Case Study;risk management

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
s
he 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 award
s
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
. B
ut
s
he
felt
,
s
he still hand not made a
contribution t
o society worthy
of her potential. Sh
e had it all, and
s
he knew it, but
s
he 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,
s
he combined another process
known
for preventing
brittleness in circuits, while freezing the bake to 100
0
below absolute
zero;
s
he 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 te
chnology, called her
good friend, a patent attorney, and
started to plan how
s
he would change the world.
Seven years later
,
Karen’s
“Nano
–
K
B
–
Tec
h
nology
, 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 q
ua
lity
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 for
ced to take the company public
to raise the cash to
buy them out and to further fund operations
. The VC inve
stors 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
–
K
B 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 yea
rs”. 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 sharehold
ers 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
viewpoi
nt.
a.
Identify the economic agents or “actors” and their potential motivations
b.
What risks do they face?
c.
If they can, h
ow 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.

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