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JUST SAY NO TO WALL STREETCase Presentation

Name Student IDBinoy Abraham 11288230Ken Finnegan 12255435Luke Curry 12253096Matthew Lee 12252778Owen O'Malley 12254827Xiang Gao 12255667

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WHAT IS EARNINGS GAME?

Intrinsicvalue

Investors

Companie

sAnalysts

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Companies

Analysts

Accountants

Wall street

WHO ARE INVOLVED?

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Try to reachthe number

Analyst

Predict theearnings

Company

THE LOOP

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INFLUENCE ON COMPANY

Over investment and expansion

Strategy formulation

Debt, assets, operations

Decision making process

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INFLUENCE ON CAPITAL MARKET

Investors donot trustcapitalmarket

Investorslose faith inthe

company

Companyoperationinfluencedby analyst

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DESTRUCTIVE NATURE OF EARNINGS GAME

Corporations seeking to hitanalysts forecasts

Two main players

Both sides are driven by

incentives

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ANALYSTS INCENTIVES

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CEOS INCENTIVES

Increase their personal fortunes

Enhance job security

Reducing the cost of capital

Corporate ego

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HOW CEOS PLAYED TO ANALYSTS FORECASTS

Miscellaneous cookie jarreserve and big bath

In process research anddesign write off

Premature or aggressiverevenue recognition

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CONSEQUENCES OF THESE SHORT TERM

STRATEGIES

It distorts corporatedecision making

Reduces security analysis andinvesting to a guessing game

It undermines the capitalmarkets

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NORTEL NETWORKSOnce a world leader in telecommunicationsproducts

Dominant supplier of electrical appliances in Canadaby 1950

Strategy to transform company focus to datanetwork in

Forecasted Capital Value of $277 billion in July 2000

Acquired 19 companies between 1997 and 2001

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NORTEL NETWORKS CORE BUSINESSES PRODUCTS)

Wireless Networks

Wire line Networks

Enterprise Networks

Optical Networks

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NORTEL NETWORKS SHARE PRICES

August of 2000, Nortel shares hit $124.5

Year-end valuation is just $24 billion in 2001

Stock fallen more than 90% from 2000

$19.4 billion second quarter loss , $3.6 billion loss in third quarter in 2001

Stock holders and Analysts incurred huge losses

2009 - Nortel files for Chapter 11 bankruptcy protection in the United States

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90 per cent income from trades over Enron Onlinewhich was the largest business site in the world

In 2000 it was the 7thlargest US corporation

The company launched its broadband services unitand Enron Online in 1999.

ENRON CORPORATION.

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ENRON CORPORATION - WALL STREETANALYSTS

Series ofpositive reports

Even comparedwith Microsoft

and GE

Higher valuation

AggressiveTargets

Recommendedinvestors to buy

the stock

Recommendedbuy or Strong

Buy

Claimed to have tripped profit in 2years

More than 40% income increase in3 Years- Share Prices hit close to

$90 in Summer 2000

2000s Annual Report shows global

revenue of $100 billion

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ENRON CORPORATION A HARD FALL

Warning signals in April 2001

October 16th, Enron announced a loss of $638 million

October 22nd, the Securities and ExchangeCommission (SEC) announced that Enron was underinvestigation.

November 8th, Enron said that it has overstatedearnings for the past four years by $586 million andthat it owed over $6 billion in debt by next year.

Enron could not come up with the cash to repay itscreditors, it declared for Chapter 11 bankruptcy

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ENRON CORPORATION - THE FALL OF ENRON.

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HOW TO FIX THE EARNINGS GAME?

Thomas Tucker Interviews: Ken Lay, resurrected CEO of Enron

Analyst of Arthur Anderson

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THOMAS TUCKER INTERVIEWS.......Ken Lay

Do you think your actions asCEO of Enron were affected byAnalysts predictions

Do you think your actions asCEO were always in theinterests of shareholders?

Looking Back would youchange any of your actions?

How would you fix the problemof the Earnings Game?

Analyst

What is the real role of anAnalyst?

Are you aware of the Scope andLimitations for Analysts?

What about biases andorientations?

How do you deal with conflicts ofinterests?

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SUMMARY CEOs should stand up to Wall Street Analysts should be more realistic when analysing

industries

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THANK YOU

Questions