INVESTMENT BANKING

LESSON 15 SEEING HOW SOME COMPANIES LIE, CHEAT & STEAL

THEIR WAY TO THE TOPInvestment Banking (2nd edition) Beijing Language and Culture

University Press, 2013

Investment Banking for Dummies, Matthew Krantz, Robert R. Johnson,Wiley & Sons, 2014

WHAT’S IN THE NEWS OR WHAT’S THERE TO LEARN?

IF CHINA STUMBLES, THE WORLD FALLS!MORGAN STANLEY CEO STILL UPBEAT ON CHINA

LESSON 15 TOPICS

A. INTRODUCTION

B. “Did you really sell that!”

OVERSTATING REVENUE – Example of “Cooking the books” and “Chainsaw Al”!

C. “Lucy, you got some explainin to do!” UNDERSTATING EXPENSES – Examples of Crazy Eddie and Waste Management

LESSON 15 TOPICS

D. OVERSTATING THE FINANCIAL POSITION E. THE USE OF OFF-BALANCE SHEET FINANCING AND OFF-BALANCE SHEET ACTIVITIES – THE ENRON SCANDAL F. WHAT’S IN INVESTMENT BANKER TO DO?

LESSON 15 A. INTRODUCTION

INTRODUCTION – Compare these 2 sayings 1. “FOR THE LOVE OF MONEY IS THE ROOT OF ALL KINDS OF EVIL!” 2. “MONEY IS THE ROOT OF ALL EVIL”

What do you think of these statements? Discuss for a few minutes with a partner or group.

LESSON 15 A. INTRODUCTION

As we have learned, investment bankers deal with lots of money, billions of dollars and they also make lots of money. How much do you think the ability to makes lots of money effects your thinking?

LESSON 15 A. INTRODUCTION

These are questions you will all think about in your lifetime. Especially as China moves up in the creation of wealth for it’s citizens.

LESSON 15 A. INTRODUCTION

So, when you have opportunities to make lots of money, the temptation is to make things look better than they are or perhaps overlook details that can make or break a deal. You may think your deal is the one that will be the blockbuster of the year! Well, in this lesson we are going to look at the bad side of IB. And when it’s bad, it’s really bad with all the money IB deal with!

LESSON 15 A. INTRODUCTION

There are 3 main temptations that executives can use to mislead people, even smart people like IB. They are:

B. Overstating revenue – making earnings appear greater than they are.

C. Understating expenses – To make the “bottom line” look better, some companies understate or either ignore certain expenses

D. Overstating the financial position – Some use accounting tricks to make financial statements look better than they really are!

LESSON 15 B. “DID YOU REALLY SELL THAT!” Overstating Revenue

“COOKING THE BOOKS!” – The story of CEO “Chainsaw Al” Dunlap. He didn’t get that name as a forester chopping down trees! While at Scott Paper he fired 1000’s of employees, closed plants and cut costs all around. After downsizing the company and making it look like a great buyout target he sold the company and walked away with over $100 million.

LESSON 15 B. DID YOU REALLY SELL THAT!

One year later “Chainsaw Al” was hired by Sunbeam, a maker of microwave ovens, coffee makers, etc. He increased inventory and was counting sales as revenue on the books by only sending an invoice but not shipping the goods – accounts receivables were way up – should have been a sign!

So, the company was booking sales on their financial statements but not delivering the goods – accounting fraud. Al Dunlap was fired and banned by the SEC, never allowed again to serve as a director of a company.

LESSON 15 B. DID YOU REALLY SELL THAT!

Chainsaw Al – In 1996 he reported negative net income. 1997 his company reported large positive net income. What actually happened?

Inventories went up 59% and accounts receivables up 38%. Revenues only went up 19%. All these should go up at about the same percentage.