Source: What's Up in Finance?: "The Deal Makers"
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This video from What’s Up in Finance? features two teams of high school students competing in a simulation of a multi-billion dollar business deal between two energy companies, as Team Sunoco attempts to acquire, or purchase, Team Tesoro. Sunoco wants to pay a lower price for Tesoro, and Tesoro would like to be sold for a higher price than Sunoco would like to pay. Each team is concerned that they won’t get a good return on the investment if the initial investment is not the right amount.
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Investing in financial markets can be a tricky business, but when it goes well, it can be very profitable. Investors hope to make a profit, which means selling something for more than you paid for it. All investments involve risk; that is, it's possible your return on an investment—the money that you gain or lose—might be different than you had originally anticipated.
Financial markets are mechanisms for buying and selling financial instruments such as stocks, bonds, and commodities. When you deal in financial markets, it is typical to use a broker who can help with the transaction and provide advice on which investments to buy. Examples of financial markets include stock markets, bond markets and commodities markets.
Stocks are a small share of ownership in a company. Only public companies, which tend to be larger companies, issue stock that anyone can purchase. By investing in stocks, you are essentially taking ownership of a tiny part of a company. If the price of the stock goes up beyond what was paid for it, it can be sold for a profit. However, if the price of the stock drops below what was paid for it, you have lost money.
A bond is like a loan, with the investor as the lender. Bonds are issued by corporations and governments. The bond issuer has an obligation to pay the bondholder interest over a period of time, and ultimately, the principal on the loan. Bonds generally provide a predictable funding stream for the investor. Bonds are different than stocks in that a bondholder does not own a share of a company. Bonds usually have a fixed term and a fixed amount of interest to be paid. Bonds are also less risky because if a company goes bankrupt and is forced to sell all of its property, bondholders get paid back first while stockholders only collect the money left over after all the other bills have been paid.
Commodities are tangible, and used in the production of goods and services. For example, some types of commodities are oil, gas, sugar, gold, coffee, and wheat. These investments are generally purchased in the form of commodity futures contracts, which are essentially bets on the future price of the commodity.
Valuation, which is the process of determining the value of an investment, is a critical part of investing as it will determine if you are paying the proper amount, and not too much. If you pay too high a price, it may be difficult to ultimately earn a profit on that investment. Sometimes the price of an investment can move in unpredictable ways, which can ultimately mean you lose a lot of money. Careful analysis as well as working with financial experts, can help mitigate those losses. It’s still important to recognize the risk involved with investing.
KWAME JACKSON: The Youth About Business competition, held every summer, gives high school students a chance to figure out if a career in high finance might be right for them. This year…
GRAPHIC TITLE: Columbia University New York
KWAME: …teams from different schools are competing against each other in a simulation of the merger and acquisition process. The teams represent real companies at the bargaining table. The goal is to get the best possible financial deal; whoever does that is the big winner.
GRAPHIC TITLE: Team Sunoco
KWAME: Team introduces themselves. The kids’ names and titles in this section are (not in correct order): Yannick (CEO/Chief Executive Officer), Tiffany (CMO/Chief Marketing Officer), Amber (CTO/Chief Technology Officer), Quidra (CHR/Chief of Human Resources), Kayla (CLO/Chief Legal Officer), Shabir (CFO/Chief Financial Officer), Brennan (CEO/Chief Executive Officer), Kristen (COO/Chief Operating Officer), Xun (CLO and CTO/Chief Legal Officer and Chief Technology Officer), Nick (CFO/Chief Financial Officer), Adrienne (CMO and CHR/Chief Marketing Officer and Chief of Human Resources). If I am missing any let me know and I will look up the spelling.
GRAPHIC TITLE: Team Tesoro. Team introduces themselves.
GRAPHIC TITLE: Monday, the teams are assigned companies.
YANNICK: Today we figured out what company we were, and it’s a petroleum company. It takes crude oil, it refines the oil and then it sells it as gas. So they use these pipelines, this partnership to fuel everything else that we own. We’re going to have to figure out how to finance the deal.
GRAPHIC TITLE: Tuesday, Teams learn more about their companies.
KRISTEN: Basically it’s been pretty stressful, everyone is trying to learn everything about a new company we’ve never heard of in a short amount of time.
BRENNAN: We are a very viable company in the oil industry, petroleum.
KRISTEN: We have been starting our due diligence, we’ve been looking into the company, the stock prices, our market caps.
GRAPHIC TITLE: Wednesday Team Sunoco learns that it will acquire Team Tesoro.
BRENNAN: Last night we found out that we were going against Sunoco, which is another high oil petroleum company, and their market cap is like double ours.
GRAPHIC TITLE: Sunoco is worth twice as much as Tesoro.
KWAME: The teams spend the week meeting with professionals in corporate finance, like investment bankers…
GRAPHIC TITLE: Accountant Starting Salary $33,600 Education, College + Certificate Work Week: 45 hours.
KWAME: …and accountants. Team Tesoro meets with an accountant who helps them understand that even though they are a smaller company, they are in better financial shape than team Sunoco.
BRENNAN: We’re sitting in negotiations and they throw at us, oh well your debts so high, and all these other problems, you all have a couple law suits, and then how do we come back at them and explain this debt ratio?
GRAPHIC TITLE: Debt Ratio = Money owed / Total Assets
ACCOUNTANT: If you look over a three-year span, you guys have progressively increased your revenue, so you are doing very well and you can show them how your stock has progressively gone up over the years.
BRENNAN: In our case we can actually pay off our debts and loans almost two times, like one and a half times, so that’s like really good coming to in a deal, especially when the company who’s acquiring you can’t even pay it off.
KWAME: Because Team Tesoro is doing so well financially, it puts them in a position to demand a higher price from Team Sunoco.
GRAPHIC TITLE: Team Sunoco meets with their investment banker.
INVESTMENT BANKER: I cannot tell you to buy something when the stock price is the highest it’s ever been. Now why would you go and buy something when it’s most expensive? It doesn’t make any sense.
GRAPHIC TITLE: Investment Banker Starting Salary: $134,000 Education: College and Grad School, Work week 70 hours +.
TIFFANY: The investment banker was brutal, like she really, I guess she kind of gave us a reality slap. She really like made us realize a lot of things.
YANNICK: But at the same time, she told us what to do, she helped us. She made us learn the equations and so now we are better prepared to take on this acquisition, and we know how to get a better deal for ourselves. Investment Banker: At the end of the day, if you find out that this transaction, you like it, you can afford it, are you paying too much for it, you don’t want to pay too much. Do the benefits outweigh the costs? Because it’s expensive, it’s very expensive right now. Graphic Title: Team Sunoco has to figure out if it can afford Team Tesoro without going into too much debt.
KWAME: When companies buy other companies, they usually don’t just pay cash outright. They also pay in stock or shares of the company. This means the seller actually gets to own part of the buyer’s company. Both companies also get access to each others customers, suppliers and shipping ports. There are a lot of potential risks and benefits for both buyer and seller. Team Sunoco has to be sure that their purchase if affordable and will make it a more successful company. Team Tesoro is in great shape financially, so they want to get what their company is worth and then some.
NICK: Our strategy is to get the best deal that we can which means that we get a premium. A premium means like, like if you had like a $100, a premium means that you get…
GRAPHIC TITLE: Premium = Percentage on top of the company’s market value.
KWAME: …a certain percentage more than you have. So say I’m getting a $150 that means that I’m getting a 50% premium.
GRAPHIC: Team Sunoco
AMBER: Negotiations are always fun when you’re like half delirious because it’s like 2:00 in the morning and they won’t take your price and your like come on, I want to go to sleep. We feel like we are going to get a good deal, and it seems like we might be able to get one over on them. Don’t put that in there.
GRAPHIC: Team Tesoro
BRENNAN: Outside you be all friends, everybody be nice with each other, everybody be cool, but once you get into negotiations all that changes, someone say something ridiculous and you’re like whoa calm down.
KRISTEN: It’s crazy.
GRAPHIC TITLE: Thursday 7pm
GRAPHIC TITLE: The Negotiation Board Room
YANNICK: So today we are ready to offer you guys our first offer because we are interested in buying you guys and so we will start off negotiations on the price with a 5% premium.
GRAPHIC TITLE: Initial offer = $5.4 billion.
BRENNAN: Okay, I am going to say this, that price is um, ridiculous.
YANNICK: Then how much do you guys think you’re worth by yourselves?
BRENNAN: I mean really just to be honest, we really just don’t need you, you’re acquiring us. So I mean we are doing well without you all.
YANNICK: So our next offer is going to be 8%.
BRENNAN: It’s not going to happen.
NICK: How much this is worth and how much is worth, he got this planned out.
KRISTIN: We are not leaving until we get…
GRAPHIC TITLE: Team Tesoro wants a 30% premium.
KWAME: …at least in the 30’s we have to get in the 30’s.
GRAPHIC TITLE: 9:30pm.
BRENNAN: We are going to have to reject your offer.
YANNICK: Can we have the counter offer now.
BRENNAN: No.
YANNICK: Can you explain why you are rejecting the 8%?
BRENNAN: People on the west, on the western coast are environmentally friendly, tree huggers if I may say.
YANNICK: We are working to clean up our act.
BRENNAN: Yeah you’re working, but it’s not cleaned up, its not cleaned up.
YANNICK: You’re afraid of losing your customer base, right?
KRISTEN: Exactly.
TIFFANY: As you guys know, we are the official fuel for NASCAR.
KRISTEN: We understand that.
YANNICK: Since we have an advertising deal with them, your company would be advertised through NASCAR races, that’s a lot of people watching.
GRAPHIC TITLE: 10:15PM
YANNICK: Can we hear a counter offer?
NICK: Our counter offer is 50% premium, which will equal to $7.8 billion dollars.
GRAPHIC TITLE: Counter offer = $7.8 billion
KWAME: Team Sunoco needs to strategize. Somehow they need to make Team Tesoro want to become part of their company.
GRAPHIC TITLE: 10:32pm
BRENNAN: First of all just say, do you accept or reject?
YANNICK: Not acceptable, we reject your offer.
BRENNAN: Now can you explain why?
YANNICK: Your shareholders are gaining a part of our company, what they will gain is something that is twice their size.
KRISTEN: Well we understand, you’re looking out for your shareholders, well we’re looking out of ours…
GRAPHIC TITLE: Shareholder: a person who owns stock in a company. … but we are also looking our for our company, and we’re looking out for our employees and customers. Those are the four basic things.
YANNICK: As for your employees, none of them are going to lose their jobs because we are not going to close down stores, we are not going to close down refineries. You guys do a lot of business in the marine area as well as for jets and things like that. Your company will be able to have markets in the east. Huge ports such as Miami or New York, that’s a lot of money you guys could be making. Nick: So we want to offer you all 38% premium.
YANNICK: 38 and 30/70, okay.
YANNICK: So we want our bottom line to be 30% really, but 32 isn’t that huge of a difference really.
GRAPHIC TITLE: Sunoco’s final offer: Tesoro’s market value + 32% premium = $6.9 billion. 80% paid in Sunoco stock. 20% paid in cash.
YANNICK: Okay, so yeah I’m thinking like 32 and give them their 80/20.
GRAPHIC TITLE: 12.33am
BRENNAN: The deal at hand is quite, quite good. So that shows good faith in the company. I guess it would only be formal if we shook hands on it.
GRAPHIC TITLE: Team Tesoro started the negotiation at a premium of 50% and Team Sunoco started at 5%. They agreed on 32%.
GRAPHIC TITLE: Friday 7am
KWAME: They’ve closed the deal, but it isn’t over. After negotiations ended, both teams spent the rest of the night writing a presentation explaining why the acquisition deal is going to benefit both companies financially. Although Team Sunoco and Team Tesoro are competing against each other and ultimately will be judged separately, the goal for this presentation is to convince the panel that together they did better than all the other teams.
TITLE GRAPHIC: The Judges (Wall Street Bankers)
YANNICK: When we acquire Tesoro, here we are with 500 new gas stations we need to supply, so there again we need more crude oil to buy. It’s more cost efficient so we are going to have a better profit margin again because the costs are going to go down.
MR. KIRK: Give the judges three minutes to summarize and then 11:15 be back in.
JUDGE 1: Most of the team had a good grasp of the knowledge.
JUDGE 2: How many people would vote #1?
JUDGE 3: Let me just say on behalf of the judges that we feel extremely privileged that we were given the opportunity to come and listen to what I have to say were four outstanding presentations. Unfortunately, as in all competitions there always has to be one winner so we would ask each of you to leave your resume and our respective firms will be contacting you to see whether you are available.
MR. KIRK: So the champion for this year is Sunoco/Tesoro.
GRAPHIC TITLE: The presentation counted for 10% of both teams’ overall score. The rest was determined by each individual team’s report to shareholders. The ultimate winner was Team Sunoco.
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