Monday, April 4, 2011
Class # 19 Highlights
Structuring a deal
This is the first part of a two part class on structuring deals through auctions. In the experiment, we considered two dimensions of a deal: the degree of transparency and debt versus equity. Deals made via auction can be transparent, as in an English auction. Here, the auctioneer discloses the leading bid along the path to getting to a final deal. Deals can also be secret. Here, the auctioneer asks for sealed bids and the results are revealed only at the end. Each type of deal has advantages, which we will flesh out in class #20.
The other dimension concerns the structure of a deal, typically debt versus equity. In a debt deal, the winning bidder promises to pay back a fixed amount. This leads to less uncertainty in the cash received by the auctioneer, but less upside if the deal proves to be really successful. An equity deal exposes the auctioneer to more risk but also more upside. In class #20, we will talk about the pros and cons of structuring deals.