Case Analysis Sheet

Group Details

Name SAP ID Roll No

Aditya Jindal   80101190329 A027
Aparna Menon  80101190441 A036
Chaitanya Bhandari  80101190121 A008
Priyansha Dwivedi 80101190215 A018

Shalini Priya 80101190553 A045

Utkarsh Shukla 80101190675 A055

“We, the members of the Group Project, certify that the submitted written report is the
original work of our team and all the analysis and reporting text is entirely our own.
Facts, figures and other relevant information drawn from sources, where required, is duly
acknowledged”.

Chapter 11, Case Name- Merill-Lynch and the Nigerian Barge Deal

What is the situation/context 

Merrill-Lynch was offered a deal by Enron in which Merrill-Lynch was to purchase three
barges worth $28 million dollars. Out of $28 million dollars, $21 million dollars would be
loaned to Merrill-Lynched by Enron and the rest will be put up by Merrill-Lynch itself. In
return, Enron will search for the buyer for these barges and if it fails to do so, then it will buy
them back within the time period of six months with a guaranteed return of 15 percent on
Merrill Lynch’s investment. This agreement offered a risk-free return, which almost seems
too good to be true.

Ethical conflict/ dilemma in that

Enron is involved in the practices like off-balance-sheet partnership and setting up special
purpose entities, which help them in writing down liabilities and show higher profit
margins.Merrill-Lynch bankers also believed that the deal being offered was almost too good
to be turned down and it would enable Enron to commit further fraud.Due to all these
reasons, they are now facing an ethical dilemma about getting in the deal with Enron.

Application of the appropriate framework/ theoretic less

 1. Violation of accounting standards: Merrill-Lynch should have applied correct
accounting standards to execute the deal.
2. Terms and conditions: All the terms and conditions to be agreed before signing the
deal, such as whether the Meill Lynch would be the owner during these six months or
not.
3. Debt Market Commitments Committee: They should have rejected the deal when
they sensed that Enron has been trying to manipulate their earnings

Choices/ option to choose, if any

The best option which Merril-Lynch had was to not to enter into the deal with Enron as they
believed that Enron is committing fraud due to the treatment transactions will get in Enron’s
book of accounts, and it could also put Meril-Lynch in the question of financial misconduct.

Apart from not being a part of the deal, they should also report about Enron’s offer to SEC
about how they are planning to use another company to increase their revenue in the book
of accounts which will result in an increase of share prices because Enron could also take
the help of  another company later for the deal.

Appreciation  of any risk along the way

1. As some of the employees were convinced with Enron’s deal, not considering the
deal could create a drift between the employees as everyone has different
perspectives about this agreement.
2. Not taking the deal could also result in missing the chance to earn profit as Meril-
Lynch was going to earn 15% return on their 7 million investment which made the
total to be 7.525 million
3. If Enron was a loyal  customer of Merrill-Lynch then not taking the deal can affect the
other business ties between these two companies. Meril-Lynch being an investment
bank, requires them to maintain good relations with their customers. 
 Chapter 11, Case Name- From Boardroom to Prison Cell: An Insider Trading
Case
What is the situation/context?

Rajat Gupta, 63-year-old business leader, considered to be most-respected corporate directors

of America was convicted by the US government on three counts of securities fraud and one
count of conspiracy, for allegedly passing confidential boardroom information about
Goldman Sachs and Procter and Gamble Co. to largest hedge fund manager, Mr. Rajratnam,
co-founder of Galleon Group who in turn earned millions of dollars trading in his tips. He
was accused of giving Mr. Rajaratnam inside information on two issues crucial to Goldman’s
financial health: a $5 billion investment by Warren Buffet’s Berkshire Hathaway Inc. and
bank’s first quarterly loss as a public company. The SEC alleged that Galleon made a profit
of approximately $840000 from information received by Gupta. Rajaratnam was found guilty
on 14 counts of securities fraud and was sentenced to jail for 11years. Mr. Gupta was
sentenced to two years in federal prison by US district judge in 2012 and also paid an of $ 5
million fine.

In the aftermath of the judgement there was an outpouring of support for Mr. Gupta from the
elites of the world. The Second Circuit Appeals court for New York received over 400 letters
of support from high profile associates of Mr. Gupta praising his philanthropic work. Mr. Bill
Gates, founder of Microsoft and Mr. Kofi Annan, Secretary General of the UN wrote in his
support. Back home in India he found support from Mr. Mukesh Ambani, Mr. Deepak
Chopra and Mr. Adi Godrej among others.

Many Indians were shocked by the fact that Mr. Gupta was convicted of insider trading.
“Half of the country will be in jail by that yard-stick” noted one commenter. Insider trading is
rampant in India and Indians accept it as a part of the elite and business world. Trading favors
and information is the only way up the ladder in the business world is something that Indians
have accepted a long time ago. The fact that insider trading is so rampant and widely
accepted in his home country may have influenced Mr. Gupta’s behavior.        

What is the ethical conflict / dilemma?

Below are some of the points of ethical conflict and dilemma present in the case:

 Whether Gupta’s indulgence in the act of insider trading was inadvertent or sheer
negligence, or did he do it with full knowledge of the consequences.
 Could we say that drive for financial gain overshadowed his personal honesty?
 Was Mr. Gupta an example of irrational behavior? Was it evident that he was acting
for his selfish interest and greed in his mind at a deeper level of conscience?
 Was the act of making money the major motivational force and consequently
became Mr. Gupta’s habit and the habit became his character?
 Why Gupta did not think that passing confidential information to a friend is incorrect
and should be avoided?

Application of proper framework

Mr. Gupta has clearly violated the principles of honesty, integrity and fairness. Insider trading
by definition makes the market an uneven playing field, giving unfair advantage to people
with insider information. This information is unavailable to normal investors due to lack of
access and not lack of effort or diligence. 

1.    Awareness of the issue: 

a.    Insider trading is illegal and immoral as it puts other people at a disadvantage and
also violates the trust placed in the individual by the investors and management. 

b.    It also violates the fiduciary duty of the individual.

2..    Resolving Issues: 

a.    Under the European Insider trading laws the course of action is simple: If a
person possesses insider information he must either disclose it or refrain from trading
on it. The American laws are more convoluted and unclear. There are several different
interpretations by courts and no clarity on a course of action. 

b.    Mr. Gupta should not have disclosed insider information to any party.

c. Mr. Rajaratnam should not have executed trades even if Mr. Gupta disclosed
material non –public information to him. This is a clear violation of insider trading
laws for which he was subsequently convicted and imprisoned.

   

Choices or option to choose if any

Mr. Rajat Gupta had a choice to not share insider information with his long term friend and
colleague Mr. Rajaratnam. Gupta and Rajaratnam had been friends for a long time, they had
worked in Goldman, Gupta was also involved in Galleon fund, a hedge fund founded and
managed by Rajaratnam. For the ultra-wealthy and powerful people trading favors is a way of
life. As the Wall Street Journal Noted “The jury found to irritated not by quick profits, but
rather, a lifestyle where insider information are the currency of friendships and elite business
relationships.

Appreciation of any risk along the way       

For Mr. Gupta and his friends Mr. Rajaratnam and Mr. Kumar, trading favors with each other
was a way of life. The circles they moved in and the people they interacted with exhibited the
same behavior. This is evident by the fact that Mr. Gupta was accused of sharing Goldman’s
insider information twice, once regarding a $5 Billion investment by Warren Buffet of
Berkshire Hathaway and again regarding the company’s first loss in a quarter as a public
entity while serving as a board member. Mr. Gupta was also accused of leaking P&G insider
information while serving as a board member. Mr. Gupta repeatedly violated the trust placed
in him by the management as well as the shareholders of both Goldman Sachs and Proctor &
Gamble. He did not understand the gravity of his own actions as insider information sharing
even though it’s wrong, was a day to day or usual thing for people like him. The fact that he
indulged in this unethical behavior a number of times at various points of time and at
different companies makes it clear that Mr. Gupta either did not think that he would get
 caught or that he was driven solely by the desire to make more money and he did not
appreciate the risks he was taking. 

 Chapter 11, Case Name- Case: Oracle’s Hostile Bid For Peoplesoft

What is the situation/ context

PeopleSoft management had officially announced a merger with J.D. Edwards, in June of
2003. This merger resulted in having 15% of the market share contrasting to 13% market
share of oracle. It was within hours of the announcement of the merger that Oracle had
launched a hostile takeover attempt of PeopleSoft at $5.1 billion, that is to say instead of
extending an offer through PeopleSoft's board, Oracle went ahead to PeopleSoft stockholders
with an offer. The oracle bid was unusual in terms that the offer of $16 per share which
represented a mere 6 % premium over the current price of PeopleSoft stock. This percent
was lesser than the usual 20 % offered by serious raiders.  The two main questions that
Oracle’s bid raised was first, would  PeopleSoft products continue to be supported second,
would customers became reluctant to buy PeopleSoft software. Managers were therefore
faced with a decision about what actions to take and respond to the uncertainty it created. To
regain customer and analyst confidence, PeopleSoft’s board considered on adopting a
Customer Assurance Program(CAP) in which customers would be reimbursed customers
from two to five times the original cost of their software if an acquirer failed to provide
adequate service during the life of a system. Once in place, it probably could not be
withdrawn by the board, and it might reduce the price that the shareholders could get for the
company. The promise of a cash payment was to encourage customers to invest in PeopleSoft
products, but what it inadvertently would have done was created a liability that might be
deterrent to Oracle’s takeover attempt altogether. This was a case of poison pill. PeopleSoft
management responded to the bid with poison pill as a defensive measure. The board
therefore had to consider the implications of a Customer Assurance Program for the welfare
of the firm, its customers and its duties to stockholders faced with a tender offer.

Ethical conflict/ dilemma in that

The  main ethical dilemmas that occurred in a hostile takeover of PeopleSoft by Oracle.

i) Should Oracle have gone forward with a hostile takeover? Would the nasty
relations it caused between the two CEO and employees have any potential
negative consequences?

ii) If the price Oracle was willing to pay high enough to induce PeopleSoft
shareholders to sell, should Oracle’s plans for the acquired company be of any
concern to the board? 

Application of the appropriate framework/ theoretic lens

Hostile bids are often responded with many difficulties when engaging in a hostile takeover.
The target company use a number of defense mechanisms to avoid the takeover. PeopleSoft
had used the poison pill defense mechanism. The poison pill provided that in the event of an
 acquirer's percentage below 20%, and this provision would be triggered each time an acquirer
increases it's stage above that level. Although this protection effectively insured that or
takeover could not occur through the purchase of stock without board approval, a hostile
raider could still take the difficult and more time consuming route of proxy battle to elect its
own members to the board who would then rescind the poison pill.

 In this takeover, the board is faced with constant struggle of solely acting on the premise of
increasing shareholders value which would maximize the immediate stock price for
PeopleSoft’s shareholders looking for a quick buck or acting on the long term strategic plans
the board might have developed for the company.

The board acted conscientiously keeping in mind the impact of a takeover on a broad range of
nonshareholder entities such as its existing customers, employees and at the same time
addressing its own reservation that Oracle might not provide adequate support (as mentioned
support is critical for ERP solutions ) and upgrades for PeopleSoft’s applications currently
used by customers, by introducing Customer Assurance Plan (CAP) which would  reimburse
two to five times the original cost of their software if the acquirer fails to provide adequates
service during system lifetime.The board was also aware that CAP could reduce the price
shareholders would get for the company.

  

Choices/option to choose, if any

Oracle when initially had bid for the tender offer of $16 per share with a 6% premium (citing
declining software license revenue and dwindling stock) could have also stated that it would
provide maintenance and upgrades for an agreed upon fixed tenure to PeopleSoft’s existing
clients post which the applications would be converted to Oracle’s E-BusinesSuite on their
consent.The new customers seeking out ERP solutions would be given a choice between
Oracle and  PeopleSoft’s products as offerings. This would lead to :

 Quicker expansion in a competitive market with reducing profitability

 Strengthening investor and customer confidence warding off uncertainty  

Oracle should have ideally approached the board with a reasonable offer instead of taking it
to the stockholders directly.

Appreciation of any risks along the way

One of the major risks Oracle would have faced had it gone with the hostile takeover is the
customer backlash from PeopleSoft’s existing customers which could have possibly resulted  in a
court's ruling mandating the board to consider the impact on nonshareholder entities and in the
worst case provide adequate compensation.

The main intention of the takeover was for Oracle to be able use PeopleSoft's consumer base
thereby increasing their own. This being conspicuous would have posed a risk of the deal not
being accepted by the Board. This would have resulted in a prolonged proxy fight between the
two companies.