Imagine traders walking hand-in-hand with buy-and-hold investors, analysts snuggling with economists, bulls and bears living in perfect harmony. Suddenly, the world is a beautiful place to live. February is the time for love. So, in keeping with the romance in the air, let's look at some love-related terms that would warm even the coldest Wall Street heart.
This term might make you think of two corporations at a diner table, sipping the same milkshake through separate straws while holding hands. Not quite. But the sweetheart deal may be the Wall Street equivalent. In a sweetheart deal, one company offers very attractive terms and conditions to another company or individual. It can be an acquisition or an attempt to lure in a new CEO.
A sweetheart deal can be a bad thing for shareholders because, if their company is being taken over, management may receive benefits (for example, buyout packages) while shareholders take a loss. If a sweetheart deal is obviously unethical and not in the interests of shareholders, legal action can be taken. (To read more about mergers and acquisitions, see The Wacky World of M&As and The Basics Of Mergers And Acquisitions.)
If you spent your formative years as your neighborhood's daredevil, you may be a risk lover. Risk lovers in the investment world don't necessarily try to jump the school bus during recess, but they do make investments with uncertain outcomes. This type of investor doesn't love risk just for its own sake, but because the risk/return tradeoff dictates that with a greater exposure to risk comes a greater possibility of payout. This means that the return is huge when it happens, but that the chance that it will happen may be slimmer. The risk lover's opposite is the investor who is risk averse - he or she prefers investments with a more guaranteed payout, even if it's smaller. (Love the risk? Then check out Risk And Diversification and Determining Risk And The Risk Pyramid.)
No, we're not talking about whether you write poetry and bring your sweetheart flowers and chocolates "just because". Sensitivity analysis is a technique used to determine how a projected outcome is affected if one of the key predictions proves false. For example, you might try to determine how sensitive a movie's box office profits are to lower-than-expected numbers during its opening weekend.
In the investing world, companies view friendly hands in a favorable light. This term refers to investors who buy a stock at the IPO and hold onto it for the long term, looking for long-term rewards rather than a short-term gain. Friendly hands help the company create a sense of stability right off the bat. Angel investors usually double as friendly hands. (Find out more about IPOs in The Murky Waters Of The IPO Market and IPO Basics Tutorial.)
Love money is the money that startup businesses get from angel investors, usually friends and family. They may give money as a result of the strength of their love for the business owner, rather than the strength of his or her business plan. This type of money is hard to come by and can be very fickle in its affections. A business that gets it should be glad.
Teddy Bear Hug
A teddy bear hug can occur when a takeover company warns its target company in advance about the offer it's about to make on its shares. If the price per share is extremely generous, and if the target company accepts, the deal is referred to as a bear hug. The target company, however, may turn down the offer in the hope of a higher price. If the acquiring company is a teddy bear, it will usually give in and raise the value of the offer. The idea is that the acquiring firm is soft like a teddy bear and wants to make everyone happy.
Happy Valentines Day!
There is plenty of love on Wall Street, even if it's just in the romance language that's lavished on many of the complex relationships and business deals that happen there. Whether it's a sweetheart deal, love money or a teddy bear hug, these terms suggest that there's a softer side to Wall Street's cut-throat, competitive - even if only on the surface.