Several participants from the MBA cohort of 2019 had a chance to head to New York to gain an understanding of the broader aspects of the finance industry. During the trip, we visited Goldman Sachs, KKR, Ardian, Morgan Stanley, JP Morgan, Candriam Asset Management, Clifford Chance, Natixis, BNP Paribas, White Star Capital, Federal Reserve.
Visit to KKR
One company that we visited was Kohlberg Kravis Roberts, better known as KKR, a global leader in the investment and private equity business.
Our aim was to understand the private equity (PE) business from the eyes of the experts. The presentation began with an overview of the PE industry before delving into two KKR acquisition case studies in the entertainment and manufacturing industries.
Within the entertainment industry, we analyzed a case study on the Ultimate Fighting Club, UFC, which agreed to sell itself to a consortium with the equity financing coming from KKR. The $4bil investment to acquire UFC was a significant appreciation from the $2mil cost of the previous acquisition in 2001. The case study went through the current entertainment market, the revenue drivers in the industry and moving to the negotiation of the license, a key component of the deal.
An opportunity to apply what we learnt in the classroom
Reflecting on my firm valuation course, I could see the connect and importance of understanding the market. The entertainment industry was going through a transformation. Increase in revenues from pay per view subscription and growth opportunities of viewers in China made this a promising business. The second aspect was analyzing the business growth drivers. One such driver was the contract negotiation with Fox which was renewed in 2018. The importance of the contract ensured a significant increase in UFC’s revenues further providing an appreciation to the firm value.
From entertainment, we moved to manufacturing, where we analyzed KKR’s acquisition of C.H.I. Overhead Doors, a leading manufacturer of overhead garage doors in North America. The role of differentiation was key in this acquisition. C.H.I.’s business model was unique as it was working on a made-to-order basis. Linking back to our Operations lecture, I could understand that a made-to-order meant no inventory (or little inventory) being held. The second interesting piece was the inexpensive real estate where the factories were present. This meant that scaling up would not be too costly. Its unique business model led to significant growth with limited capital expenditure, making it a cash cow from KKR’s perspective. From a strategy perspective, I could see the key differentiation that C.H.I. had in comparison to all other firms, driving its value proposition.
Overall, both these case studies gave me a perspective of market drivers and business drivers to drive financials. The role of these drivers was crucial to understanding where the business was heading to in the future. While the discounted cash flow was important, the prediction of future cash flows was driven by market and business drivers. I had a macro-perspective of the connection between our strategy, finance, marketing, and operations classes to the financials and modeling to understand and forecast the business, and this is a key process within the private equity industry.
Visit to the New York Stock Exchange
We also had a chance to visit the New York Stock Exchange (NYSE). When I think
of a stock exchange, I think of charts, graphs, piles of paper, ears glued to the phone and constant hustle and bustle. My mother, being a former stockbroker in Bombay, would explain to me the functioning of the share market. Keeping both of these in mind, I was very excited to discover the biggest stock exchange in the world.
A stock exchange, in essence, is a market place to connect buyers and sellers of securities. NYSE is the world’s largest stock exchange with a market cap of ~30 trillion. My preconceptions of a stock exchange were changed as I walked into the NYSE. The hustle and bustle were replaced by computers and piles of papers were replaced by software for buy and sell side orders. Technology has played a key role in automating many of the processes. A trading floor of what was ~5000 traders had come down to ~500, with many of the deals being done through the various systems. We got a demo of the system and what is it that the traders look for. It ran through the algorithms that run in the background for buy and sell orders along with all up to date news on various companies.
I could understand the efficient market hypothesis just with the speed of transactions and information that was being analyzed, reflecting on stock prices with all available information. The speed of decision making was clearly evident as the traders explained what they look for at the end of the day.
Considering there are many trading firms, how does one differentiate from the other players? Relationships and service were key. Despite all the complexity and technical expertise, the role of relationships was clearly evident to build an effective firm.
As we got an understanding of J.P Morgan and their trading system, I could understand the idea of the relationships between the market makers. However, building an effective relationship when you have two parties with different KPIs and sometimes contrasting objectives is difficult. I could see our negotiation class in action here as the traders worked with one another on buy and sell orders for their clients while determining the volume and price. Dealing with millions of dollars, negotiations were crucial especially considering the price volatility and volume of trade.
Overall, the visit to the NYSE was a great opportunity for us to understand the technical aspect of finance combined with technological advancements. This was put together with a strong emphasis on business negotiations and relationship building. I could relate back to the wisdom my mother provided when she was a broker. “You have to know trades and who to trade with at your fingertips”, in other words, quick and accurate decision making is crucial.