Corporate Financial Management - Assignment Example

Running head: Financial Management Name: University: Course: Tutor: Date of Submission: A takeover in the United Kingdom refers to the acquisition of public companies and this process is usually governed by the city code on takeovers and mergers that are also known as city codes or takeover code(Arnold,2005, pp. 45-65). The code requires that all the shareholders in any particular are supposed to be treated equally and gives the necessary regulations on when and what kind of information the party companies must and also cannot release publicly that are in relation to the bid, the set timetables for the particular aspects of the bid and also thus sets the minimum levels of the bid that follow previous purchase of shares (Arnold, 2005, pp. 23-78). Most companies are said to have acquired many other properties using this mechanisms for reasons. Some are said to be opportunists whereby they find out that the target company is going for a reasonable price due to reasons based on the company itself and with this the buying company decides to buy it based on the future strategy that they have laid in relation to profit making(Arnold,2005, pp. 45-65). On the other hand, others are called strategic buyers where they are thought have other effects of buying that could be beyond the simple effect of making of profit in their company. Some of the advantages to the acquiring company will be in the improvement of the distribution capabilities. In most occasions, target companies seem to be attractive because they allow the taking company enter a market without taking of the risks, time and even the expense of venturing into new markets (Eiteman, Stonehill, Moffett, 2007,pp. 67-89). Some takeovers happen because the acquiring wants to reduce completion from this profit making company. Also, this happens so that the acquiring can make profits using combined efforts of the two companies rather than two separately operating companies due to the reduction of the redundant functions. PCL company management or shareholders may also benefit from the principal-agent problems that are usually associated with the compensation off the top executives. For instance, we understand that sometimes it is easy and fair for the top executives to reduce the price of their company's stock due the information asymmetry. The executive in this case can therefore accelerate accounting for the expected expenses, can delay the accounting of the expected revenue, can engage in off balance sheet transaction that make the company's profitability appear to temporarily appear bad or poorer, or in a simple way promote and report severely conservative in estimating the future earnings of the company that are likely to reduce the future share price (Shapiro,2006,pp. 56-89). When a company is taken over at a lower price, the acquiring company gains windfall from the former top shareholders or executives in this case actions to which he superstitiously reduces the share price. Therefore, the millions or even the billions of the shareholders will be transferred from these previous shareholders to the current owner or the one that has acquired. In addition to this, Arnold reiterates that takeover helps the acquiring company increase in its revenues due to the increase in the resource companies that has increased its sales. This thus helps the acquiring company venture into new business and markets. Multi-sourcing helps the company to go into wide businesses compared to having only one company. In this case, acquisition of another company with or without same business class will automatically help the company to venture into other markets kin terms of location and even other categories of services being offered. The acquiring company will also make big profits in that in first case they have increased the profit making of the group and also they may have reduced competition that the bought company was giving them especially if it was making great sales compared to theirs. The acquiring of a new company will also increase the market share of this particular company which too increases the economy of the company's sale. The acquiring company also experiences and increased efficiency which results from the corporate synergies which are basically jobs with overlapping responsibilities that can be eliminated thus reducing the cost of operation. Apart from profit making, the acquiring company may be disadvantaged if at all the goodwill given to the shareholders of the company being disposed or bought will often be paid in excess. The sale of this company to another company also tends to reduce competition and the choice of the consumers in the oligopoly markets. Though good to the buying company but bad to the consumers for lack of variety in the brands on the market. This process also affects job creation whereby the bought company will not maintain its staffs in the company for the new management will opt to put every assignment under their already employed staffs thus cutting down on the jobs (Arnold,2005, pp. 45-65). Another disadvantage can be seen from the aspect of cultural integration which posses a conflict between the old and the new management of the company. The staffs in the company being bought tend to lack motivation as a result of meeting new management which may subject them to humiliation from the buying company's management. Importance of the non-financial factors in contributing to the success of a merger According to Arnold (2005, pp. 45-65), a merger can be defined as the combining of any two commercial companies to make one; this was considered to be an apt one for commercial companies but not for the voluntary sector, by respondents. This would lead one to consider a definition of voluntary sector mergers to be ``the combining or absorption of two organizations etc into one. Non-financial factors can be seen to contribute to the success of a merger in a way it obtaining a debt is cheaper in obtaining and the rate of return is lower. This is because it less risky to the investors in that the interest is paid before the dividends and incase in the event of liquidation, the holders of the debt are said to be repaid with priority. Madura, 2008 adds that the cost of equity-retained earnings and even the issue of new stock represent the opportunity cost. This is therefore the calculation of what the shareholder could have earned himself if at all they have invested funds themselves, if they have received any dividends and if they have invested the funds somewhere else. Another advantage of debt that is making the merger process succeed is that the debts are tax deductable (Madura, 2008). In this case, it implies that the higher the debt, the higher the profit that the company will make over this defaulting firm on repayment in that the interests will be higher. Some companies do rely on the US domestic and Euro commercial papers that are usually reserved for only most respected corporations which have high credit ratings and when they are issued companies can avoid paying the fee at to an intermediary bank. They are in most occasions short term hence sold at a discount. From the primary research done by (Madura, 2008,pp. 34-56) This was felt had been achieved by having a stable financial base before the merger and the interviewee talked of a ``comfort blanket''. Q.2 Over the recent years the world has experienced most extraordinary financial events as result of instability of various economies. The world has witnessed the largest corporate bankruptcy of famous companies such as Lehman Brothers, mortgage giants such as Bear Stearns among other industries like housing. In order to control the economic conditions of financial bubbles various governments have implemented various polices to deal with the situation. The governments and the Federal Reserve have in most cases over the years responded to Bubble and bust cycles by huge monetary injections into the financial systems to recover from the doom crisis of these cycles. Financial booms and busts over the years have had advanced as well as profound effects on global financial markets. According to the world financial history the most recent bust started in United States in the housing market resulting to the financial imbalances in the country as other parts of the world. These financial booms and busts have been over the years been associated with the deepest global recession and the Great Depression. An economic bubble can be described as a trade in products or assets with inflated values .Bubbles therefore occurs causing many of the product prices to be traded in high volumes. Though, in the financial history many economies argue that the cause of bubbles remains a challenge many of them are convinced that asset prices often deviate strongly from intrinsic values (Arnold, 2005, pp. 23-78). Many explanations have indicated that recently shown economic bubbles tends to appear without any uncertainty, speculation or even bounded rationality. Though, many economic theories indicates that bubbles are more often caused by price coordination and emerging social norms. A credit boom- bust cycle is an episode characterized primarily by sustained increase in various economic indicators followed by a sharp and rapid contraction (Arnold, 2005, pp. 23-78). Primarily financial booms are usually driven by rapid expansion of credit causing sharp increases commodity and product prices. As a result of financial booms most of the asset prices normally collapse causing a credit crunch period in which access to financing opportunities are sharply reduced below levels observed during normal times. The unwinding effect of the bust phase in financial economies usually causes considerably large reduction in investment as well as a fall in consumption eventually being followed by an economic recession period. The recession following a burst of an economic boom is usually short-lived hence in most cases the GDP and consumption growth usually resume a within the same year that the episodes occurred. Though, in most cases the recovery of the financial sector is usually slower hence the credit usually remains depressed for several periods. In such cases the credit normally falls sharply than GDP increasing the cost of borrowing (Arnold, 2005, pp. 23-78). The efficient market theory argues that all market participants should receive information and act on all of the market information as soon as it becomes available. Financial instability on the on the financial market is basically affected by numerous boom and bust where the financial market were seen to go higher the later on collapsed. This is said to be different from the other markets in that it lacks the excessive leverage. The difference in the instability of the market is as a result of the misrepresentation and the non disclosure that greatly indicates fraud kin the markets of the financial players. Most players in this field are banks who do intern do represent their clients and thereby regarding the banking relation from two perspectives. In the first place, the banks deceive their clients that they are depositors when in real sense they are unsecured creditors to the bank because depositors do take risky steps. Secondly, the bankers do promise their clients that whenever they deposit their money, they can access it anytime they feel like when kin real sense it isn’t so. This therefore builds or creates high and enormous speculations in people (Arnold, 2005, pp. 23-78). This misrepresentation of the information from the banks did lure depositors into depositing the money with them, now that they don’t tell the truth; most of them would have never placed excessive leverage on the banks. References Arnold, G., (2005), Corporate Financial Management, 3rd edition, Harlow: Pearson Education Limited, pp.23-78 Eiteman, D., Stonehill, A., Moffett, M., (2007), Multinational Business Finance, 11th edition, Harlow: Pearson Education Limited, pp.67-89 Madura, J., (2008), International Corporate Finance, 9th edition, USA: Thomson South- Western,pp. ,pp.34-56 Shapiro, A., (2006), Multinational financial management, 8th edition, USA: John Wiley& Sons,pp. Financial Management,pp.56-89 Read More