Pretty Woman and the CFA Program

One of those great classic films on television recently was Pretty Woman with Julia Roberts and Richard Gere. As I watched this, various financial topics came to mind.

To start with, Edward Lewis’s business is a vulture investor: buying up distressed firms and selling the parts for more than the purchase price. In Corporate Finance terms these companies have negative synergies, potentially even a conglomerate discount. By the time Edward has seen the light, his deal with Morse Snr turns into a classic private equity deal: buy the firm, create additional value (“Mr. Lewis and I are going to build ships together, great big ships”).

Various ethical considerations appear. Firstly, Edward knows that the big ship-construction contract has gone on ice and hints that it may be lost entirely, destroying further value in the target company. Is this material, non-public information? Not entirely clear, but certainly near the ethical edge. By the polo racetrack Edward is concerned about industrial espionage when he sees Viv talking to Morse Jnr.

Snippets of conversation on the phone hint at Lewis’ insistence that his staff keep a close track of share prices. It is unlikely that this is true technical analysis, as holding periods are not that short – far more likely the stock prices are providing information as to how the market is reacting to other news regarding the companies, perhaps indicating when a good time may be to increase stakes in these businesses.

The negotiations on Viv’s fee show great references to Economics. They negotiate $3000 for the week’s “services”. At the end of the week they have the following conversation:

Vivian: I would have stayed for two thousand.

Edward: I would have paid four.

This provides a producer surplus for Viv of at least $1000 ($3k – $2k) and a consumer surplus for Edward of at least $1000 ($4k – $3k). One could also extend this argument to how economic rent is defined, given the steep inelasticity of (Viv’s) supply. In any case, this particular market seems highly inefficient with large potential economic profits.

Any other financial references most welcome!

And you thought the film was a fairly tale?