Deck 19: Using Securities Markets for Financing and Investing Opportunities

Question 1

Wagging the Dog
After 35 years of hard work you finally made it to the post of chief executive officer of Laddie Come Home, a large producer of pet foods. As part of your new compensation package, you are entitled to bonuses based on the company's stock performance. If the stock price of Laddie Come Home exceeds $50 a share during the current fiscal year, you could realize close to $3 million in bonuses. The stock is currently selling for $42.
A financial institution specializing in mergers and acquisitions tells you that a major competitor, Barking up the Wrong Tree, wants to acquire your company for upward of $50 a share. Your attorney says the merger is perfectly legal and poses no antitrust problems. You realize your board of directors would probably agree if you suggested selling the company. Unfortunately, at least half your current employees would lose their jobs in the merger. Many of these employees have been with the company over 20 years.
You plan to retire within the next two years, and a $3 million bonus could make life easier. What are the ethical considerations in this situation? What are your alternatives? What are the consequences of each alternative? What will you do?

Answer 1

The given case describes about a situation where an individual became CEO of an organization named 'LC' after 35 years of hard work and dedication. His new compensation package includes bonuses based on company's stock performance. If the stock price crosses $50 mark, the CEO would be able to make $3 million as bonus. The current price of share is $42. The CEO got information from a financial institution, which is specializes in mergers and acquisitions that another firm wants to acquire 'LC' for upward of $50 per share. According to the attorney, the merger is legal and has no issues. CEO is sure that the board of directors would also agree on the proposition of selling the firm. But the CEO of 'LC' is in a fix because selling the firm would result in half of the employees losing their job. The employees include those also, who have been with the company for almost 20 years.
After studying the case one can understand the dilemma of the CEO. If he chooses to sell the firm for an upward share price, he would earn $ 3 million bonus and can live his life comfortably but the merger of the firm 'LC' with another firm would leave half of the employees jobless. In the given situation the CEO must not accept the offer for merger of the firm based on ethical grounds. In a general opinion selling the firm just to make $3 million and living life peacefully, leaving so many employees jobless seems quite unethical.
The CEO himself has worked for the organization for 35 long years and has earned the position of CEO, by making the decision to sell the firm and leaving employees jobless who have been with the company for more than 20 years would ruin the employees' life. The CEO of the firm has ethical responsibility towards the employees of the firm for their well being. In order to make his life easier, the CEO cannot make employees' life difficult by selling the firm for some money.
The CEO of the firm LC must deny the offer of merger. He must not put emphasis on monetary benefits and follow ethical behavior. This would help in setting an example for others to follow and can prevent the firm from the hassles of insider trading. He must try and increase share prices of the firm and earn bonus. Instead of going for merger with another firm he can try and acquire some other firm to increase stock prices. He must try to foster ethical and moral behavior in the firm. The CEO must try to incorporate a culture of open communication, trust, integrity and confidence. The employees should be involved in decision making and their feedback can be taken for finding ways to increase stock prices and expand the business.

Question 2

What do you know about investing in stocks, bonds, mutual funds, ETFs, and other investments? What sources of information have you used in the past for making investments?

Answer 2

Most students know very little about investing. This class provides a great opportunity to guide them to sources such as newspapers, firms like Morningstar, and TV shows.

Question 3

Should you totally rely on Morningstar or any other investment-advice service or should you search out several sources of advice? How can you know what advice is best?

Answer 3

People should not rely on any one source of information when investing. The best advice is targeted specifically toward the individual and his or her needs over time. You cannot know which advice is best, so you must study various sources and make the best judgment you can.

Question 4

Given what you've read in this text and from other sources, would you recommend that your fellow students invest in stocks, bonds, mutual funds, ETFs, real estate, or some other investments? Why?