Financial Management - Assignment Example

Financial Management Part Identify and explain the objectives and general principles of Panel of Takeovers and Merger The objective of panel of Takeovers is to ensure fair treatment of shareholders and to ensure an opportunity is provided to them to decide on the benefits of a takeover and that an offeror provides same if not better treatment to shareholders of the same class. Matters related to commercial or financial merits or demerits of takeovers are for the company and its shareholders to decide, it is not concerned with them. Its goal is to provide an orderly framework within which takeovers are conducted along with the promotion of the integrity of financial markets. The statements of standards of commercial behavior and the general principles are one and the same thing as the general principles set out in Article 3 of the Directive. They are expected to be followed in spirit in order to achieve their underlying purpose. Below is a brief summary of some of the most important Rules: In the event of an offer being made the employees of both the offeror and the offeree should be informed. The issuer must take responsibility via statements for any takeover circulars that he issues and take responsibility for the contents. Appointment of a competent independent adviser by the target company whose advice on the offer must be brought to the knowledge of all the shareholders, together with the opinion of the board. Unless shareholders approve such plans all those actions which might frustrate the offer during the course of an offer by the target company are generally prohibited. Upon acquisition of interests in shares carrying 30% or more of the voting rights of a company that person or group must make a cash offer to all other shareholders at the highest price paid in the 12 months before announcement of the offer. Selected shareholders shall not be provided favorable deals as they are banned. Uniform information must be provided to all shareholders (Fisher 2003, pp. 160-168). B. Identify and examine the economic reasons for acquisitions and mergers and discuss why the expected economic benefits may not be reached. In an acquisition one company acquires another and in a merger both the companies join together to form a new entity. One of the driving forces behind acquiring a company is to create shareholder value over and above that of the sum of the two companies. It is theorized that a singular company on its own has less value as compared to two companies when merged together become more valuable. It can enhance the company’s revenue through increase in market share, can even generate tax gains and economies of scale can help generate cost efficiency. Companies with a strong financial base will act to acquire other companies to ensure their own company is more competitive and cost-efficient in the sector or industry. Acquisition or merger ensures that the company will gain a greater market share or to achieve a niche or cost leadership in a production process. If the company which is targeted for acquisition is in dire financial crisis it will welcome the acquisition as this will ensure its continued survival and be part of a much bigger picture. Not all acquisitions and mergers are successful as statistically speaking 40% to 80% of all acquisitions and mergers do not reach their intended conclusion and one of the reasons for this failure is that the upper management is stretched too thin and may be unable to handle the acquisition or merger process properly or neglect their core business responsibilities or the fear of the unknown has driven many companies’ management to make hasty decision say for example changing economic landscape , introduction of new technology, globalization or a conflict of diverging corporate cultures. It may not be necessary for a company to opt for an acquisition or merger but it may still nonetheless go for it because the CEO desires to be on the top and is eyeing the bonuses he / they get from the acquisition or merger with not a single thought on how it will affect the share price. Hence we can safely conclude that in order for an acquisition or merger to be successful the management of both the companies should make a list to note down what are the barriers that are preventing them from enhancing the shareholders stock value (Hitt et al., 2009 pp. 184-197). The barriers could be cultural clashes, employees being declared redundant, dissimilar systems and processes etc. Part2: Identify the long term funding options available for unquoted small and medium business enterprises and discuss the advantages and disadvantages of these funding options. Money is the life line of a business, be it small or medium hence it is prudent to have a solid financial backup to ensure long lasting success f not then there is a very high possibility that the business will die in its infancy. It is necessary to have sufficient funds so as to purchase the required equipment, payment of wages and to promote the services and products provided by the business right from day one. Following long term options can be availed by a small and medium business enterprise: Commercial Banks: provide loans to all types of financial institutions and businesses. Advantages: They do not ask for a share in the profits, handover equity or control of the business and there is a possibility that the loan is tax deductible. Disadvantages: A business cannot secure a loan if operating history or collateral is not provided furthermore companies with limited cash flows will have difficulty in servicing the debt and it will have impact on the credit ratings of the business as the more loan is applied for the higher the risk to the lender hence the interest rates will go up. Angel Investors: are individuals who invest in businesses so as to reap higher returns compared to investments in conventional investments. Advantages: They are in a position to provide much needed capital for starting a business and that too on flexible terms as they have an informal investment criteria compared to banks and venture capital firms. They can bring forth considerable experience and contacts which the business can benefit from as they themselves were businessmen and have invested in lots of businesses. Unlike banks and credit cards no monthly payments have to be made to angel investors Disadvantages: They do not make follow on investments as they have a smaller risk appetite compared to venture capital firms. They might have a hidden agenda and some angel investors are not so supportive and they want a high percentage stake in the company and apart from that a large return on their investment upon exiting the business, most of them also desire a certain amount of control in running the company (Ochtel 2009, pp. 163-180). Venture Capital Funding: Venture capital firms are on the lookout for businesses that offer high profits and whose future prospects for growth are promising. They offer money and take up ownership of the company. Advantages: money offered by venture capital firms are not a loan that needs to be repaid, they only receive their money when the business goes public, they provide management support , expert advice and assist in hiring the required personal for the business. Help to formulate business strategy Disadvantages: No longer the sole owner of the business as venture capital firms take up partial ownership and control of the business. They may push towards a faster Initial Public Offering then what was originally planned. Asset Based Financing: under this plan a company pledges its assets to secure a loan from a bank or a financial institution. Normally accounts receivables or inventories are used as collateral. Advantages: More cash is available and that too much faster then compared to a bank and apart from that additional services like accounts receivable processing, invoicing and collection are also provided Disadvantages: As the business’s assets are used as collateral for the loan it increases the cost of funds and cuts into profits as the business will have to pay the amount borrowed and a certain percentage as interest say 10% Long Term Debts: are those debts which are paid over a period of no more than 5 to 10 years. Advantages: one of the benefits of securing a long term debt is the lower monthly payment as it has to be paid over a long period of time hence longer the period the lower the monthly payment. This also allows the business to opt for a bigger loan as it will pay it off over a long period of time. Disadvantages: If the company is having trouble making ends meet there is always the possibility that it will be unable to pay the monthly installments. Lines of Credit: Its purpose is to provide short term funds to a business in order to maintain a positive cash flow, the business can pay off the loan at end of the month when it receives payments for goods sold or services provided. Advantages: Interest is payable only on the amount which is withdrawn by the business and once payment is made the credit line is replenished and one of the positive aspects of lines of credit is that no collateral is required. Disadvantages: It can be difficult to obtain with high maintenance and account fee. The interest rate is variable and it is dependent on the credit score of the business i.e the better the credit score the more favorable the interest rate and terms of payment. SBA Loans: The SBA is an independent agency of the federal government and provides loans to small businesses and partially guarantees them. Advantages: It is ideal for those businesses that under normal circumstances are unable to secure a loan on account of having a low cash flow or assets. It offers low down payment and monthly payments and that too on flexible terms. The SBA charges minimal fee for processing the loan. Disadvantages: In order to secure a loan there is a lot of paperwork as the government is involved in providing the loan and the interest rates may be slightly higher. Part 3: Discuss the arguments for and against the director’s proposal The director’s argument that it does not make sense to declare a dividend is valid however being a public limited company the interests of the shareholders comes first and if we were to apply the Clientele Effect theory then the Family Care Direct plc should go ahead and declare the dividend as the objective of the shareholders for purchasing the shares of the company because they expect a high dividend payout should the company abstain from declaring the dividend the shareholders have the option to sell their stocks which will result in decline of company’s share price and will have an adverse affect on the company’s reputation. The director argued it is not feasible to declare the dividend and should instead invest the funds is correct because if we were to apply the Modigliani and Millers dividend theory it does not matter if the company declare the dividend or not as according to the M&M theory the market value of a firm is determined by its earning power and the risk of its underlying assets, and is not dependent on the way it chooses to distribute dividends or finance its investments (Banerjee 1990, p. 286). One of the deciding factors for announcing or not announcing a dividend depends on the tax consequences i.e. the amount of tax which a company has to pay either way a company still announces dividends so as to send a positive signal to the market. Also this theory assumes it does not matter whether a dividend has been declared or not as investors can affect their return on a stock so end of the day they are not concerned with the company’s dividend policy as they pursue their own dividend policy. By this we mean that if a company declares a large dividend the shareholders will use it to acquire additional shares and if it is too small then they will dispose some of the shares to generate the requisite cash resources. Identify and describe alternatives to cash dividends. Following are the alternatives to cash dividends: Stock dividends: are dividends paid to existing shareholders in the form of additional shares in place of cash, stock dividends are not taxed as they are in the form of shares and not cash however they are taxed when sold for cash. Stock splits: upon approval from the directors and shareholders the shares of a company are increased meaning they might announce that we are issuing one share for every two shares held by a shareholder. The side effect of this act is that share price is reduced. A stock split is normally announced when the stock price of the company is deemed to be too high compared to other companies in its sector. Share repurchases: here the company buy backs its own shares thus reducing the number of outstanding shares and increasing the earnings per share and improving the market value of the shares (Broyles 2003, pp. 296-308). Discuss the advantages and disadvantages of share repurchases, i.e a company repurchasing its own shares. Advantages: The benefits of share repurchases are that if a company’s stock is undervalued it can utilize its excess resources to purchase its shares from the market thus reducing the number of outstanding shares and increasing the value of the remaining shares. Another reason why share repurchasing is being given more importance is because capital gains are taxed at a lower rate as compared to dividends. However it is a viable option when large quantities of shares are issued to the employees as it dilutes the share price, the company repurchases the shares from the market which offsets the dilution effect. Share repurchasing is also used by the management when it wants to discourage a hostile takeover bid. By repurchasing the shares the share price escalates thus ensuring that the takeover bids becomes more expensive (Baker 2005, p. 435). Disadvantages: The drawbacks of share repurchases is that it can be used to cover up poor financial ratios i.e a company can purchase its own shares and create an artificial boost in the financial ratios thus misleading potential investors into thinking that the company’s performance is improving. It also indicates that the management is facing a creative crisis and does not know how to utilize its excess cash resources. It can create an artificial jump in the company’s share price which would allow insiders to take advantage of the price increase and sell their shares at a much higher price while the ordinary investor buys and sells at a slower pace. Bibliography: FISHER, J., & FISHER, J. (2003). The law of investor protection. London, Sweet & Maxwell. HITT, M. A., IRELAND, R. D., & HOSKISSON, R. E. (2009). Strategic management: competitiveness and globalization; concepts. Mason, Ohio, South-Western Cengage Learning. OCHTEL, R. T. (2009). Business planning, business plans, and venture funding: a definitive reference guide for start-up companies. Carlsbad, Calif, Carlsbad Technology Group. BANERJEE, B. (1990). Financial policy and management accounting. Calcutta, World Press Private. BROYLES, J. E. (2003). Financial management and real options. Chichester, Wiley. http://www.netlibrary.com/urlapi.asp?action=summary&v=1&bookid=83726. BAKER, H. K., & POWELL, G. E. (2005). Understanding financial management: a practical guide. Malden, MA, Blackwell Pub. Read More