be ignored. Because this sector is categorized by strong competition the need for innovative and skillful business strategies is a must. ** (Note: since our case is set in 1998 it is important to note how the graph assumed a positive trend and ignore the instance of the tech bubble burst) Creative Computers and Ubid: Creative...
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...required that the investors keep their money for a minimum of 2 years. The firm is looking to invest into Internet Sector. And currently they are exploring Ubid, an online auction company and a subsidiary of Creative Computers. Ubid and Creative Computers Ubid is a subsidiary of Creative Computers, a catalog distributor of computers and computer peripherals. In 1998, the company began selling computer equipment over the internet. Ubid website was developed to sell factory excess and refurbished goods through an auction format. Buyers could view and bid on computers, peripheral equipment and other consumer electronics. Ubid generated revenues of $2.1m in its 1st quarter. Creative Computers’ management felt that its stock price did not adequately reflect the potential of internet business as other internet players in the market were highly valued. Therefore, with an intention of improving valuation, the company decided to carve-out the internet subsidiary. Inorder to discover the fair price, the company decided to roll out an IPO of 20% of Ubid’s equity. The management also decided to distribute the remaining 80% of Ubid’s shares to the share-holders of Creative Computers in a tax free spin-off six months after the Ubid IPO. Through IPO, the company sold 1.817m shares at a price of $15 per share. On the first day of trading, Ubid shares opened at $38 and reached a high of $60 before closing at...
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...subsidiary firm Ubid. The analysis deduces arbitrage to be the best investment strategy. Strategic Capital Management (SCM), LLC: SCM is a recent entrepreneur venture founded by Elena King and two of her fellow classmates. The company has currently generated 20 million dollars and aims for annual returns of 10 percent. Its investors are charged a management fee of 2% of assets under management and an incentive fee equal to 20% of profits. Moreover company policy requires investors to keep their money invested for a minimum of two years. Recent meetings with prominent analysts, Henry Blodgett of Merrill Lynch and Mary Meeker of Morgan Stanley have indicated the Internet Sector to hold promising investment opportunities, therefore Creative Computers and its subsidiary Ubid present potential prospects for investment. Analysis: Internet Sector: Dot-com Bubble The dot-com bubble has enabled the Internet sector and its related fields to yield earnings at an above-average rate relative to the market. Hence the expected return on these growth stocks is great (see figure below). However these investments involve an inherent risk that must not be ignored. Because this sector is categorized by strong competition the need for innovative and skillful business strategies is a must. ** (Note: since our case is set in 1998 it is important to note how the graph assumed a positive trend and ignore the instance of the tech bubble burst) Creative Computers and Ubid: Creative...
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... Late submission carries point deduction: 5 marks for 1‐day (or less) overdue, 8 marks for 2‐day overdue, and all 10 marks for 3‐day (or more) overdue. Exception will be considered only for medical reasons. Case Report Structure: I. Case background (0.5 mark) II. III. Create a table with the key dates, events, and decisions to be made. Investing in hedge funds (1 mark) Key differences with mutual funds in terms of investment strategy, risk, and reward. Arbitrage opportunity (2 mark) Was there an arbitrage opportunity on Dec 9? What should be the arbitrage transactions (long or short in each stock, number of Ubid shares for each share of Creative Computers)? Elena is required to post cash collateral for her short position. Should she borrow to purchase Creative Computers (CC)? The initial margin is 50% for both long and short positions. Assume that the arbitrage opportunity disappears when Ubid shares are distributed to CC shareholders. Without considering margin interests on both long and short positions, what should be the minimum rate of return in six months? IV. Risks in arbitrage (1 mark) What are the risks associated with the arbitrage...
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...American Finance Association Limited Arbitrage in Equity Markets Author(s): Mark Mitchell, Todd Pulvino, Erik Stafford Source: The Journal of Finance, Vol. 57, No. 2 (Apr., 2002), pp. 551-584 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2697750 Accessed: 08/01/2010 15:26 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Blackwell Publishing and American Finance Association...
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...the role of price impact on trading decisions 1. As a portfolio manager for the UNIL Advisors Nikkei 225 Index fund, which has ¥100 billion of assets linked to Nikkei 225 index, what would you do when you hear the news of index reconstitution? 2. What would you do if, instead, you were at the proprietary trading desk of Goldman Sacs? Strategic Capital Management, LLC (SCM) The objective of this case is to develop an understanding of how arbitrage acts to enforce the law of one price. It also provides a venue to discuss the various real world imperfections that can prevent arbitrageurs from eliminating mispricing in the equity markets. 1. Is there an arbitrage opportunity based on market valuations of Creative Computers and Ubid as on December 9th, 1998. 2. If yes, how would you take advantage of it? 3. What are the potential risks of such a strategy? AXA MONY The objective of this case is to understand the pricing of convertible bond and how it may be utilized profitably in merger transactions (you may ignore the part of the case dealing with issues of corporate control) 1. How would you price the ORAN at issue? Is it fairly priced? How does the price of ORAN on Feb 9th, 2004, imply about the probability of deal succeeding? 2. What is the fair price of MONY stock? If this is different from the market price of $31.55, how do you explain the difference? Risk Arbitrage: Abbott Labs and Alza The objective of the case is to analyze an arbitrage...
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...Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs Owen A. Lamont and Richard H. Thaler University of Chicago and National Bureau of Economic Research Recent equity carve-outs in U.S. technology stocks appear to violate a basic premise of financial theory: identical assets have identical prices. In our 1998–2000 sample, holders of a share of company A are expected to receive x shares of company B, but the price of A is less than x times the price of B. A prominent example involves 3Com and Palm. Arbitrage does not eliminate this blatant mispricing due to short-sale constraints, so that B is overpriced but expensive or impossible to sell short. Evidence from options prices shows that shorting costs are extremely high, eliminating exploitable arbitrage opportunities. I. Introduction There are two important implications of the efficient market hypothesis. The first is that it is not easy to earn excess returns. The second is that prices are “correct” in the sense that prices reflect fundamental value. This latter implication is, in many ways, more important than the first. Do asset markets offer rational signals to the economy about where to We thank John Cochrane, Douglas Diamond, Merle Erickson, Lou Harrison, J. B. Heaton, Ravi Jagannathan, Arvind Krishnamurthy, Mark Mitchell, Todd Pulvino, Tuomo Vuolteenaho, an anonymous referee, and seminar participants at the American Finance Association, Harvard Business School, the National Bureau of Economic...
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