Mar 11, 2007

Two plus Two

I remember long back, when my world was not so complicated, my Math teacher telling me that 2+2 equals 4.
Then, I enrolled into an MBA program, and suddenly, things were not so simple anymore.

My Banking Prof says 2+2 is whatever the RBI says it is. Banks can take money and create credit through money multiplier. The RBI can reduce the effect of this multiplier by raising the CRR. So, the RBI can decide what 2+2 will be.
The Equity Research Prof counters that by saying it is not the RBI, but the SEBI that has the final say. Again, just because 2+2 is 4 today doesn’t mean it is going to be the same in future. In fact, we should look out for situations where 2+2 is less than 4, and buy that company’s stock. This will lead to huge gains in future.
The Mergers & Acquisitions Prof has a very different viewpoint. He says that business leaders did not get where they are by adding 2+2 and getting 4. “You should be able to create value by exploiting synergies,” he thunders. He says Tata is able to buy Corus because Mr. Ratan Tata can see 2+2 and come up with 22. He also adds sarcastically, “You MBAs are all risk-averse idiots. You can never think big. An entrepreneur can look at 2+2 and see various possibilities, and that is what makes him your boss.”
The Taxation Prof sagely observes that 2+2 might be 4 before you file your returns. But after deducting excise duty at 16%, sales tax at 4%, income tax at 33% and all other miscellaneous taxes that you and I have never heard of, it is unlikely that 2+2 will be a positive number.
The Portfolio Management Prof has an interesting viewpoint. He says that the very fact that you have asked 2+2 and not 1+3 or 3+1 means that you have decided to allocate your assets equally among different investment options. This might not always be a good idea, since the decision has to be based on your age, income levels, risk appetite, wife’s shopping habits etc.
The Management Control Prof says that we should not waste top management’s valuable time by squabbling over 2+2. He says we should put down limits on sides, say 3.8 and 4.2. As long as the answer is within this range, the variance is not significant, and hence can be ignored.
The International Finance Prof suddenly wants to know which currency we are talking about. He says if you add 2 dollars with 2 pounds and convert the answer to rupees, then the answer is likely to be more than a middle class daily income. Again, it depends on whether you are converting at today’s prices or three months’ forward prices.
The Accounting Prof first wants us to clarify whether we are accounting for this value under Indian GAAP (Generally Accepted Accounting Principles, for the uninitiated) or US GAAP. He says both the answer, and the treatment in accounts will differ accordingly. Of course, given the right fees, a skilled accountant can make this 2+2 appear as 22 in the revenue side, but it is a bit difficult after some guys called Sarbanes & Oxley decided to spoil the party.
The Costing Prof emphasizes that we should check whether the 2+2 is fixed at different levels of production or variable. Our primary aim should be to reduce the value of 2+2 through various cost cutting techniques like inventory management, productivity improvement, machine utilization and what not.
The Derivatives Prof says that if you leverage your transaction, then 2+2 is likely to give you the benefit of 22 at a very low cost. What he of course conveniently forgets to mention is that you also stand to lose 22 if your bet goes wrong.
The Quantitative Techniques Prof says that we should ideally test the results of 2+2 over a number of samples, and see if the results are consistent. We can use the regression model and check what factors affect the answer, and how inter-related they are.

The Investment Banking Prof has the final word – he says 2+2 is whatever the client wants it to be. You can tinker around with your assumptions in your valuation model and arrive at what the client wants. What matters is that you get your big fat bonuses, a limousine, a five star lunch with the client, a flight in a chartered plane, a party in a yacht after the deal etc – all for doing nothing but tinker around with the possible answer for 2+2.

After all this gyaan, I am confused. Can anybody tell me what is two plus two?


  1. i never realized that we had so many profs... ultimately mba teaches u redundancy... u still have no answer to the equation and all the profs have said the same thing...

  2. As an MBA, u shld be able to make whatever u want to make it out to be... :D

    after all i think the most sagacious advice comes from the mktg prof, when he says, "the answer for 2+2 depends on how smart the customer is!!". simple indeed!

  3. *** IM Lecture ***

    Prof: What is 2+2
    Participants (without looking up): << taka taka taka tak... tak tak taka taka tak!! >>