Valuing Internet Startups and Managing Risk
Your firm is considering making a takeover offer for small Internet startups with uncertain valuations. Learn how to calculate bids per block of shares, anticipate adverse selection and moral hazard, and handle asymmetric information in the context of bidding strategies and risk management.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Managerial Economics Fall 2017 - Mike Shor Lecture 12
Last time Calculate expected values when facing risk Beware of uncertainty and framing Auctions allow pricing when valuations are uncertain 2
The Takeover Your firm is considering making a takeover offer for a large number of small, privately- held Internet startups. The value of each startup is known with certainty only by its management who is unlikely to accept an offer below its value. Valuing Internet startups is quite challenging. You only know that the shares of each startup are worth somewhere between $0 and $1000 per block of shares, and each possible value has equal probability for each startup. Your value is 1.5x the value to management. Because of corporate synergy, if you successfully acquire a startup, the shares would be worth 50% more to you than their current value to the management. How much do you bid per block of shares for each startup? 3
Outline Anticipating adverse selection & moral hazard 4
Asymmetric Information The effect of uncertainty depends on whether all parties are or are not equally uninformed If all are equally uninformed: use expected value Adverse selection unobserved traits before deal is struck Moral hazard unobserved actions after deal is struck 5
Asymmetric Information Adverse selection or Moral hazard? All-you-can-eat restaurants often lose money Safer cars sometimes lead to more accidents iPhone apps get worse reviews when free 6
The Takeover Risk A company is worth between $0 and $1000 per block of shares Synergy Company value increases by 50% if purchases Adverse Selection Offer only accepted if company is worth less 7
201 299 404 326 584 84 534 34 549 49 100 711 134 680 269 217 698 356 948 578 366 197 595 863 389 681 533 566 197 976 921 995 638 404 255 91 729 440 527 129 975 334 51 485 400 20 177 570 350 39 706 365 867 257 894 675 285 419 452 598 594 207 536 142 919 815 558 428 131 624 197 489 923 810 275 519 763 582 90 109 688 267 390 336 897 926 808 972 705 725 34 163 898 704 848 112 120 790 817 573 494 472 917 356 383 398 94 472 917 356 383 398 94 708 534 575 597 141 21 129 87 208 34 75 97 359 479 371 413 711 134 680 269 217 698 356 948 578 366 197 595 863 389 681 533 566 197 976 921 995 638 404 255 91 729 440 527 129 975 334 51 485 400 20 177 570 350 39 706 365 867 257 894 675 285 419 452 598 594 207 536 142 919 815 558 428 131 624 197 489 923 810 275 519 763 582 90 109 688 267 390 336 897 926 808 972 705 725 34 163 898 704 848 112 120 790 817 573 494 245 168 180 255 332 320 96 174 Random Company Values 296 204 296 204 606 383 137 106 117 363 423 228 100 470 234 114 287 87 85 4 660 160 194 306 501 77 728 600 30 266 548 386 311 213 734 401 585 504 99 525 59 25 441 1 Bid $500 428 629 678 642 197 142 303 48 189 234 72 129 178 296 204 Lose 49 413 135 164 365 336 51 741 241 449 Synergies Profits 14 14 86 86 58 854 58 854 8
The Takeover Bid $500 Adverse selection Companies that accept: worth $250 on average With synergies: worth $375 on average Profit: value-bid = $375-$500 = $125 Overall profit = $125 x 50 = $6,250 What if you bid a different amount? Win 50 companies, on average 9
Adverse Selection Anticipate adverse selection & protect yourself against it Signaling & screening 10
A Diamond is Forever Diamond engagement rings are relatively recent (<100 years) What purpose do they serve?
Screening One way to avoid adverse selection is to gather information about the party. Another is screening an effort by the less informed party to have the more informed party reveal his or her type Require an action or offer a menu of choices Must be observable and costly Must not be desirable for bad types to do 12
Screening & Signaling How to attract only good sales people? How to determine an insured s risk? How to assure bank depositors? How to assure used car buyers? 13
Moral Hazard 14
Unlimited First Class Travel AAirpass customers would make multiple reservations in case they missed a flight million miles per year. Donated earned miles Many AAirpass holders In the 1980s, AA needed cash accumulated more than 2 Offered AAirpass unlimited 1st class & earn miles $250,000 plus $150,000 for a companion pass priced just above expenditures of top customers San Francisco to pick her up and then fly to Paris together. He was airborne almost every other day. If a friend mentioned a new exhibit at the Louvre, Rothstein thought nothing of jetting from his Chicago home to 1993: $1,000,000 2004: $3,000,000 1981: $250,000 1990: $600,000
Moral Hazard When costs change, behavior changes Cholesterol wonder drugs lead to worse diets Hourly consulting wages lead to less efficient work Insured individuals take more risks Recipients of loans take more risks Non-commissioned employees don t work as hard Companies that are too big to fail fail 16
When there is no solution, there is no problem.
Moral Hazard Anticipate Moral Hazard Cholesterol wonder drugs lead to worse diets Hourly consulting wages lead to less efficient work Insured individuals take more risks Recipients of loans take more risks Non-commissioned employees don t work as hard Companies that are too big to fail fail 18
Summary Anticipate adverse selection Signal if you have more information Screen if you are less informed Anticipate moral hazard Predict behavior under changed costs & risks 19
