76 Understanding Rational Decision Making
Table 2.5 displays some of the think-aloud comments of two real-world audience membersas they made investment decisions. The comments in the fi rst column were made by a partner
in a private equity fi rm as he read a plan developed by partners in another private equity fi rm to
acquire a bankrupt textile manufacturer (note: the names of the fi rms and the partners have been
changed). The comments in the second column were made by an experienced private investor
TABLE 2.5 Experts’ Comments That Reveal Their Decision Criteria for Making Investment Decisions
Comments on an Acquisition Plan by a
Partner in a Private Equity FirmComments on a Financial Analyst’s Stock Research
Report by a Private InvestorNature of the
investment
- The company is in bankruptcy.
They [the managing partners] are
buying the assets from the receiver. - Based on this description, it sounds
like a great company for a bankrupt
company. - I’ll read through all this stuff on
their products and markets because
it’s useful to know, but most of my
questions are going to have to do with
the fi nancial information. - Oh that’s good they have new
equipment. At least they won’t have
to put a lot of money into new
machinery. I’m sort of familiar with
this type of operation since we have
experience in a similar industry. - I want them to say up front that
they are buying this company out of
bankruptcy.- I assume the company’s making some kind of
chemicals. - I’d like to see what percentage each chemical
is of their product mix. - I assume that most of their products are
similar chemical products. Only because my
father was a chemical engineer do I understand
the chemical process they just talked us through.
If you weren’t a chemical engineer you probably
wouldn’t be interested, from an investment point
of view.
- I assume the company’s making some kind of
Price/Terms
of the deal
- So, so far they have set up the
partnerships with equity—1.4 million,
debt—7.2 million, but they still
haven’t told us, oh here it is, what
the transaction is. Our equity
contributions are $1,470,000. So the
bank doesn’t make anything, but they
can put this loan on their books as
secure now. - I want to see what are the
sources and uses of the transaction,
the $8,670,000 on the second page.
Where do we fi t into the total fi nancial
picture?
4. Then they give me a bunch of data, the
52 week high and low, 20 to 50. So we’re selling
near high. [Note: The company’s stock was
currently trading at $48 per share.] That would
make me wonder why we expect the stock that’s
more than double the price to triple within the
next 12 months.
Current and
future value
- What I usually like to see is a
snapshot of the company, which it
doesn’t appear that they have. Just
the company’s fi nancials, their sales,
operating income at least, those two
things, at least for the last three years.
Depreciation and capital expenditures
... some things to give an idea of cash
fl ows. They make you fl ip to the back
to look through the numbers, which
I will do now.
5. We’re talking about $150 price value, that
seems a little outrageous to me, but maybe these
guys know something I don’t.
10. They give current capitalization. And yet they
said one of the reasons they recommended it was
because that was changing. And they give you no
idea how that’s changing.