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The second meeting was set up a week after all the requests for pricing had been submitted. Each response had its pluses and minuses. While most of the nonunion bids were slightly lower, they had certain negative components. For example, the plumbing contractor could not provide the number of skilled plumbers needed just when the project would most require their skill. The heating and cooling contractor cost pennies less than its union counterpart but had fewer licensed specialists on its payroll. The union contractors came in with bids that met all the special requirements and certifications needed, but they were slightly higher in labor cost. After reviewing the bids, John told Peter he’d like to go with the union contractors if the union would lower its cost by two cents per labor hour. That would make the union contractors’ bids economically competitive with nonunion labor. Peter thought the job would hire enough skilled labor to make the project worthwhile, so he’d ask the locals to tap funds from their Market Recovery Program—a fund union members pay into just for this sort of situation—to apply toward labor costs. But labor could offer things—such as certified skilled workers and the resources to commit to completing the job—the nonunion contractors couldn’t, and John knew this.

Today, many organizations disappear from the list of successful business organizations on the popular ranking of some professional bodies (Agrawal, 2006). One of the factors generally reported as its root cause is the failure to manage innovation within the system. A critical psychological analysis of the attitude (statements as refl ected on interviews to
the media or the address of the Annual General Meeting) and behaviour of the respected business leaders and CEOs (as actually perceived by the group within or insiders, who really know the person well) reveals a wide discrepancy. It cannot be objectively established but inferences could be drawn that probably Indian business leaders and successful entrepreneurs possess a common style of managing people. At some stage in every level it is the personal relationship that matters in the fi nal decisionmaking.

This is based on the perceptual response analysis of those who aspire to get a chance to lead the organization. In case my thesis gets empirical support and validity, then the absence of entrepreneurial leadership in India requires further empirical examination. Thus, this leads only to routine success and normal achievement, which could be relatively better in that business environment. Any global business/ entrepreneurial leader of this century has to go beyond personalized relationships and feelings of insecurity (loss/absence of power) in order to compete and keep going. Therefore, societies, where leaders say something and do just the opposite, will have diffi culties in fostering and developing an entrepreneurial existence. The role of the top management in an organization is crucial in making an entrepreneurial initiative, a reality and the process effective. Here, a CEO has to go miles away from the transformational leadership if he/she is willing to take the organization ahead.

Consider two facts:

A significant part of the value of many businesses is the real property from which they operate, being factory, warehouse or office premises.

The vast majority of management or employee buy-outs are funded by debt, as employees traditionally do not have large amounts of spare capital.

Obviously, purchasing real property with the business can be a problem for an MBO team, so if you plan for your business to be bought by your management or employees you need to consider whether it is feasible to include in the sale the real property from which the business operates. On the one hand, including the property will push up the sale price but, on the other, excluding it will reduce the hard assets available as security to support the borrowings.

If the company that owns the business also owns the property (as apposed to it being owned by another company or the owner privately) a sale of shares will automatically mean the property will be included in the sale. If you own the property in your own name, you can exclude it from the sale and rent it to the new business. There are also capital tax advantages in owning the property as an individual, rather than through a company.

Once you have decided that an MBO or an EPO is the optimum exit option you should review the ownership of any business properties and allow yourself time to adjust their ownership if necessary, subject to expert advice.

The second kind of models that we want to highlight is “reduced-form models.” Unlike structural models, they are based on information from the credit market, such as asset swap spreads or credit default swap spreads. Thus they are capable of capturing valuable information regarding the probability of default that is contained in bond and credit default swap markets. This is particularly helpful when insufficient or no balance sheet data is available. In the reduced-form framework, default is modeled as a surprise event. Rather than modeling the value of a firm’s assets, here the probability of default is derived directly from market data. The interested reader may note that this approach is similar to the way interest rates are modeled in order to price fixed income derivatives.

The bear market for credit between 1997 and mid-2002 has put a new focus on valuing corporate credit. The debt-financed equity bull market of the second half of the 1990s was accompanied by historically high default rates and investigations of the management and reporting of corporate balance sheets.

Obviously the standard approach of using rating agency credit ratings to gauge credit risk is no longer sufficient. As a consequence, quantitative approaches have recently gained popularity, particularly structural models based on equity-market inputs. Quantitative models can be used as a tool to provide warning signals or to determine whether the spread on a corporate bond adequately compensates the investor for the risk. Due to the current low-yield/low-return environment the number of investors interested in credit products has grown worldwide. Credit models like KMV or CreditGrades have been developed to meet the growing investor demand.

These enhancements of the Merton model are able to incorporate companyspecific details and can include subjective credit analyst views. With respect to the rapidly expanding credit derivatives market, quantitative models provide critical inputs for valuation and hedging. Default correlation, a major driver for the valuation of credit portfolio products, can be modeled in both structural and reduced form models. Finally, quantitative credit models have become indispensable tools for the risk management of financial institutions.

Although various quantitative models are used by credit investors, two approaches for modeling default have gained widespread acceptance: structural models and reduced-form models. Both of these methods provide estimates of default probabilities or fair market spreads.