Corporate Raiders and Takeover Targets - Assignment Example

1.Tell us your name, where you work, where you are in the program, and tell us one thing that you want to take with you from this class. (this is re-taken course I did not pass it first time, i am in business and social corporate responsibility this is one of another course and i will finish my degree...etc) If there should be one thing that I should take with me from this class is the basic knowledge and principles of finance that will continue to guide me in my profession in the years to come. I always believe that no matter how many theories one learns about a subject, there are always core principles behind them which makes the theories more structured and easier to learn. I also believe that if one has a weak grasp of the basic principles, one would not be able to apply the theories well in real life. So, I wish to master the basic principles of finance, so that even I forget all the theories that I learn in the future, the principles will guide me in my future decisions as well as bring me back to learning those theories again. Apart from it, I want to take with me the holistic approach to finance, a strategic approach to doing business in order to create value for the company through finance, when viewed from a larger perspective. Knowing this approach will enable me to make decisions which will have an impact on the company as a whole. 2.New: POST one new thing that you learned about working capital, its management, or how it can affect a business's operations. Working capital is the life-blood of the business; one of the major reasons why many profitable businesses fail is due to poor management of working capital. Management of working capital ensures the sustainability of the business's operations because it has to meet the current obligations of the company. I learned that poor management of working capital usually results in detrimental relationships with key stakeholders, a factor which contributes to the company's future success—creditors get angry and feel cheated when the business fails to pay on time, employees are demotivated when salaries are delayed, operations are hampered when utility bills are not paid in full, investors and shareholders are distressed when higher finance charges occur due to loans not yet paid as well as additional borrowings to cover the short-term need for cash. When these relationships are jeopardized, the company's future is in a very bad shape all because of poor working capital management. That is why excellent working capital management and good business policies related to it is one of the determinants of a company's sustainability in the future. 3.Working capital: POST a short description of a time that working capital affected how you or your organization did business. Remember to respond to other students' postings. I had been assigned to head a strategic business unit of our company which operations is in retail of office supplies, school supplies and accessories. The first few months of my appointment I visualized of expanding the market share of my SBU, which will entail a capital budgeting plan for the next five years. In order to grow the operations, open up more branches in order to increase market scope and reach, as well as grow my SBU's market share, I devised a capital budgeting plan. While doing my plan and assessing the current financial statement of my SBU, I realized although we have a good deal of working capital, most of it was in inventories which I realized could compromise our liquidity position. Also, I realized that the collections policy for some of our non-company owned branches has been very poor, which lead us to having more accounts receivable than cash. I always believe that the sustainability of a business's operations lies in its effective handling of its working capital—this is the life blood of the business especially for its day-to-day operations. What I did was to revise the collections policy first, trimmed it down a bit without compromising our sales; be more stringent with collections and offer discounts/incentives to early payments. I was able to convert most of the accounts receivable in less than a year. Also, because most of our assets were in our inventories, I did not want to cut down on the current level as it was the level that was needed to meet the sales. What I did was to ensure that the turnover was high on that level of inventory in order to convert them into cash in a faster manner. I did it by investing on strategic marketing and integrated marketing communications to make customers frequent the branches more often. I cut down the operating cycle from 70 days to 45 days. After a year, I was able to stabilize my SBU's balance sheet, then my superiors presented the capital budgeting to investors, and with better working capital management, my plan had been approved and my brand continued to expand in terms of reach and branches. 4.Improvement: IDENTIFY one way that your organization (or an organization that you are familiar with) could improve how it manages working capital. DISCUSS how the improvement would impact cash flow. Working capital could be improved by delving with the management of its components: cash and short-term marketable securities, accounts receivable, inventories, and current liabilities. It is usual that the aim of working capital management is to lower the cash conversion cycle of the company, or the time it takes to convert the inventories into cash. The cash conversion cycle is the sum of the inventory period, the accounts receivable period less the accounts payable period. Therefore, in order to improve working capital management, the company can do something with the inventory period, the accounts receivable period or sometimes with the accounts payable period. If a company cuts the production time and convert them into sales, the less cash the business needs in order to meet its obligations. If a company can also cut down on the accounts receivable period and convert the accounts receivable into cash in a much faster time, the less cash it needs to maintain as it can meet its current obligations with the cash that comes from the collections. A company can also increase its working capital management by securing trade terms with suppliers that can give it a longer period accounts payable period. As the period from the time of inventory acquisition and payment becomes longer, the lower the cash the company needs to maintain in order to meet these obligations. The cash that the company can generate from the sale of its inventory, then later collection, can be used to finance these liabilities, therefore less cash is needed to maintain. These are the ways my company can continue to utilize in order to improve the management of working capital. 5.Risk: DESCRIBE a project you have been involved in and the types of risk that were inherent in the project. My expansion project, as mentioned above included project-stand alone risk and a project contribution-to-firm risk. These were risks associated with the capital budgeting decisions. More specifically, the risks that were associated with the firm included the success of the project in terms of generating enough cash flow to bring a decent amount of net present value to the firm. This was if the project failed to meet the sales projections which in turn would provide cash flows to the firm. Apart from this risk, there was a risk that my cost projections would increase, thus cutting down the amount of the projected cash flows that were in line with the project. These risks were project stand alone risks, but risks that are usually project contribution-to-firm risks because my strategic business unit was a substantial part of the company's business portfolio. 6.Differences: RESPOND to the statement - How do timing differences and project size impact your decision process? Timing and project size impacts my decision process because the project definitely entails money which has a time value. With the scarcity of financial resources, the project that I need to pursue should produce the highest net present value, which entails a higher return on the capital that is employed in the project. Timing differences and project size in the real world shows the dilemma on choosing among a number of proposed project more than the decision to just proceed or not to proceed with a certain project. Timing differences occur when the apparent cash flow streams between two projects are not the same, thus one appears to be better than the other; project size conflicts occur when the size of cash flows differ between the projects. Therefore, it is very important to be cautious when assessing these projects. In some cases, the internal rate of return of one of the projects may appear much higher, but in the end it is the net present value, the value that the project creates for the company which should matter. Therefore, in assessing timing differences and project sizes, the net present value method of evaluation should be used in order to come up with a decision on which project to pursue. 7.Size: RESPOND to the following situation - If your organization grew by 10% - identify the incremental costs you would incur. What if your organization grew by 100%? How/why would the costs differ? Discuss this concept in relation to accounting and economic factors. If the organization grew by 10%, most of the incremental costs would include most variable costs, including direct labor, direct material and some overhead allocation. Since it would only be 10%, the company would be able to utilize its unused capacity for additional operations. The fixed costs could remain even when the company would expand by 10%. If the company grew by 100%, the company's variable and fixed costs would also increase. The company's capacity would have to increase which entails investing in additional plants, the administrative/staff functions of the business would have to expand as well in order to supervise the growth and expansion which would require hiring more people; the distribution systems would have to improve as well. In short, the costs which used to be fixed only remained fixed over a certain extent, and increases as the company expanded in the process. 8.EVA: RESPOND to the question: Do EVA considerations impact capital budgeting decisions? How could a company incorporate the idea of EVA into their capital budgeting decision process? The computation of EVA is consist of computing for the net operating profit after tax less than the factor of the weighted average cost of capital and the invested capital in the previous year. This is to measure the profit after deducting the cost of capital which is employed on the project. Since acquisition of capital for the project entails some costs, all the profits do not remain free for the business. Unless these costs of capital employed are deducted from the profits will the real incremental profit, or as it is being coined as economic value added to the firm will determine if the capital budgeting decision really creates value to the company. 9.SKEPTIC: EXPLAIN to a skeptic why it makes sense to focus on shareholder value. When might boosting shareholder value be in conflict with ethical considerations? Long before Modigliani and Miller published their proposition that there is value to shareholders, businesses usually focus on maximizing profits. As the business world comes to realize that there is such a thing as shareholder value which can be maximized, apart from just maximizing the profits, but by making financial decisions that affect it, the shift to shareholder value maximization had become the focus. Maximizing shareholder value makes sense because in the contemporary times where marketplace becomes more sophisticated and competitive, companies' access to funds in order to grow their businesses have also become scarcer as capital markets become increasingly sophisticated and competitive, if not more competitive than product markets. This increase in competition for funds, which usually result in more costly capital employment for the company is the major reason why companies must focus on shareholder value. The companies which are able to maximize their shareholder value are the ones which are rewarded with greater access to funds in the process. The access to capital is very important for companies to grow in the process, that is why the focus on shareholder value is very important. However, as shareholders tend to minimize the agency costs which arise when managers' interests are different from those of the shareholders, shareholders link this measure of value to managers' performance in order to reward them. As managers become rewarded to increase the value of shareholders, there is a tendency for them to resort to unethical actions. Boosting shareholder value by unethical and illegal actions such as insider trading, information leaks, etc are in conflict with ethical considerations. 10.TAKEOVER: It has been said that firms that sell for less than book value are prime candidates for a takeover, because the acquirer can purchase assets for less than their cost. Are there any other reasons why companies with low market-to-book ratios might be more subject to attack by corporate raiders? Companies with low market-to-book ratios are potential targets by corporate raiders not only because their assets are less than their costs, but also because these companies tend to be undervalued. If a corporate raider sees an opportunity in the future to increase the market value of the company, it can make a significant sum in profit. Therefore, these companies with low market-to-book ratio are considered bargains—their assets are priced less than their costs and, with some modifications, they can be sold for more. Thus, they become so attractive to corporate raiders. 11.ARTICLE: Using the online virtual library resources, LOCATE an article about a recent takeover, merger, or other action that impacted a company’s capital structure. DISCUSS the impact of the action on the company’s capital structure. Did the action have the intended results –raise more cash, provide resources, eliminate a competitor? If you were responsible would you have taken similar action or would you have done something else. POST a short summary of the article and your responses to the above questions here. MAKE-SURE that you include a citation for the article and any other sources that you used. POST a response to at least one other student’s posting. In March this year, it was announced that a merger between Merck and Schering-Plough would take place. Merck would buy Schering-Plough's stocks for USD23.61 per share, at an approximately USD 41 billion as the cost of the total deal. According to the article, Merck's move to acquire its competitor was driven by its aim to cut down on costs and benefit from Schering-Plough's product and research portfolio (Allbusiness.com). As part of the merger, Merck will purchase all outstanding shares of Schering-Plough for $23.61 per share or approximately $41.1 billion. The purchase price represents a 34% premium over Friday's closing equity price. The merger is anticipated to be financed with 56% equity and 44% cash. Merck expects to utilize incremental debt of $8.5 billion, comprising $3 billion from a one-year bridge loan and $5.5 billion revolver borrowings, for the cash portion. The deal is expected to close in the fourth quarter of 2009. The incremental $8.5 billion of debt will pressure the credit profile of the proforma combined entity, as leverage jumps to approximately 1.7 times (x) from 0.8x for Merck alone based on year-end 2008 results. Uncertainty exists to the tenure of long-term debt to be used as well as the company's plans to address the higher leverage upon the consummation of the transaction. Primarily all of the combined cash balance will be used for the merger; however, Merck also had $6.5 billion of long-term investments at the end of 2008 (AllBusiness.com 2009). However, according to the article, the merger would increase Merck's leverage which could be detrimental to its credit score and rating. As Fitch lowered its rating due to the changes in the company's capital structure. Although the move has been criticized due to the changes in the company's credit score, I thought that the move was strategic for the company. If I were in the same situation with the person who made the decision, although I would be speaking on a very generalized manner and my knowledge was limited to the amount of sales of Merck, making itself sustainable through its current operations alone would really be a problem. And in order to address this problem of sustainability, buying Schering-Plough which produced positive and favorable figures would be a wiser decision. This could prevent Merck from continually slipping down to lower levels of sales, which could result in much lower decrease in its market price as a consequence to it. 12.MAXIMIZE: DISCUSS how profit and shareholder value impact the value of the firm. What are some of the ethical considerations of maximizing profits? Maximizing shareholder value? Has the view changed in the last 20 years? If so, DISCUSS how it has changed. How would you classify the organization that you work for – do they maximize profits or shareholder value? Profit and shareholder value impacts the firm as both measured by the economic value added and the market value added. Higher profits lead to higher profits to the firm after the company deducts its cost of capital employed. Higher shareholder value gives an impression of a good investment, thus lowering the costs to borrowing capital in the process. These are the effects of profit and shareholder value to the firm's economic value added. As regards the firm's market value added, the firm is viewed as an investment opportunity in the capital market. As profits and shareholder value rise, the better the public at large perceives the firm in terms of profitability, sustainability and potential return. Therefore, buyers will bid for the company, which will drive the market value of the firm. This is the market value added. This is another way where profit and shareholder value impact the value of the firm as a whole. 13.BANKRUPCTY: DESCRIBE a bankruptcy situation that you have witnessed or researched. In your opinion why did the company file bankruptcy? What could the organization have done to avoid the situation. In an article from CNNMONEY.com (Reuters 2009), the bankrupt Polaroid is sold for $59 million in an auction. The company has filed bankruptcy in December 2008 after continued decline in sales over the years of its leading product, the Polaroid imaging device that set the cornerstone for today's cameras. Polaroid filed bankruptcy because of its inability to adopt to the changing needs of the marketplace. As technology evolves, the company that sticks to its past glory will have a harder time convincing the market to continue patronizing its products. This is the major cause why Polaroid has gone bankrupt. The company has filed for bankruptcy in order to get a chance to sell itself to other interested investors who have the ability to retain its past glory. In order to avoid the situation, the company could have used its core strength—its technology as well as its brand name in order to have a significant position in the imaging market. These decisions must have been done long ago, when research and development for digital devices has been the trend, as prompted by the changes in technology. Had the company been able to join the race for the digital imaging device and build on its core competence, it must have been able to adapt to its environment which could sustain its ability to come up with higher sales and preserve its operations. 14.VENTURE: How would you differentiate a venture capitalist from an investment banker? A venture capitalist is a financial institution, an individual person or another company which buys private equity for a given business, usually a start-up business. It buys a part of the company in exchange for a substantial control over the investment. In contrast, an investment banker is an institution which tries to help a company raise the needed fund by acting as a middle man and offer the company to other buyers in the capital market. If an entrepreneur is in need of a substantial amount of funds when debt is not an option, it could sell a part of the equity to raise some funds. This can also happen when the entrepreneur wishes to sell his or her company in exchange for cash. The major difference between a venture capitalist and an investment banker is the ownership of the equity; venture capital firms buy the company for investment, while an investment banker buys the company for the hope of selling it at a higher price. There is also a difference in terms of sales terms, where the investment banker charges the company some amount of commission for helping it raise the amount of cash that the latter needs in line with its decision to access the capital market. 15.GO PUBLIC: COMMENT on the statement: the decision to "go public" should be made only after all opportunities for private placement have been exhausted. I also believe that going public, or in other terms accessing capital funds from the public at large is the last of all the considerations for a company that needs equity capital. Going public is a serious consideration because it is the costliest method to raise capital for a company. When a company goes public, there are substantial underwriting fees that are associated with the IPO. Apart from these fees for underwriters and investment bankers, perhaps the costliest fees would be the additional investment for costs of regulations that public companies incur. The substantial loss in corporate control when a company goes public, as it has to inform the public about most of its activities could slow down the company in terms of decision-making that requires corporate governance. Thus, these considerations should be noted first before going public. If there were no other opportunities for private placement and the advantages of an IPO could outweigh the costs, only then could a company could decide to go public. 16.CURRENCY: LOCATE an article that discusses how valuation of foreign currency has affected an organization's operations and/or profitability. For example now that the Euro is stronger, describe how has that affected US businesses operating in Europe? In an article from CNNMONEY.Com (Clifford 2009), despite Oracle's, the software giants, ability to generate revenue and declare dividends in the midst of the financial crisis, the company must have generated an 11% increase in its revenue in contrast to just 2% in growth. As the company conducts half of its business internationally, the stronger dollar has hit the company hard despite its good performance in the midst of the crisis. And if foreign exchange rates were even, Oracle said the company would have seen an 11% surge in revenues for the quarter, much more than the meager 2% it was able to come up with fighting the stronger dollar (Clifford 2009). As the dollar gets stronger, the foreign exchange rate in the country where Oracle does business gets weaker, thus for every dollar, a higher equivalent of the foreign currency is needed. This makes Oracle's products more expensive, thus it becomes less competitive in terms of pricing. Exchange rate definitely does have a huge effect especially for companies that conduct business internationally. 17.MULTINATIONAL: DISCUSS why large multinational corporations located in small countries such as Holland and Switzerland are interested in developing a global investor base. When a company desires to grow in terms of scope of operations, distribution, etc. a significant amount of capital is needed to support this growth. Small countries such as Holland and Switzerland, in order to finance their expansion cannot resort to the local capital market alone. They have to build global investor base in order to acquire capital from many parts of the world so that these large multinational companies would have easier access to capital. The major motivation behind this can be that small countries such as Holland and Switzerland have competitive capital markets. This increase in competition also increases the cost of acquiring capital locally. 18.GLOBALIZATION: DISCUSS how globalization has affected how businesses deal with the changing business environment. What would you as a business leader be on the lookout for in your industry? Globalization has redefined the rules of doing business over the years. With the advancement of technology, doing a business overseas is not as costly as it has been in the past. This results in greater competition among markets, and sophistication of the market as a whole. Therefore, a company must be keen enough to watch for these new trends in order to survive in the business world. As a business leader, macro-environmental forces such as political, economic, social and technological forces can have drastic impacts on my company as these forces are usually the impetus for globalization. Apart from these forces, there are forces within the industry. During the recent times where the Internet plays a huge part in commerce, the bargaining power of buyers have increased over the years. This is because of availability of information at a very low cost, which makes them demand for better service and more quality products. The bargaining power of suppliers increase as well as they are able to reach more customers through the Internet. Because the cost of conducting business nowadays is so much less with the onset of e-commerce and better technology, the threat of new entrants become high as barriers to entry to many businesses becomes lower. The greater collaboration in the marketplace due to the Internet has increased the threat of substitute as well. Thus, globalization, propelled by the advancement in information technology has made many industries in a greater degree of rivalry than ever. Globalization overall pushes businesses to become more efficient in the process. They are forced to deliver better products to consumers while having the ability to cut down on costs. These are the trends that a business leader should watch out for. Bibliography Business Wire. (2009 March 9). “Fitch: Merck's Leverage to Increase on Schering-Plough Merger; Merck on Watch Negative.” Allbusiness.com. Date accessed: April 9, 2009 from http://www.allbusiness.com/pharmaceuticals-biotechnology/pharmaceutical/11809351-1.html Clifford, C. (2009 March 18). “Oracle profits, sales beat the Street.” CNNMoney.com. Date accessed: April 9, 2009 from http://money.cnn.com/2009/03/18/technology/oracle_earnings/index.htm Eddey, P. H. (1991 January). “Corporate Raiders and Takeover Targets.” Journal of Business Finance and Accounting. Volume 18 Issue 2, pp. 151-171. Date accessed: April 9, 2009 from http://web.ebscohost.com/ehost/viewarticle?data=dGJyMPPp44rp2%2fdV0%2bnjisfk5Ie46bVPtq%2buTLSk63nn5Kx95uXxjL6qrUmvpbBIrq%2beSrims1KvqJ5Zy5zyit%2fk8Xnh6ueH7N%2fiVbCmr1C0rLJOsqukhN%2fk5VXj5KR84LPgjeac8nnls79mpNfsVbKrs1G0r7A%2b5OXwhd%2fqu4ji3MSN6uLSffbq&hid=114G Goldman, D. & Smith, A. (2009 March 9). “Merck and Schering-Plough in $41B merger.” CNNMoney.com. Date accessed: April 9, 2009 from http://money.cnn.com/2009/03/09/news/companies/merck_schering_plough/index.htm Horngren, C. T, Harrison, W. T., & Bamber, L. S. (2002) Accounting. New Jersey: Prentice Hall, Inc. Keown, A. J., Martin, J. D., Petty, J. W., Scott, Jr., D. F. (2005) Financial Management: Principles and Applications. New Jersey: Pearson Education, Inc. Reuters. (2009 April 2). “Bankrupt Polaroid sold for $59 million.” CNNMoney.com. Date accessed: April 9, 2009 from http://money.cnn.com/2009/04/02/news/companies/polaroid.reut/index.htm Read More