BULLS

HEADLINES
Kraft purchases Cadbury for $19.5B Brinks Home Security will be purchased by Tyco for $2B Wells Fargo announced a surprise Q4 profit Obama wants to curtail bank risk taking Chinese officials are seeking to tighten lending

& BEARS
Vo l u m e 3 I s s u e 1 7 J a n u a r y 2 4 2 0 1 0

FINANCIAL MARKETS
D OW NA S DAQ S&P 50 0 OIL GOLD 10 Y R 10,172.98, -4.12% 2,205.29, -3.61% 1,091.76, -3.90% $74.54, -$3.46 $1,089, -$40.90 3.598%

THIS WEEKS ISSUE

What Venture Capitalists Look For Hedge Fund Risk Management Silicon Valleys Business Model Club Focus: Carnegie Mellon UFA This Week in Barrons 2 3 4 5 6

MARKET SUMMARY
Monday January 18, 2010 Markets closed - MLK Day Tuesday January 19, 2010 Mergers and Acquisitions news gave the bulls a reason to run during Tuesdays session. Cadburys board accepted a $19.5 billion dollar offer from Kraft foods. The bid was increased from an initial offer of $17.1 billion. Also on the M&A front, Brinks Home Security announced that it would be purchased by Tyco for roughly $2 billion. The merger news was enough to bolster the price of Citigroups stock despite the fact that the company reported earnings that came in less than the streets expectations. The Dow Industrials Average finished up 1.1% at 10,725, the S&P 500 finished up 1.3% at 1150, and NASDAQ finished up 1.4% at 2320. Wednesday January 20, 2010 U.S. stocks end lower, but off of the worst levels of the day. The selloff was triggered by the news that Chinese officials are seeking to tighten lending. Wells Fargo announced a surprise quarterly profit and gave guidance that economic conditions continue to improve. The Dow Industrials Average finished down 1.1% at 10,603, the S&P 500 finished down 1.1% at 1138, and NASDAQ finished up 1.3% at 2291. Thursday January 21, 2010 Major U.S. averages shed roughly 2% across the board during Thursdays trading session. The selloff was enough to leave the Dow Industrials Average and NASDAQ flat for the year. Financial stocks led the broad market decline as President Barack Obama announced a proposal to curtail bank risk taking. Goldman Sachs reported fourth quarter earnings of $8.20 vs a loss of $4.97 in the same period last year. The analyst consensus estimate was for $5.20. The Dow Industrials Average finished down 2% at 10,390, the S&P 500 finished down 1.1% at 1116, and NASDAQ finished up 1.3% at 2266. Friday January 22, 2010 Selling continued during the Friday trading session despite better than expected earnings reports from General Electric, McDonalds and Google. Market sentiment seems to still be affected by the Obama administrations move to limit the size of banks, and cut their risk taking capability, which would include an end to proprietary trading for institutions that are allowed to borrow at the Fed discount window. The Dow Industrials Average finished down 2.09% at 10,172.98, the S&P 500 finished down 1.1% at 1091376, and NASDAQ finished up 1.3% at 2205.29.

THE WEEK IN QUOTES

The Supreme Court has just determined the winners of next terms elections. It wont be Republicans. It wont be Democrats. It will be corporate America. - Charles Schumer, New York Senator, on the courts decision on Thursday to remove limits on corporate political spending Its very romantic in the TV and movies. They think its flying in for a weekend. They need to think of it in terms of months. - Suzanne Brooks, director of the Center for International Disaster Information, on volunteers who wish to travel to Haiti to provide aid I believe they failed the American people. - Richard Shelby, an Alabama Republican on the Senate Banking Committee, on the Feds response to the financial crisis

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**FEATURED ARTICLE**

WHAT VENTURE CApITALISTS LOOK FOR IN YOUR BUSINESS By Siddharth Arora, Carnegie Mellon University
STORY HIGHLIGHTS: Venture capital (VC) firms provide private equity capital typically for early-stage, high-potential and growth companies in the interest of generating a return. The first requirement is a strong management team, with relevant experience, drive, self-confidence, and expertise. The VC wants to see the possibility of hitting a home run by investing in your company.

YOUR IDEA The financial and economic devastation that the US has seen in the past couple of years has had its obvious effect on employment opportunities. This era has spawned a new breed of people who are too naive to see the obstacles that are obvious to others i.e. people we affectionately refer to as entrepreneurs. This time presents a golden opportunity for people like these and even YOU to build on all those ideas that youve had in high school and college but never acted on it because you happily chose to slave away your first couple of years after college in a bank/ consultancy/ fortune 500 company to pay off your debt effectively killing your passion. Thats a well accepted/ traditional route to take in my culture and forms part of the stereotypes associated with it. WHO VENTURE CAPITALISTS ARE? You have an idea, something youre really passionate about and require funding to see it materialize. Unless youre a trust fund baby, where are you going to get the money from? The answer is Venture Capitalists. Venture capital (VC) firms provide private equity capital typically for early-stage, high-potential and growth companies in the interest of generating a return (IRR- Internal Rate of Return) through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. They are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in 1 out of 400 opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential (like biotech/software), as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3-7 years) that venture capitalists expect. WHAT DO VC FIRMS LOOK AT? Because investments are illiquid and require 3-7 years to harvest, venture capitalists are expected to carry out detailed due diligence prior to investment. Due diligence is nothing but a careful assess-

ment of your venture to decide whether they wish to invest in it or not. So how can YOU maximize your chances of getting invested into? Heres a quick compilation of what I believe VC firms look at (ranked 1 through 10 in order of importance). When I say I believe, I mean the below parameters are the most for what venture capitalists have scrutinized my idea, when I have pitched it: Strong management: The first requirement is a strong management team, with relevant experience, drive, self-confidence, and expertise. Financial models can be cooked to represent a beautiful valuation of your business but nothing can substitute a strong management team. The catch phrase for VCs is management, management, management. Market growth potential: Your idea means nothing if you have dont have a substantial market base to sell your product. You need to understand the size of your market today, where it shall be in the next 5 years and in the next 10. Uniqueness of product: What differentiates your product from what is already available out there? Does your company have a patent or other proprietary protection to forestall competitors? Why are people not aware of this yet? MONEY: Does your company have the possibility of growing quickly and becoming an attractive acquisition target or IPO candidate? Venture capitalists are primarily concerned with one figure- the INTERNAL RATE OF RETURN (IRR) which represents how they will realize liquidity and receive VALUE for their investment. This no. needs to typically hover around 40%-50% to get investors interested. Gross Profit Margins >>40%: This point speaks for itself. Large profit margins give a company room for error and enhance its attractiveness for a possible IPO or acquisition. Home run potential: The VC wants to see the possibility of hitting a home run by investing in your company. If your own projections show only modest growth, or if the growth of the business is limited by technology/ competitive factors, dont expect to get financed. Good luck with your idea. Make it worth millions.

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FINANCIAL NEWS

INTRO TO HEDgE FUND RISK MANAgEMENT By Pavitra Venkatraman & Prerak Vohra, IIM Calcutta
STORY HIGHLIGHTS: This article reviews several aspects of risk management, the implications and causes of these risks for hedge funds. Traditional risk management tools such as Value at Risk (VaR) were originally developed for over-the-counter derivatives portfo- lios and hence are not sufficient for capturing the risk exposures of hedge fund investments. There is an urgent need for new generation risk management tools.

During the financial crisis many hedge funds were caught in an swirl of asset price declines, and margin calls as the liquidity crisis and credit crunch paralyzed the worlds financial system. This article reviews several aspects of risk management, the implications and causes of these risks for hedge funds. This article also aims to suggest the way forward to mitigate the risks outlined.

The most obvious drawback is the fact that VaR cannot fully capture the gamut of risks that hedge funds exhibit. VaR does not capture liquidity risk, event risk, factor exposures, and time-varying risks due to dynamic trading strategies that may be systematically keyed to market conditions.

Besides this, the leptokurtosis and negative skewness typically associated with hedge fund strategies presHedge funds today are an extremely popular asset ent a significant challenge to the existing quantitaclass. Because these funds typically employ significant tive methodologies. Another significant feature for leverage, they play a more alternative investments of important role in global Hedge funds is their low securities markets than correlations to traditionwhat the sizes of their seal market indexes such as curities indicate. Post the the S&P 500. However, financial crisis, as hedge correlations being linfunds become more and ear measures of associamore regulated, managtion often ignore certain ers have to face significant nonlinear relations that challenges such as greater characterize hedge-fund regulatory scrutiny and investments. increasing demand of risk management from Managers are unwillthe investors. Against the ing to provide position backdrop of such an entransparency, and invesvironment, hedge fund tors usually do not have managers are being forced to bolster controls around the time or resources to infer positions. Both managvaluation and build infrastructure to support risk ers and investors seek risk transparency, hence there management. is an urgent need for risk analytic tools that can provide investors with a meaningful snapshot of a hedge Mentioned below are few of the key aspects of Hedge funds exposures without compromising the proprifund risk management. etary information held in the managers positions. Need for Complex Risk Management Tools To mitigate the factors considered above, there is an urgent need for new generation risk management Traditional risk management tools such as Value at tools, specifically designed to handle the myriad risks Risk (VaR) were originally developed for over-the- associated with hedge funds. counter derivatives portfolios and hence are not sufficient for capturing the risk exposures of hedge fund To read more of this article, please visit www.BullsBearinvestments. VaR has a number of limitations that are sPress.com. particularly challenging for hedge-fund investments.

FINANCIAL NEWS
SILICON VALLEYS HIgH OCTANE BUSINESS MODEL By Arnav Guleria, Arizona State University
STORY HIGHLIGHTS: Boston VC focuses on exits via strategic acquisition while Silicon Valley prefers on IPOs. Strategic exits bring lower risk at the cost of lower valuations; as a result, the Boston model invests in more conservative, later stage companies than Silicon Valley, which thrives on early stage game-changers. Silicon Valley just understands its disruptive flavour of venture capital better than anyone else.

On 1 December, Reuters reported of a new stock exchange that increased its listings from 15 to 72 in just four months. The article goes on to describe how the exchanges proceeds have helped fund the localitys public infrastructure, including hospitals and public schools, out of poverty. Yet this is not a traditional emerging markets phenomenon, the companies being traded no Apples, Googles or Goldman Sachses described here is the Haradheere Maritime Stock Exchange, an equity market for the capitalisation of Somalian pirate ventures. What is intriguing about this example is not that investors can contribute in the form of cash, munitions or sons one divorcee received 75,000 USD for contributing a rocket-propelled grenade launcher for 38 days, courtesy of her ex-husbands alimony payment but that a functioning venture capital (VC) market, however deplorable its societal implications, has emerged in a region otherwise written off by civilised society. Bostons Route 128 was once considered humanitys source of technical wunderkind. No more today, the crown of tech capital of the world proudly and securely rests on the Silicon Valley. Vivek Wadhwa asserts that Route 128s failure was based on its dominance by large, vertically integrated, and secretive companies that trapped technology, skill and know-how...within the boundaries of large corporations. Yet how and why did Silicon Valley develop its open, serial entrepreneur paradigm where a single entrepreneur may start several successful companies in his life-time and where a single piece of IP, technical or experiential, may be levered across many companies? A key difference between Boston and Silicon Valley VC is that Boston focuses on exits via strategic acquisition while Silicon Valley focuses on IPOs. The Boston model has the advantage in that strategic exits can be performed at an earlier stage in a companys development, lowering the VC firms exposure but also reducing its exit valuation. As a result of the lower exit price and risk, Boston VC cannot afford to

lose too many of its portfolio companies. Thus, it tends to invest more conservatively by entering ventures at later stages and by avoiding companies that arent easily acquired. The latter requirement rules out disruptive companies that dont presently have an apparent acquisition candidate; the Boston VC partner who turned down Facebook now says that may turn out to have been a mistake3. Silicon Valley, on the other hand, operates on a strategy more akin to that of, staying with our pirate theme, sea turtle reproduction several high-risk bets of which a small fraction will succeed, but where those that succeed will do so with great magnitude. The high octane fuel for this machine is the IPO. Thus, Silicon Valley can invest in earlier and more eclectic companies than can Boston; earlier since the high return IPO exit allows for high risk, and eclectic since the IPO market isnt constrained by possible acquisition partners. Attempts to replicate Silicon Valley elsewhere are flawed in that they attempt to imitate one part of the system, the entrepreneurs or the VCs, without respect for the interactions that make up the entire cluster. The Silicon Valley ecosystem rivals that of biological systems in its complexity, uniqueness, and as weve witnessed with the recent IPO slow-down, fragility. The author isnt suggesting that attempts to build a VC community are in vain - as the Somalian example suggests, venture markets can and do erupt organically - but that the Boston model with a heavy reliance on strategic partners and academic research institutions is a more plausible bet. Paul Graham, a Y Combinator founder, recalls a story where he asked a Google employee why Google is better at search than Yahoo. The employee replied that there isnt anything specific, but that Google just understands search so much better. Graham relates this to VC Silicon Valley just understands its disruptive flavour of venture capital better than anyone else.

CLUB FOCUS
CARNEgIE MELLON UFA By Dylan Ozmore, Carnegie Mellon University

An Interview with Kristin Carew, President of the coming an active member of UFA helped me decide Undergraduate Finance Association. that I wanted to pursue a job on Wall Street. Ive held a few different positions on the e-board since 1. What are the goals of the UFA and can you tell my freshman year, including Secretary and Vice me how the organization got started? President. Im in the process of transitioning into the role of President now, since our last President is UFAs primary goal since its founding in 2000 has graduating at the end of the semester. always been to provide Carnegie Mellon students who are interested in finance careers with oppor- 4. What advice do you have for students who are tunities to learn more about the industry, supple- looking for a job on Wall Street? menting academic courses in finance with events and workshops open to students from all majors. Get involved with relevant campus organizations, We work toward this goal by offering case compe- and learn everything you can by participating in titions, networking events, clubs, reading books about information sessions, prothe industry, and following fessor dinners, guest speakpublications like the Wall ers, alumni panels, and othStreet Journal. And dont be er activities. afraid to reach out to alumni contacts working for firms 2. How is the organization youre interested in netstructured? What sets the working always helps, and UFA apart from other orthey can give you a lot of ganizations? valuable information about the kind of work they do. Our organization has an eboard with a President, Vice President, Secretary, Trea5. What stock investment do surer, Activities Director, you like right now? Marketing Director, and IT Director. We also have sevLately, I like Salesforce.com eral committees that focus (CRM). Salesforce.com is a on specific types of events major player in several seclike case competitions or alumni programs. UFA tors of the growing cloud computing market, includsets itself apart from other organizations by catering ing Software as a Service and Platform as a Service to students interested in a wide range of occupations applications, and it has posted impressive growth in in the financial industry, from corporate finance to revenue and earnings per share over the last several jobs on Wall Street. years. 3. Kristin, can you tell me about yourself ? How did 6. Where can students go to get more information you get involved with UFA and become President? about the UFA or to reach out to you? Im a junior in Carnegie Mellons Business Administration program, with a track in finance and an International Relations and Politics minor. I got involved with UFA in the first semester of my freshman year, when I interviewed for a position on the e-board and became Activities Director. As a freshman, I knew I wanted to major in business, but I was uncertain about what particular career path to follow finance was among my interests, and beWe can be reached by email at finance@andrew. cmu.edu, and we also maintain a group on Facebook (http://www.facebook.com/group. php?gid=2200705364&ref=ts) and a Twitter account (http://www.twitter.com/CMU_UFA). Our website, cmufinanceclub.com, is currently undergoing a full redesign and should be back up later this semester.

HIgH RISK, HIgH RETURN

THIS WEEK IN BARRONS... By r.f. culbertson, Carnegie Mellon University
Thoughts When I was a kid I used to pray every night for a new bicycle then I realized that the Lord doesnt work that way so I stole the bike and asked Him to forgive me. Andrew Dice Clay. This week the biggest news in many years hit the wires. Obama challenging the banks nope. Ben Bernanke potentially NOT being re-appointed to the FED nope. The market falling 500+ DOW points in 3 days nope. It was the Supreme Courts 5 to 4 decision on Thursday to allow Corporations to spend any amount of money they please on the Politician of their choice deciding that corporations are people and people are entitled to free speech. This decision could eliminate the last vestige of any integrity in our election system. It throws out over a century of restrictions imposed by Congress against corporations so that they could not influence the outcome of elections. Corporations have an unfair advantage over the small guy, over real people, in the amount of money they control. What does this all mean? It means future Supreme Court Justices will be appointed by presidents who have been bought, purchased, and are controlled by corporations, and confirmed by U.S. senators who also have been purchased by corporations. It means Exxon Mobil, who earned $45 billion last year, can spend any amount of money they want on advertisements supporting a political candidate, and if they want a candidate elected they have billions to spend on that candidate. How on earth could an honest man compete? It means candidates will cut deals with Google, Microsoft, General Electric, Exxon Mobile in order to get elected. It also means these same companies can place people in our government, who will pass and enforce legislation favorable to their special interests. Consider that there may be more wars because companies love getting giant military contracts, and there may be less labor rights because they just get in the way of profitability.

Andrew Dice Clay: I dont drink to get happy or to forget the pain, I drink to stop the voices in my head. The bad part about the voices in my head is that they stutter. So what about the Democrats losing Massachusetts: it was a true rebellion by the masses giving the message: no more! But what about Obama coming out strongly for his new financial reform at the banker level. Potentially you could dismiss this as politics losing Massachusetts striking out at Wall Street so that he looks good to the voters. But after looking at the transcripts of the speeches I get the impression that Obama was personally wronged. In other words, what if when Congress bailed out the banks, Obama made one of those back door deals where the banks had to do something to make Obama look good when it was over such as lower bonuses or understate profits. And lets assume the banks did not keep up their end of the bargain. And now its Chicago Politics gone wild its PAYBACK time. Heck, Ben Bernake is Wall Streets best friend giving them money when (and even if they dont) need it and now his appointment is clearly in jeopardy. So we fell 500+ points in 3 days blasting thru 10,200 on the DOW as a level of support because the idea of Helicopter Ben not giving out free money to Wall Street scared all the bankers and honestly Wall Street could be saying to Obama: Lets see how many people love you after we crash this market and take the 401Ks down to next to nothing. Obama wants rules and regulations that would seriously crimp the bankers style, instead of going along with every agenda they have. Somethings brewing folks, you can feel it, smell it, sense it. I smell a bit of warfare between Obama and his Banker elite handlers. And do I think that the paper dollar can withstand the onslaught of all the ills we face right now honestly Ill continue to trust gold.

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Bulls & Bears 2009-2010 Team

President & Founder Dylan Ozmore Krishan Wanchoo Editor-In-Chief Daniel Sholler Internal Writers Siddharth Arora Arnav Guleria Balraj Hansra Sophia-Keely Brian Meier Wyatt Ozmore Cara Repasky Soubhagya Sahoo Anuranjan Sharma Ruslan Skomorohov Rob Spence Robert Sun