Sunday, April 29, 2007

Current Teaching Responsibility and Study

I have to teach the subject Mergers and Acquisition from the last week of June 2007. I am going to use the book, Takeovers, Restructuring, and Corporate
Governance, fourth edition by Fred Weston, Mark Mitchell, and Harold Mulherin as the text book. There are 22 chapters in this book. As a part of my preparation, I plan to read 22 books one on each chapter to acquire the required depth in subject. I also plan to read five other books on mergers and acquisitions to pick up various ways of explaining the same topics.

The five books being used for broadening the knowledge are:

1. Wyatt & Kieso, Business Combinations: Planning and Action, International Text Book company, 1969
2. Weston & Samuel C. Weaver, Mergers and Acquisitions, Tata Mcgraw Hill, 2001
3. James W. Bradley and Donald H. Korn, Acquisition and Corporate Development, Lexington Books, D.C. Heath & Co., Lexington, 1981 ( a book by Arthur D. Little Executives)
4. P.S. Sudarsanam, The Essence of Mergers and Acquisitions, Prentice Hall of India Private Limited, New Delhi, 1997
5. Fred Weston et al., Takeovers, Restructuring, and Corporate governance, second edition

The books being used for deepening the knowledge include: 1. Book on Income tax of India, 2. Company Act of India, 3. Advanced Accounting text, 4. Valuation by Copeland, 5. Book on Joint Ventures by Yoz and Hamel, 6. M&A:
A Practical Guide to Doing the Deal by Jeffrey Hooke, 8. Strategic Management:Concepts and Cases by Thompson and Strickland 13th edition, and 9. Mergers et al, Issues, Implications, and Case Laws in Corporate Restructuring by S. Ramanujam.

I am now involved in a study marathon.

Friday, April 13, 2007

Markowitz/Sharpe Portfolio Analysis and Target Prices

Portfolio Analysis proposed by Markowitz requires estimates of expected return and risk. Target prices provided by analysts can be used as the expected returns. Literature on the portfolio theory says the risk can be estimated from the historical data as it is more stable.

I have done the portfolio analysis using target price data from Sharekhan Value Line October 2006 recently using an excel spread sheet template. The template accommodates only 20 risky securities.

Out of the 95 correlations 17 were found to be negative when correletions were calculated using past 27 month data. The output that allows negative holdings or short selling gives an expected return of 92.50% and 17.44% standard deviation.

The highest return possible on a security was 68.7% and the lowest standard deviation on a security was 28.2%. The hedge portfolio enhanced the return and decreased the standard deviation.

The immediate questions are the level of confidence that we can have in target price estimates and the confidence in the risk estimated made using the past data (27 months in this case).

Thursday, April 12, 2007



We the unwilling, led by the unknowing, are doing the impossible for the ungrateful. We have done so much for so long, with so little knowledge that we will one day qualify to do anything knowing nothing. Be proud to be an ANALYST.

The above preamble was sent by an analyst through email among an analyst e-group. Below is my response to this preamble.

My response:

Dr. K.V.S.S. Narayana Rao

I appreciate this preamble.I published a paper arguing that the text books on security analysis were not written properly and I circulated this paper to all text book authors in USA. After we study a text we cannot do an analysis in which we have confidence. I feel in this respect technical analysis is much better. Fundamental analysis is described in very ambiguous manner. Financial forecasting is not covered properly in the texts. DCF model is criticisized in the texts. There is no adequate explanation of determining target prices.

But the work being done by analysts "led by the unknowing" is useful to convey some useful and valuable information to the traders and investors. That is why research departments are being maintained. Many of us join the departments not unwillingly, but with a big hope.

To improve the analytical part, my proposal is that the analytical methods are documented in a such a detailed manner, that every investor and trader can understand the methodology. That does not mean every investor and trader can do his own analysis. Analysis to identify one share that satisfies a specified analytical method requires analysis of a large number of shares. This is time consuming. Hence professional analysts come out with research reports on those scrips which pass the screening test of the method. Because investor/trader knows the method he can study the report, convince himself that the analysis is appropriate and do his trading/investment with conviction. Such an approach and attidue on the part of analyst community will reduce ambiguity to some extent, and we will all be more comfortable psychologically in our participation in this activity which is basically a risky situation. What I mean by risky situation is that our judgments are sometimes right and sometimes wrong. We are the same persons, our methods are same, but sometimes they succeed and sometimes they fail. People laugh at us and criticize when we fail.

Thanks to the analyst for bringing out an issue that troubles some of us.

Narayana Rao