here at Illinois we might be interested in the Chicago Bulls as a basketball team.
We might say that's a great monopoly market and
they've got a tremendous cash flow.
I want to buy that organization and make money.
Well, the seller's going to look at the future cash flow projected
of that organization, discounting it back to the present.
And an efficient market is going to predict that the price they sell it for
is equal to that future discounted cash flow.
So, when you buy that organization of the Chicago Bulls,
the expectation in an efficient market is your NPV will be zero.
That is, you'll get a competitive rate of return on investment.
What it's really saying, it's hard to get sustainable competitive advantage, or
positive NPV, by just going out and buying it.
Because the sellers, if they are smart, they'll be selling it at a price
that kind of captures all of the value for themselves.
Not easy to just buy your way into profitability.
And the situation may be even worse than the efficient market, and
this is called the winner's curse.
So, the idea is that the most optimistic bidder usually
overestimates the true value of the firm.
And this one's really an incredible example.
Quaker Oats, in late 1994, purchased Snapple Beverage Company for $1.7 billion.
Many analysts at the time calculated that they overpaid by about 1 billion.
So, even if they had just consulted analysts in the market,
they would've gotten this input from a lot of different people,
that they're overpaying by a billion.
And then, later on, or three years later,
it actually is revealed that the analysts were correct.
Quaker Oats sold Snapple for $300 million.
So there, getting the winning bid doesn't mean you win.
You may actually be losing because you paid too much.
So, in general, this is the idea, then, of asymmetric information.
And if you're playing a game of bidding with other people,
suppose I am bidding against Warren Buffett.
I don't think I want to play that game too much because Warren Buffett has so
much more information than I do.
So, when I go and try to acquire something, I may be prone to the winner's
curse, while Warren Buffett, having more information, much less so.
So, as we just mentioned, Quaker Oats overpaid for Snapple by over $1 billion.
In terms of some of the categories that we've discussed in this video,
what are some possible reasons to explain why such an over-evaluation may occur?
So, please reflect on this question and post your response in the discussions for
this video.
Thank you.