What do Gnomes, Elephants, Gunslingers and Obi-Wan Have to Do with the World of Finance?
by Nancy Godson
Sleeping Beauty went about her daily business, serenely unaware that lurking within the busy market was the stealthy Black Knight who, frustrated with his unproductive foray into bottom fishing, was intently tracking her every move.
Suddenly, just as the sly raider had gathered the necessary resources to stage a hostile takeover of Beauty, the White Knight (a welcome suitor intent on protecting her assets from the threat of possession), appeared on the scene. Beauty watched uneasily as the two warring knights ignored the speculative whispers coursing throughout the hectic room and focused their attention solely upon battling one another.
It was then, while everyone was distracted, that a third knight appeared—the Gray Knight, who swiftly seized the appealing Sleeping Beauty (fresh out of shark repellent, unfortunately) in a dawn raid, surprising them all.
The preceding may read like a bad romance novel, but persons of finance will recognize it as the language of corporate mergers and acquisitions.
“More than most disciplines, the world of finance operates using a core of colorful and playful language,” says Allen Seward, Ph.D., an associate professor of Finance and Insurance at Baylor. “By ‘colorful,’ I mean that we take words or phrases recognized in a specific context and attach an entirely different, yet equally logical, meaning to them.”
Who knew that financial analysts, bankers, stockbrokers, pension planners and insurance adjusters were such whimsical folk?
For example, a raider (one who buys controlling interest of a company’s stock, then installs new management) stages a dawn raidby gaining substantial shares of a Sleeping Beauty (a potential target company with appealing assets that has not been approached by an acquirer) without the company realizing it. A company has shark repellent when its charter is amended to protect the company against such surprise takeovers.
An investor is bottom fishing when he or she buys a falling or low-priced stock in the hope that it will experience a dramatic rebound and, consequently, yield a healthy profit. Martha Stewart’s Omnimedia is an example of a stock which suffered severe losses at the time of Stewart’s arrest and trial, but rebounded significantly during her imprisonment. The financial lesson? If a favorite stock is down, it may be time to consider purchasing additional shares.
“Financial language is as creative as the discipline itself,” says Dr. Seward. “Our terminology conveys the imagination required to address the financial challenges of daily life.”
A prime example of how financial experts implement creative problem solving is CATs (no, not Andrew Lloyd Webber’s long-running Broadway musical). Technically, CATS is an acronym for Certificate of Accrual on Treasury Securities—a zero coupon treasury security. The industry considers the stylized version with the lower-case ‘s’ to be cuter, however.
“CATs were developed in 1996 as a financial instrument to save USAA Insurance Company from a bankruptcy potential that became evident after Hurricane Andrew slammed into south Florida, says Dr. Seward.
“The insurance industry’s estimated capacity at the time was $50 billion,” he said. “Had Andrew advanced just 40 miles north to Miami, the insured losses would have exceeded $50 billion and USAA would have been bankrupted, along with most companies in the state.”
Rather than withdraw from the market, USAA sought a creative solution to future catastrophic claims.
“CATs are higher yielding, short-term corporate bonds capable of pouring an additional $400 million into USAA in the event of an insured, major catastrophe,” explains Dr. Seward. “It’s a playful name for an extremely sophisticated solution to a serious financial situation.”
The financial industry is filled with a variety of metaphors that help lend familiarity to unfamiliar, complex concepts. At the same time, some linguists might argue that by its very quirkiness financial terminology is designed to discern the true insider from au poseurs.
For instance, ankle biters may describe your neighbor’s rowdy children, but in the world of finance it is a stock issued with a market capitalization of $500 million. If you knew that, you are probably an insider.
To be fair, many financial catchphrases are familiar. Most laypersons understand the concept of a hostile takeover or, if given the choice between golden handcuffs or a golden parachute, grab the parachute and jump.
We know that a cafeteria plan has nothing to do with what you’re eating for lunch, and that a turkey isn’t just a loser on holidays.
Other phrases, however, can be downright obtuse.
If the phrase death play is ever mentioned in regard to the company you happen to manage, see your doctor immediately.
A bear spread does not necessarily describe Baylor’s athletic points system; however, it is a strategy geared to profit from an opponent’s fall.
A Fill-or-Kill order comes with ready-made cement shoes. If a broker is unable to fill the transaction immediately, then fuhgedaboutit.
Tender offers may or may not lead to a happy marriage, and death spiral convertibles rarely pass inspection—financial or otherwise.
Some corporate entities are inspired to create a financial language all their own—or cavalierly adopt an existing one. Not too long ago in a galaxy far, far away resided the fallen energy company Enron, which freely (and without the permission of LucasFilm, Ltd.) attached Star Wars-related names to several of its financial vehicles. Remember Obi-1 Holdings LLC and the mysterious Chewco?
But let us avoid the Dark Side.
According to Dr. Seward, financial language is also quite specific to one’s particular area of expertise. In other words, an investment expert may not necessarily understand the quirky vocabulary of a pension planner, even though they both operate under the umbrella of financial services.
“The field of mergers and acquisitions uses fairy-tale imagery and mythological terms to define its processes,” says Dr. Seward. “Whereas those working in investments and pensions more often use gangster terminology and animal references.”
Enter the castrated ram, or, in proper zoological terms, a wether. The wether serves the important role of walking at the head of a shepherd’s flock with a bell around its neck to constantly signal its position to the shepherd.
It stands to reason then, that a market bellwether is a select financial security used as a signal to indicate that the market may be changing direction.
And that should make cents in any language.
Baylor Business Review, Fall 2005