Topic: Cases in Risk Management
Description:
Case should be double-spaced pages. Graphs, tables and other visual cues may be used to support the author’s position.
Succinctness and brevity are important. Text added to obscure or obfuscate will result in a reduction in points. A lack of detail or a demonstrated lack of interest will also result in a reduction of points.
Here are the three questions which should be the main focus for the paper:
a. Identify the economic agents or “actors” and their potential motivations
b. What risks do they face?
c. If they can, how might they mitigate their risks? If they can only partially cover their exposure, explain how.
Case #1: The Entrepreneur
Cases in Risk Management
Edward H. Fredericks, Jr.
Karen Burrows was a child prodigy showing at a very young age an amazing comprehension and mastery for mathematics and the physical sciences. At age 15 she graduated from MIT with a Ph.d in Physics and started post -doc work in nano -technology at the prestiges Google Institute founded by the young prodigies that founded Google, Inc. in the 1990’s.
By the age of 20, Karen held a number of patents, had been awarded numerous science and intellectual achievement awards including a noble prize in physics, was a millionaire m any times over, drove a fancy German sedan and had a very smart and handsome husband . But she felt , she still hand not made a contribution t o society worthy of her potential. Sh e had it all, and she knew it, but she wanted to change the world, for the better. Sh e wanted to create something that would affect everyone’s lives and make the world a better place.
Sh e came across it one weekend alm ost by accident. While working on a process that allowed nano-c ircuits to run hotter, preventing melt-down, she combined another process known for preventing brittleness in circuits, while freezing the bake to 100 below absolute zero; she found the result ant circuitry could handle over 100 times the current capacity of existing integrated circuits. If the circuit maintained performance over say a five to ten year life-span , then conceivably, a supercomputer capable of billions of calculations a second, cou ld be made the size of a pin-head. Sh e could design a computer that could easily handle all the transactions for say, a large global bank; the physical size of the computer itself would be less than a square inch.
She quickly documented the pr ocess and technology, called her good friend, a patent attorney, and started to plan how she would change the world.
Seven years later , Karen’s “Nano -K B-Technology , Inc. ” had still not brought a single product to market. Advised to start slow and then ramp up to more ambitious products, instead, she opted to sh o ot for the moon and start with large integrated circuit design and production. She had problems ramping up produc tion to sustainable levels that made commercialization viable. Progress was slowed by quality control issues and manufacturer’s unwillingness to adopt and utilize her technology in their designs. Her desire for perfection and her incredible intellect, as w ell as reputation, made her management sty le inflexible and difficult. Personal went through the executive suite so quickly; the firm had stopped ordering name plates for the doors. Rumor was that even her marriage was suffering and that she was currently involved in a “trial separation”.
The company was originally funded by Karen’s trust but soon after , tapped local venture capital sources for second and third rounds of funding. These investors were eager to invest, so promising was the technology , but ha d gr own weary of the delays and Karen’s inflexible management style.
VC and other private capital sources is a small world and rumors circulated that Nano-K B was in trouble and may be closed down by investors. Karen went through the last of her trust and sold what personal assets she had to raise cash to keep the company operating. She knew that she was very close to commercial viability and was willing to risk everything on the success of her technology.
The original investors wanted out and she was forced to take the company public to raise the cash to buy them out and to further fund operations. The VC investors sold all their shares but kept warrants , “The Entrepreneur”, Cases in Risk Management. Copyright Edward H. Fredericks, Jr. 2014 All rights reserved. No portion of this document may be reproduced without permission of the author. she sold half her holdings maintaining a 33% ownership in the firm. The IPO price was originally set at $ 10 a share but was lowered to $7.50 due to lackluster demand.
Karen kept working to improve her production processes and solve quality issues. Eighteen months after the IPO, Karen finally felt confident that all production and quality issues were reso lved. Over the weekend she meet with various corporate entities and the following Monday before the start of business, Samsung, Sony and General Electric announced licensing agreements. Before the end of the week, every major technology company in the worl d had either licensed Nano -KB technology or was in negotiations.
The stock rose more than tenfold in the short course of a week surprising even the most optimistic forecasts. By the time all “the dust had settled”, Nano -K B stock was trading at over $100 a share. This attracted the attention of some of the most aggressive, and some consider the most unscrupulous, market participants in the industry.
One such individual, Karl Icant, was known as a “raider” and for eliciting “greenmail” from his corporate vi ctims. He would buy shares and create enough divers ion and bad publicity that companies paid him a premium over market price for his shares , just to get rid of him.
At the next annual meeting Karen was surprised to hear that Karl owned 7% of her company’s shares and wanted a seat on the board. At a press conference held after the annual meeting, Karl was critical of current management saying that” the firm had been mismanaged and misdirected for years”. He said the current technology was the first thing of value created by the firm but it had taken over nine years to do it. He announced that he did not want to wait another nine years for the next discovery and felt the only rational decision would be to sell the firm. He thought the firm was worth $120 a share and if they could get more, “fine, it would be gravy”. He demanded a seat on the board so that he could represent the interests of the poor shareholders that have waited so long for something positive.
Karen laughed at Karl’s grandstanding but soon found she was in serious trouble when a number of large pension -funds, a significant percentage of ownership, came out publically supporting Karl’s viewpoint.
a. Identify the economic agents or “actors” and their potential motivations
b. What risks do they face?
c. If they can, how might they m itigate their risks? If they can only partially cover their exposure, explain how.
Cases are required to have a cover page which includes name and date submitted. Cases should be no longer than five double -spaced pages. Graphs, tables and other visual cues should be used to support the author ’s position.
Succinctness and brevity are important . Text added to obscure or obfusc ate will result in a reduction in points. A lack of detail or a demonstrated lack of interest will also result in a reduction of points.
“The Entrepreneur”, Cases in Risk Management. Copyright Edward H. Fredericks, Jr. 2014 All rights reserved. No portion of this document may be reproduced without permission of the author.