In the Managing Risk simulation Kramer Associates hired a new investment portfolio manager to manage some of the new clients. The new manager was to manage the investments for a trial period of 18 months. Every six months the new client would review the portfolio performance and each client also reserved the right to withdraw their capital if the portfolio makes a loss anytime during the trial period. In each period the manager was to evaluate the market to determine the best portfolio for each investor.The investors desired portfolios to match their goals and ranged from conservative, moderate to high growth.
The most conservative would focus on capital preservation primarily where the others would be fine with some market fluctuations as long as they continued to increase value. Each of the investment choices was outlined giving a brief description of the investments, followed by information-based on previous history and analyst’s feedback. The investments were also given a beta value was given also showing the volatility of each of the stocks.
In the simulation the beta value was used to match the risk that was determined for each of the investors. The simulation was valuable in providing a real type of response from each investor as the challenge would be to match the investment success with the expectations of the investors. The simulation run several times had varied results. The investors held to their goals in their portfolios and did not waver from them. The high risk taker wanted high profits even though the risk would indicate that losses may be inevitable for period.The most conservative investor dropped the services of the manager because the yields were too high and risky. The challenges that Kramer Associates faces is similar to J. P.
Morgan. As Kramer seeks to provide financial stability to its customers so does Morgan. J. P.
Morgan sits at number 20 of the Fortune 500 and with revenue of 57 billion the company works on a different level (CNN. com, 2005). Instead of serving the individual investor J. P. Morgan looks to serve not only individual consumers through credit, but also retail banks and large corporations.Their main business divides into four major interests; portfolio business taking advantage of arbitrage opportunities, corporate finance exploring opportunities for companies to obtain funds, trading by aggressively making loans to sell off to investors and distribution or the sale of exempt securities, treasuries and agencies (WFHummel. com, 2004). J.
P. Morgan like Kramer’s beta values uses risk management tools to customize market-risk exposures (riskglossary. com, 2004).The consumers select the exposure to risk and the companies advise an appropriate strategy to help the consumers and companies make choices to serve their varying needs. As discussed in the Random Walk theory suggesting that market prices do not show specific patterns.
Obviously a company such as J. P. Morgan has made its mark by being able to develop ways to be reasonable accurate in its risk assessment so as to be profitable to over $4 billion over the last year. It could be suggested that even a company of the size of J.
P. Morgan will be susceptible to the market.A strategy that could be taken further is to work to develop more of the service side of the business. Providing services and a margin could be more predictable than the markets as indicated by the theory. The company has a credit arm for the individual consumer and it appears that is has made an effort to retain fees over market risk. The weakness of this strategy could be customer backlash if the consumers decide that the fees are out of the market norm. Other ways to remove the fluctuations of the markets would be to get larger in the service business.
Being an advisor to companies like Tommy Hilfiger in brokering purchase deals is another way to mitigate risk (Crotty, 2005). The primary risk is then shouldered by the selling company and not Morgan. The apparent flaw may be however that with the low risk also is the low margin. If the deal is fully financed profits could be realized that are much larger. In mergers there is much to gain and much to risk. There are many reasons companies to merge such as, complementary products, increased market and buying power, cost savings in combined operations, access to additional funding and the list could go on.Some of the down sides to mergers can be equally numerous and cause them to be less than profitable could be lack of synergies, cultural differences, lack of top management commitment, customer reaction, competitor retaliation and regulatory issues (yeald. com, 2004).
Nearly the bottom line and possibly the best prevention for any of these problems are planning with careful study of previous mergers and their problems with solutions at the ready to implement when they arise. Planning is not enough; there must be a clear line of execution for the plan as well.A good plan goes to waste without a solid effort. Most often times these are handled by companies that specialize in the art of mergers and unless one of the merging companies has good practice it would be a necessity to attain these services.
The challenge is to manage risk, an established means for entrepreneurs to do so is to partner with an equity partner that offers extensive experience in making deals and contacts as well as reasonable access to capital. Even the best, most financially secure acquisition is challenged with long odds if they move forward with inadequate guidance.The first strategy is due diligence and guidance by those who know the business and risks of mergers(Capron and Mitchell, 1998).
Conclusion Mergers and acquisitions are the fastest methods of increasing a business’s holdings. This action creates larger companies from smaller companies. The goal is to create savings of cost and increased revenue from a larger company. Mergers and Acquisitions can be worth future million and billions of dollars for the companies.
Financial transactions for mergers and acquisitions can be comprised of cash, stock trades and or a combination of both.