Recently Apple Corporation has been heavily criticised for its dividend policy and lack of pay-outs despite having huge amounts of Cash at their disposal.
There are a few reasons why they may not have paid out any extra;
Firstly, there could be legal constraints such as the need to protect creditors. Considering the amount of cash that Apple has on hand however, suggests that they have more than enough to cover any loan covenants that may exist on loans.
Secondly, this also covers any liquidity constraints that they may have. Apple does not have a significantly high level of debt and does not face any earnings problems that could impact on interest payments.
In a recent press release from Apple, the changes to their dividend policy were announced: "the Board has approved a 15% increase in the Company’s quarterly dividend and
today has declared a dividend of $3.05 per common share, payable on May 16, 2013
to shareholders of record as of the close of business on May 13, 2013. Apple is
among the largest dividend payers in the world, with annual payments of about
$11 billion."
To me this suggests that Apple is actually making very large payments every year and in relation to Porter's (1955) theory regarding the acceptability of dividend policies, should be considered as very generous.
Porter argued that a dividend policy would only maximise shareholders wealth if the new share price plus the dividend were more than the previous share price.
Apple may be holding on to the cash so that they have the necessary capital to invest in any +NPV (Net Present Value) projects which would increase shareholder wealth in the longer term. Should Apple really be criticised for actually paying out decent dividends while holding on to Cash that may be used in the future for further investment and expansion.
The reason this strategy has been criticised is because they have been hoarding cash for a few years now, with no significant investment introduced and currently no plans to do so.
This may be why, along with the increase to dividends, Apple intends to spend $60bn on a share buyback scheme; the "largest single share repurchase authorisation in history".
Modigliani and Millar (1961) would support the view taken by investors requesting a pay-out; they argue that dividends should be a residual payment: any funds left over after all +NPV opportunities have been invested in should be paid out as a dividend.
It is actually in the Shareholders interest for Apple to reinvest the Cash as this would add more shareholder wealth than an increased dividend would.
Apple's share price has been falling as it faces stronger and stronger competition from Android and increasingly Samsung. When the increase to dividends was announced the share price rose 5.5%, which is a point in favour of simply paying out dividends in order to keep investors happy and not damage their market value any further. This action is representative of dividend relevance as a company that pays more dividends is likely to be valued higher than one with lower pay-outs.
Apple's criticism for not returning Capital also stems from not giving a reason for their actions. If they were to say they had it earmarked for a particular investment then it may have reduced the growing public feeling of Apples selfishness.
Sunday, 28 April 2013
Sunday, 21 April 2013
Capital Structure
The capital structure of a company can have a huge effect on the perceived success of that company by impacting on risk and return. While debt finance is cheaper than equity, it carries more risk due to constant nature of interest payments. If more debt is to be taken on by Shareholders then they are going to require a better rate of return to offset the risk.
Over the past three years Murray International Holdings (MIH), former owner of Rangers Football Club, has restructured twice. Both times has been to reduce the level of debt it holds. The company has been struggling in recent years and has been making a loss. With the amount of debt that it has (£370m down from £637m the previous year) the risk to the returns of the shareholders is still very high, and as such they require a high rate of return. Additionally, this high level of debt increases the amount of interest payments required, which reduces the profits (or increases the losses in this case) that can be used to pay out dividends to shareholders.
The second restructuring involved a deal with Lloyds Banking Group to reduce £118m of debt with them in return for a similar amount of share capital and premiums.
MIH has to reduce the debt to a point where the risk is low enough to encourage shareholders and reassure the market about their position which will increase the market value of the shares.
There is a traditional view that there is a balancing point between the amount of Equity and debt capital required (gearing level) that is considered to be the optimal capital structure. A little debt helps to increase the share value and dividend payouts to investors but too much debt will increase the risk beyond a point that investors are happy to accept and as a result will require a higher rate of return.
However, Modigliani and Miller (1958, 1963), disagreed that there was an optimal capital structure. They believed that a company's value depends entirely on business risk and that the total market value of any company is independent of its capital structure. The volatility of the MIH's earnings is what increases the risk under their theory.
These two theories both agreed that extreme positions, i.e. all debt or highly geared, were to be avoided as the benefits provided by the other form of finance would be lost to the company. Therefore a compromise between the two extremes was to be sought regardless of whether there was an opitmal capital structure or not.
In the case of MIH, the amount of restructuring and the type (reduction of debt in the first instance and exchange of debt for equity in the second) leads to the conclusion that MIH has not decided what the level of gearing it requires is. The changing conditions and health of the company give rise to fears regarding its ability to pay interest and the lack of dividends poor market value of the company is a cause for concern for shareholders.
Over the past three years Murray International Holdings (MIH), former owner of Rangers Football Club, has restructured twice. Both times has been to reduce the level of debt it holds. The company has been struggling in recent years and has been making a loss. With the amount of debt that it has (£370m down from £637m the previous year) the risk to the returns of the shareholders is still very high, and as such they require a high rate of return. Additionally, this high level of debt increases the amount of interest payments required, which reduces the profits (or increases the losses in this case) that can be used to pay out dividends to shareholders.
The second restructuring involved a deal with Lloyds Banking Group to reduce £118m of debt with them in return for a similar amount of share capital and premiums.
MIH has to reduce the debt to a point where the risk is low enough to encourage shareholders and reassure the market about their position which will increase the market value of the shares.
There is a traditional view that there is a balancing point between the amount of Equity and debt capital required (gearing level) that is considered to be the optimal capital structure. A little debt helps to increase the share value and dividend payouts to investors but too much debt will increase the risk beyond a point that investors are happy to accept and as a result will require a higher rate of return.
However, Modigliani and Miller (1958, 1963), disagreed that there was an optimal capital structure. They believed that a company's value depends entirely on business risk and that the total market value of any company is independent of its capital structure. The volatility of the MIH's earnings is what increases the risk under their theory.
These two theories both agreed that extreme positions, i.e. all debt or highly geared, were to be avoided as the benefits provided by the other form of finance would be lost to the company. Therefore a compromise between the two extremes was to be sought regardless of whether there was an opitmal capital structure or not.
In the case of MIH, the amount of restructuring and the type (reduction of debt in the first instance and exchange of debt for equity in the second) leads to the conclusion that MIH has not decided what the level of gearing it requires is. The changing conditions and health of the company give rise to fears regarding its ability to pay interest and the lack of dividends poor market value of the company is a cause for concern for shareholders.
Friday, 22 March 2013
Regulation of Global Financial Markets
Over the past couple of decades a large number of corporate failures have led to an increase in the intensity and demand for regulation within global markets. Regulators were brought in to try and reassure the public and improve public opinion of firms and increase consumer confidence.
The most recent scandal, manipulation of the Libor rate by leading banks, has called into question whether there is enough regulation within the financial market. The Libor rate is used as a benchmark interest rate for a range of financial deals and represents the price that a bank is willing to pay another for a currency.
This scandal occurred during the height of the financial crisis in 2008 and has, along with a number of other altercations, caused deep public distrust in the banking industry.
There are two models of regulation; national self or statutory regulation; and self-legitimation. The first of these models suggests that regulation follows a cyclical pattern by loosening regulation during periods when the economy is strong and regulations increase when a crisis occurs. As the Libor rate was manipulated as a result of the financial crisis in 2008 it could be said that the call for reform that followed the discovery of the scandal falls into this model of regulation.
The self-legitimation model suggests that at times of public distrust and lack of confidence in the market, companies will take whatever action required of them to improve their public image. This in itself acts as regulation without the force of the law.
The role of regulators, however, can be diluted by the impact of Government. For example, in the Libor case, the Government was accused of not doing enough to regulate the banking industry by not giving the Regulator the power they require to do their job effectively. The proposal was that regulators should be able to force a split between retail and investment banking operations of a bank if reforms were not taken up. The Government failed to provide the legal powers to regulators to do this because of fears of handing too much power to regulators. They also feared that it would make the Banks less competitive which would further threaten a recovering economy. As such it makes it more of an empty threat.
The theory of Regulatory capture is likely to play a role in future, as it has done in the past with cases such as Enron in the early 2000's. It suggests the idea that regulators can become too intertwined with the targets of their regulation. There is a fear that the regulations that that these targets are required to adhere to become a list of topics that require a "box-ticking" attitude. This theory may be a simple explanation for why the Government is unwilling to give the regulators in the Libor case too much power. In the future, this power may be a way to manipulate and control the activities and operations of banks and as such may damage the industry.
It would appear that regulation is self-defeating as it seems that corporations will suffer the new regulation put on them subsequent to a scandal or failure but then find a way to circumvent that same regulation before they themselves become the centre of a scandal. They may get away with it for a while but eventually more regulation will kick in a the process will start again.
The most recent scandal, manipulation of the Libor rate by leading banks, has called into question whether there is enough regulation within the financial market. The Libor rate is used as a benchmark interest rate for a range of financial deals and represents the price that a bank is willing to pay another for a currency.
This scandal occurred during the height of the financial crisis in 2008 and has, along with a number of other altercations, caused deep public distrust in the banking industry.
There are two models of regulation; national self or statutory regulation; and self-legitimation. The first of these models suggests that regulation follows a cyclical pattern by loosening regulation during periods when the economy is strong and regulations increase when a crisis occurs. As the Libor rate was manipulated as a result of the financial crisis in 2008 it could be said that the call for reform that followed the discovery of the scandal falls into this model of regulation.
The self-legitimation model suggests that at times of public distrust and lack of confidence in the market, companies will take whatever action required of them to improve their public image. This in itself acts as regulation without the force of the law.
The role of regulators, however, can be diluted by the impact of Government. For example, in the Libor case, the Government was accused of not doing enough to regulate the banking industry by not giving the Regulator the power they require to do their job effectively. The proposal was that regulators should be able to force a split between retail and investment banking operations of a bank if reforms were not taken up. The Government failed to provide the legal powers to regulators to do this because of fears of handing too much power to regulators. They also feared that it would make the Banks less competitive which would further threaten a recovering economy. As such it makes it more of an empty threat.
The theory of Regulatory capture is likely to play a role in future, as it has done in the past with cases such as Enron in the early 2000's. It suggests the idea that regulators can become too intertwined with the targets of their regulation. There is a fear that the regulations that that these targets are required to adhere to become a list of topics that require a "box-ticking" attitude. This theory may be a simple explanation for why the Government is unwilling to give the regulators in the Libor case too much power. In the future, this power may be a way to manipulate and control the activities and operations of banks and as such may damage the industry.
It would appear that regulation is self-defeating as it seems that corporations will suffer the new regulation put on them subsequent to a scandal or failure but then find a way to circumvent that same regulation before they themselves become the centre of a scandal. They may get away with it for a while but eventually more regulation will kick in a the process will start again.
Sunday, 17 March 2013
Recovery since Credit Crunch 2008
The banking crisis that started in 2007, which saw the collapse and takeover of many of the World's largest banks, for example, Lehman Brothers and Bear Stearns, led to the credit crunch of 2008. The consequences included; rising cost of bank lending, and bond and equity finance; depressed house and share prices; reduced consumer confidence and spending; and negative impact on UK exports.
Prior to the crisis, the majority of developed countries were experiencing one of the longest periods of time with low interest rates. This encouraged borrowing and spending and discouraged saving leading to a housing market boom in the UK and the US. This also led to "predatory lending" to sub-prime borrowers who should have been more doubtful borrowers because of their diminished ability to repay.
The banks became greedy and soon found new ways to sell credit such as derivatives and Collateralised Debt Obligations (CDO's). These subsequently failed.
Rescue plans were produced by Governments all over the world; the US tried to secure a $700bn bailout fund but was denied in a vote by Congress; part-nationalisation of RBS, Lloyd's TSB and HBOS and £50bn from the Treasury with an additional £200bn from the Bank of England for a rescue plan in the UK; also in the UK, a bank debt guarantee of £250bn; and Switzerland sets up a $60bn "toxic debt fund". £119bn alone went to Northern Rock in the UK.
The UK is now on its way to recovery, but there is still quite a way to go as consumer confidence and spending is still low and interest rates are still not at ideal levels. The economy has not been kick-started again yet.
This leads onto the Funding for Lending scheme started by the Bank of England and the UK treasury to encourage UK banks to start lending to companies and households. Set up in 2012 it has recently been evaluated to measure its success so far and whether or not it has helped the economy out of the recession. The scheme has £60bn available to banks for lending purposes. It is a way to provide cheap finance to those who need it to restart the economy.
While this is a great idea in theory, there is a chance that the opportunity for cheap finance will not be taken up because there is no demand for it.
As of March 4th, 39 banks had taken part in the scheme, withdrawing £14bn worth of loans. However, the net borrowing figure fell by £2.4bn in the last quarter of 2012 suggesting that the loans are taking a while to have an effect due to the time taken to approve loans.
While the idea here is a good one surely the treasury could be using the money on a more productive scheme? The funds are available until December 2012 but by the end of 2013 they should have a better idea of the success of the scheme so far. It is quite a small way of improving consumer confidence and increasing spending. I believe that they should find a better way to motivate banks to provide cheaper loans/mortgages to the public and to businesses. An incentive scheme could be argued for that would reward banks who give mortgages at a certain level. All it requires is one or two banks to start and the rest will fall in line.
Prior to the crisis, the majority of developed countries were experiencing one of the longest periods of time with low interest rates. This encouraged borrowing and spending and discouraged saving leading to a housing market boom in the UK and the US. This also led to "predatory lending" to sub-prime borrowers who should have been more doubtful borrowers because of their diminished ability to repay.
The banks became greedy and soon found new ways to sell credit such as derivatives and Collateralised Debt Obligations (CDO's). These subsequently failed.
Rescue plans were produced by Governments all over the world; the US tried to secure a $700bn bailout fund but was denied in a vote by Congress; part-nationalisation of RBS, Lloyd's TSB and HBOS and £50bn from the Treasury with an additional £200bn from the Bank of England for a rescue plan in the UK; also in the UK, a bank debt guarantee of £250bn; and Switzerland sets up a $60bn "toxic debt fund". £119bn alone went to Northern Rock in the UK.
The UK is now on its way to recovery, but there is still quite a way to go as consumer confidence and spending is still low and interest rates are still not at ideal levels. The economy has not been kick-started again yet.
This leads onto the Funding for Lending scheme started by the Bank of England and the UK treasury to encourage UK banks to start lending to companies and households. Set up in 2012 it has recently been evaluated to measure its success so far and whether or not it has helped the economy out of the recession. The scheme has £60bn available to banks for lending purposes. It is a way to provide cheap finance to those who need it to restart the economy.
While this is a great idea in theory, there is a chance that the opportunity for cheap finance will not be taken up because there is no demand for it.
As of March 4th, 39 banks had taken part in the scheme, withdrawing £14bn worth of loans. However, the net borrowing figure fell by £2.4bn in the last quarter of 2012 suggesting that the loans are taking a while to have an effect due to the time taken to approve loans.
While the idea here is a good one surely the treasury could be using the money on a more productive scheme? The funds are available until December 2012 but by the end of 2013 they should have a better idea of the success of the scheme so far. It is quite a small way of improving consumer confidence and increasing spending. I believe that they should find a better way to motivate banks to provide cheaper loans/mortgages to the public and to businesses. An incentive scheme could be argued for that would reward banks who give mortgages at a certain level. All it requires is one or two banks to start and the rest will fall in line.
Sunday, 10 March 2013
Mergers and Acquisitions
It is believed that 2013 will bring around a come back in merger and acquisition activity in world markets. In the last month alone there have been three major deals announced worth $75 billion. First there was the purchase of Heinz by Warren Buffett's Berkshire Hathaway and 3G Capital (private equity firm) for $28 billion. Second, was management buyout of Dell by its original founder for $24 billion and finally, Liberty Global acquired Virgin Media for $23 billion.
There has also been a significant merger in the last month or so of 2 major US airlines (US Airways and American Airlines) which has been greatly anticipated. Recent economic and market conditions have led companies to behave far more cautiously as the risk on major deals like these has been greatly increased. There hasn't been this level of activity since the early 2000's and it may be a taste of things to come as the market is kick-started into more headline grabbing deals such as the ones already mentioned.
This was due in part to the failure and scandals of some huge companies such as Enron that severely reduced confidence in the markets for mergers and acquisitions and created a great deal of mistrust the world over.
In the US, the recent survival after the fiscal cliff that was looking likely unless serious steps were taken to reduce the deficit and rescue the economy, has made more executives bolder to make large scale deals.
With the economic crisis many companies were seeking to survive rather than pursue growth objectives in what was a very trying period for all global companies. Focus has been more on the core business activities within a business and most companies have far less spare cash lying around than usual, effectively reducing the incentives for any M & A activity further.
Mergers and acquisitions of the size mentioned above also lead to issues involving all stakeholders, not just the shareholders. First of all, the employees of the firm being taken over will be put at risk of losing their jobs, particularly senior management members. The employees who are working closer to the frontline of the business are more likely to be kept on as they have an intimate knowledge of the work required on a day to day basis. In many cases firms are taken over because they have been weakened by poor management and made more susceptible to take overs. If this is the case then top managers are more likely to be fired and replaced by personnel that have been approved by the incoming firm. In the Heinz case Unite, representing the workers at Heinz, has already called for a meeting with the new owners to discuss the consequences of the take over on the current employees. It is likely that many top managers will lose their jobs.
A lot of the other stakeholders relationships with the company may change depending on the management approach and strategy of the firm taking over. For suppliers it may depend on whether the company is working within the same industry as the target company or not, as they may wish to change suppliers to someone who they already have a strong working relationship with. With customers the bidding firm may use different distribution channels in use.
The US airlines merger will create the biggest airline in the world and while this will have been at the fore in the minds of the those organizing the merger, they will also have seen the opportunities for vertical integration and creating synergies between the two companies and hopefully getting the chance to compare and share their respective strategic capabilities. This merger in particular will create a very large amount of market power and dominance in the US air travel industry.
There has also been a significant merger in the last month or so of 2 major US airlines (US Airways and American Airlines) which has been greatly anticipated. Recent economic and market conditions have led companies to behave far more cautiously as the risk on major deals like these has been greatly increased. There hasn't been this level of activity since the early 2000's and it may be a taste of things to come as the market is kick-started into more headline grabbing deals such as the ones already mentioned.
This was due in part to the failure and scandals of some huge companies such as Enron that severely reduced confidence in the markets for mergers and acquisitions and created a great deal of mistrust the world over.
In the US, the recent survival after the fiscal cliff that was looking likely unless serious steps were taken to reduce the deficit and rescue the economy, has made more executives bolder to make large scale deals.
With the economic crisis many companies were seeking to survive rather than pursue growth objectives in what was a very trying period for all global companies. Focus has been more on the core business activities within a business and most companies have far less spare cash lying around than usual, effectively reducing the incentives for any M & A activity further.
Mergers and acquisitions of the size mentioned above also lead to issues involving all stakeholders, not just the shareholders. First of all, the employees of the firm being taken over will be put at risk of losing their jobs, particularly senior management members. The employees who are working closer to the frontline of the business are more likely to be kept on as they have an intimate knowledge of the work required on a day to day basis. In many cases firms are taken over because they have been weakened by poor management and made more susceptible to take overs. If this is the case then top managers are more likely to be fired and replaced by personnel that have been approved by the incoming firm. In the Heinz case Unite, representing the workers at Heinz, has already called for a meeting with the new owners to discuss the consequences of the take over on the current employees. It is likely that many top managers will lose their jobs.
A lot of the other stakeholders relationships with the company may change depending on the management approach and strategy of the firm taking over. For suppliers it may depend on whether the company is working within the same industry as the target company or not, as they may wish to change suppliers to someone who they already have a strong working relationship with. With customers the bidding firm may use different distribution channels in use.
The US airlines merger will create the biggest airline in the world and while this will have been at the fore in the minds of the those organizing the merger, they will also have seen the opportunities for vertical integration and creating synergies between the two companies and hopefully getting the chance to compare and share their respective strategic capabilities. This merger in particular will create a very large amount of market power and dominance in the US air travel industry.
Sunday, 3 March 2013
Foreign Direct Investment
Foreign Direct Investment (FDI) is "the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control". For some companies, this will be done by building factories abroad so as to reduce costs where the labour or land prices may be cheaper. Alternatively, companies can seek to merge or acquire pre-existing companies within the country they wish to invest in, so as to gain a entry into the foreign market there and save themselves from setting up their own brand there which can be very time consuming.
Currently, Manchester Airports Group (MAG) is preparing a $2 billion bid for Chicago Midway Airport in the US, in an attempt to expand their portfolio abroad. At this point there is little further information on the bid, however, we can speculate that MAG is looking to find a way into the American market and look to make the first airport in America privatized.
MAG will be able to use its technical know-how in the application as a means to secure their bid as their experience in the industry is very strong.
In the last 5 years or so FDI has taken a step backwards because of the financial crisis and companies being less willing to spend their money abroad when there is an increased risk for unpredictable returns.
In the example mentioned above, MAG is attempted to buy into an already well established market rather that into a developing country where it may find it difficult to create a competitive advantage due to the fact that all the other players in the market are not newcomers to the industry as well and if anything have a better understanding of the market they are already in.
This acquisition could however, provide a strong synergy between the existing airports owned by MAG in the UK with the new Chicago airport. It may be in a better position to bring more business between the UK and the US.
It is unlikely to bring any major benefits to the US as most of the staff will retain their positions and it will just be a change of ownership that will occur. It is clear that the acquisition is only being attempted to increase their share of the market and, hopefully for shareholders, their share value. There is a clear asset available that is already set up and only looking for new ownership meaning that the transition for MAG would not be a difficult one.
FDI has often been considered a way to avoid transportation costs when importing or exporting but the nature of the company means that this is not their main aim. MAG will see this as a opportunity to escape the UK where all the airports are already privatized and are trying to get a head start in a new market. However, sometimes this can backfire as they are the first company to experience how the new market works and there is always some risk in that. Any slightly late-comers will get a chance to study the approach of the leader into the new market and adjust their potential plan for joining in the industry as well.
Currently, Manchester Airports Group (MAG) is preparing a $2 billion bid for Chicago Midway Airport in the US, in an attempt to expand their portfolio abroad. At this point there is little further information on the bid, however, we can speculate that MAG is looking to find a way into the American market and look to make the first airport in America privatized.
MAG will be able to use its technical know-how in the application as a means to secure their bid as their experience in the industry is very strong.
In the last 5 years or so FDI has taken a step backwards because of the financial crisis and companies being less willing to spend their money abroad when there is an increased risk for unpredictable returns.
In the example mentioned above, MAG is attempted to buy into an already well established market rather that into a developing country where it may find it difficult to create a competitive advantage due to the fact that all the other players in the market are not newcomers to the industry as well and if anything have a better understanding of the market they are already in.
This acquisition could however, provide a strong synergy between the existing airports owned by MAG in the UK with the new Chicago airport. It may be in a better position to bring more business between the UK and the US.
It is unlikely to bring any major benefits to the US as most of the staff will retain their positions and it will just be a change of ownership that will occur. It is clear that the acquisition is only being attempted to increase their share of the market and, hopefully for shareholders, their share value. There is a clear asset available that is already set up and only looking for new ownership meaning that the transition for MAG would not be a difficult one.
FDI has often been considered a way to avoid transportation costs when importing or exporting but the nature of the company means that this is not their main aim. MAG will see this as a opportunity to escape the UK where all the airports are already privatized and are trying to get a head start in a new market. However, sometimes this can backfire as they are the first company to experience how the new market works and there is always some risk in that. Any slightly late-comers will get a chance to study the approach of the leader into the new market and adjust their potential plan for joining in the industry as well.
Sunday, 24 February 2013
Multinational Tax Management
Multinational tax management is involved with the positioning of an international company abroad so that it avoids the highest tax rates that it is liable to pay in the countries that it operates within. This will minimize their total tax liability worldwide. They do this by allocating costs and revenues to different centers in different parts of the world where tax rate varies significantly. For example, Ireland has a tax rate of 12.5% which often attracts businesses to become incorporated in Ireland as opposed to the UK where it is now 24%. (However, is due to be reduced to 21% by April 2014 to reduce the gap between 'tax havens' so as to encourage businesses to remain within the UK and for new ones to be encouraged to incorporate here.
There have been a number of high profile cases recently of companies that have been avoiding tax by moving their costs and revenues abroad so as to report lower profits in the UK and as such reduce their liability.
Starbucks were recently discovered to have only payed £8.6m in tax over the last 14 years of trading within the UK, which caused public outrage. Since then they have agreed to voluntarily pay additional taxes. However, they are not the only companies that are doing this; Amazon and Google have also been criticised for this. George Osborne has recently spoken out against these firms and has demanded a crackdown on firms who "are not paying their fair share of tax". Many people have criticised him as these companies are using Subsidiaries or joint ventures to restructure transactions, ownership and/or re-position funds which are entirely legal options available to them. There are also a great number of people who believe they should be paying more tax. This implies the stakeholder theory of strategic management which involves the companies taking a bigger interest in society as a whole.
Using these methods, many individuals as well as multinational companies have avoided paying large amounts of tax in the UK. In a very controversial move by the HM Revenue & Customs (HMRC) a list of "tax dodgers" have been named and shamed. However, there were no large corporations on the list and in response the HMRC said they were working to close the loopholes that these corporations used to avoid paying large amounts of tax.
Accounting firms have also been criticised for offering tax advice that actually helps companies reduce their tax liability within the UK. This is threatening revenues within some of the biggest accounting firms in the industry who are currently doing nothing illegal.
The upcoming G20 summit will take a long look at closing the loopholes that multinational firms firms currently exploit to reduce their tax liability.
The reasons for these moves by multinational companies aren't always clear; many believe that a shareholder theory perspective can be used as they are trying to increase shareholder value the most by reporting the highest possible net profit. However, agency theory could also be applied as the higher the profits, the higher the reward for senior management.
There have been a number of high profile cases recently of companies that have been avoiding tax by moving their costs and revenues abroad so as to report lower profits in the UK and as such reduce their liability.
Starbucks were recently discovered to have only payed £8.6m in tax over the last 14 years of trading within the UK, which caused public outrage. Since then they have agreed to voluntarily pay additional taxes. However, they are not the only companies that are doing this; Amazon and Google have also been criticised for this. George Osborne has recently spoken out against these firms and has demanded a crackdown on firms who "are not paying their fair share of tax". Many people have criticised him as these companies are using Subsidiaries or joint ventures to restructure transactions, ownership and/or re-position funds which are entirely legal options available to them. There are also a great number of people who believe they should be paying more tax. This implies the stakeholder theory of strategic management which involves the companies taking a bigger interest in society as a whole.
Using these methods, many individuals as well as multinational companies have avoided paying large amounts of tax in the UK. In a very controversial move by the HM Revenue & Customs (HMRC) a list of "tax dodgers" have been named and shamed. However, there were no large corporations on the list and in response the HMRC said they were working to close the loopholes that these corporations used to avoid paying large amounts of tax.
Accounting firms have also been criticised for offering tax advice that actually helps companies reduce their tax liability within the UK. This is threatening revenues within some of the biggest accounting firms in the industry who are currently doing nothing illegal.
The upcoming G20 summit will take a long look at closing the loopholes that multinational firms firms currently exploit to reduce their tax liability.
The reasons for these moves by multinational companies aren't always clear; many believe that a shareholder theory perspective can be used as they are trying to increase shareholder value the most by reporting the highest possible net profit. However, agency theory could also be applied as the higher the profits, the higher the reward for senior management.
Sunday, 17 February 2013
Raising multinational finance
There are two methods of raising finance for multinational firms; debt and equity. Equity is sold to investors in the form of a share, or a number of shares in the company. When a company first starts to sell its shares in an Initial Public Offering (IPO) it becomes 'listed' on the stock exchange which it had applied to.
Debt finance is raised through the securing of Capital from a lender (eg. a bank) in return for a promise (either secured, or not) to repay the money borrowed at a later date and to pay interest in the interim period on a regular basis.
In recent news, the sale of Heinz to Warren Buffett's Berkshire Hathaway and the private equity firm 3G has used both share capital and debt finance to secure it. Shareholders are still to vote on the outcome of the sale but Berkshire Hathaway will be paying $12-13 billion in cash totaling $23 billion and the remaining balance will be raised through debt finance. Current share holders are going to be offered $72.50 per share which is a 20% premium to the current market share price, representing a significant return on investment for original shareholders.
The huge amount of debt to be taken on (c $5 billion) is a risk even considering that debt is one of the least risky forms of multinational finance. However, the finer points of the deal are still to be decided and this includes what kind of debt will be used and what it will be secured against (a figure this large will surely be secured against something, despite Berkshire Hathaway having an excellent credit rating from Moody's of Aa2).
During the Economic crisis, the number of mergers and acquisitions fell as the rate of borrowing went up and it become more difficult to raise equity finance as fewer investors were keen to spend their capital. But recently there has been a number of headline grabbing mergers, such as that between American Airlines and US Airways for $11 billion that will create the worlds largest airline. The other recent example of this was the proposed takeover of Dell by its founder, Michael Dell, for $24 billion. Closer to home, the UK's Virgin Media is to be bought by Liberty Global for $23.3 billion.
The US Airways and American Airlines merger has brought a lot of scrutiny on itself as it raises questions regarding the competition within the industry, particularly North America. However, this is a point for another post!
Debt finance is raised through the securing of Capital from a lender (eg. a bank) in return for a promise (either secured, or not) to repay the money borrowed at a later date and to pay interest in the interim period on a regular basis.
In recent news, the sale of Heinz to Warren Buffett's Berkshire Hathaway and the private equity firm 3G has used both share capital and debt finance to secure it. Shareholders are still to vote on the outcome of the sale but Berkshire Hathaway will be paying $12-13 billion in cash totaling $23 billion and the remaining balance will be raised through debt finance. Current share holders are going to be offered $72.50 per share which is a 20% premium to the current market share price, representing a significant return on investment for original shareholders.
The huge amount of debt to be taken on (c $5 billion) is a risk even considering that debt is one of the least risky forms of multinational finance. However, the finer points of the deal are still to be decided and this includes what kind of debt will be used and what it will be secured against (a figure this large will surely be secured against something, despite Berkshire Hathaway having an excellent credit rating from Moody's of Aa2).
During the Economic crisis, the number of mergers and acquisitions fell as the rate of borrowing went up and it become more difficult to raise equity finance as fewer investors were keen to spend their capital. But recently there has been a number of headline grabbing mergers, such as that between American Airlines and US Airways for $11 billion that will create the worlds largest airline. The other recent example of this was the proposed takeover of Dell by its founder, Michael Dell, for $24 billion. Closer to home, the UK's Virgin Media is to be bought by Liberty Global for $23.3 billion.
The US Airways and American Airlines merger has brought a lot of scrutiny on itself as it raises questions regarding the competition within the industry, particularly North America. However, this is a point for another post!
Sunday, 10 February 2013
International Stock Exchanges and Stock Market Efficiency
Fama (1970) identified 3 different forms of Stock Market efficiency; weak, semi-strong and strong. Weak form efficiency is considered to be the minimum required for a market to operate and the current share price is based only on the past performance of the share price of a company. Most stock exchanges operate at a higher level than this since there are no mechanical trading rules that can generate profits in excess of the average return.
Semi-strong form efficiency is based on past share price movements and all publicly available information and the market will react quickly and rationally to any new information. This is the category that most stock exchanges fall into as they can't make abnormal returns by studying the news as the share prices will already have been updated with all publicly available information. For example, on Friday 8th February, the share price of Moody's, a credit agency, fell 6.6% because of legal action being taken within the industry. This shows not only that as soon as news becomes publicly available there is a visible impact on a company but also that the company doesn't even need to be directly involved with the story but because it is working within the same industry the negative information also had an impact on Moody's. This is also despite the fact that the CEO stated that he had no knowledge of any impending legal action after one of their competitors (Standard & Poor) was sued by the US Government.
Kendal (1953) also had some theories that Fama built upon for his Forms of Efficiency. He stated that there was no systematic link between one price movement and the subsequent ones. This is evidenced by Moody's share price falling despite the announcement of a 66% net profit increase in the last quarter of 2012. (Considered good news!)
This also shows that the share price reflects all known information at all times.
Recently Boeing, the airplane manufacturer has encountered problems with the batteries on some of its new Dreamliner planes and has had to delay the delivery of many orders. This has had a negative impact on the share price of Boeing.
However, there are anomalies that have been discovered and subsequently solved due to the nature of the stock exchanges around the world and those stock brokers working in them.
For example, the time of day effect, which works in 2 ways. Before the weekend prices may increase as buyers want to have a good portfolio before the weekend and then on Monday morning the share prices tend to fall as they get rid of shares they decided they didn't need over the weekend. There was a time when if information came out at lunch time then the share price was not adjusted and it was possible to make abnormal gains because all the analysts would be out having lunch. This was easily solved by having staggered lunch breaks. However, many stock exchange workers now hardly ever leave their desks during the day until the market closes, so as to avoid missing any information.
The final form of efficiency is is Strong form efficiency. This implies that all information (public or not) is reflected in the share price. This implies that not even insider dealing would lead to abnormal gains, therefore markets can often be described as strong form inefficient. This leaves the market open to insider dealing but there is a serious threat of imprisonment for this behavior. There haven't been any recent examples of insider dealing but the Former CEO of Enron Jeff Skilling was a high profile example in the early naughties.
These forms of efficiency mean that abnormal gains can only be made by chance or through illegal means.
Semi-strong form efficiency is based on past share price movements and all publicly available information and the market will react quickly and rationally to any new information. This is the category that most stock exchanges fall into as they can't make abnormal returns by studying the news as the share prices will already have been updated with all publicly available information. For example, on Friday 8th February, the share price of Moody's, a credit agency, fell 6.6% because of legal action being taken within the industry. This shows not only that as soon as news becomes publicly available there is a visible impact on a company but also that the company doesn't even need to be directly involved with the story but because it is working within the same industry the negative information also had an impact on Moody's. This is also despite the fact that the CEO stated that he had no knowledge of any impending legal action after one of their competitors (Standard & Poor) was sued by the US Government.
Kendal (1953) also had some theories that Fama built upon for his Forms of Efficiency. He stated that there was no systematic link between one price movement and the subsequent ones. This is evidenced by Moody's share price falling despite the announcement of a 66% net profit increase in the last quarter of 2012. (Considered good news!)
This also shows that the share price reflects all known information at all times.
Recently Boeing, the airplane manufacturer has encountered problems with the batteries on some of its new Dreamliner planes and has had to delay the delivery of many orders. This has had a negative impact on the share price of Boeing.
However, there are anomalies that have been discovered and subsequently solved due to the nature of the stock exchanges around the world and those stock brokers working in them.
For example, the time of day effect, which works in 2 ways. Before the weekend prices may increase as buyers want to have a good portfolio before the weekend and then on Monday morning the share prices tend to fall as they get rid of shares they decided they didn't need over the weekend. There was a time when if information came out at lunch time then the share price was not adjusted and it was possible to make abnormal gains because all the analysts would be out having lunch. This was easily solved by having staggered lunch breaks. However, many stock exchange workers now hardly ever leave their desks during the day until the market closes, so as to avoid missing any information.
The final form of efficiency is is Strong form efficiency. This implies that all information (public or not) is reflected in the share price. This implies that not even insider dealing would lead to abnormal gains, therefore markets can often be described as strong form inefficient. This leaves the market open to insider dealing but there is a serious threat of imprisonment for this behavior. There haven't been any recent examples of insider dealing but the Former CEO of Enron Jeff Skilling was a high profile example in the early naughties.
These forms of efficiency mean that abnormal gains can only be made by chance or through illegal means.
Sunday, 3 February 2013
A recovery of shareholder wealth for Research in Motion?
Shareholder wealth maximization is considered the foremost strategy for modern companies to pursue. It requires a combination of long and short term goals but above all is to link the objectives of the management team of a company to that companies objectives. This will motivate the managers to do what is best for the company in the future, while not necessarily providing the company with many short term benefits. This avoids the risk of managers acting in their own interests (agency theory) and also utilizes share options reward schemes to create incentive's for management.
Research in Motion (RIM), the company behind Blackberry, was for many years a very successful global contender with its modern devices with high functionality that proved to be very popular among business' all over the world. However, in recent years it has had a number of failures that have caused the share price to fall through the floor. While the company still sells a large amount of devices (14.1 million last year) its failures are most often contributed to the management team.
The Co-CEO's Mike Lazaridis and Jim Balsillie have delayed release dates and have faced great public ridicule regarding the failures of the many services for up to three days at a time. Their share of the smartphone market has fallen (from 19% to 12% in 2011) and there is a growing number of people who would rather use their own smartphones for work and email rather than the company issued Blackberry. The release of the Blackberry Playbook tablet was an unmitigated disaster with serious design flaws which appeared to have been rushed off the production line to compete with the top shelf products already flooding the market. 500,000 models were shipped in the first quarter after the release but only 200,000 in the following quarter.
This string of failures by management have led to many questions regarding their competency to run the company. Have they lost sight of objectives to increase shareholder wealth or were those objectives even evident in the first place? More recently the share price of RIM took a hit after the 2012 summer riots throughout the UK which it was believed were organised using the Blackberry messenger service.
On January 22nd 2012, Thorsten Heins became the new CEO of RIM. This change at the top had been a long time coming and it came at a time when things for Blackberry were looking pretty dire; in the last year the share price had fallen by 70% and RIM was being badly beaten by competition from the Apple iPhone and Google's Android smartphones.
The questions now being asked are what kind of changes are required from RIM for it to start making a recovery? Market analyst's were calling for RIM to consider selling the handset production business and concentrate on what it was originally good at: the corporate customers.
In the last few weeks, RIM has changed its name to Blackberry and has presented it's newest product, the Blackberry Z10, to the market. This product is running the new operating system, Blackberry 10, which is either going to take back part of the market for Blackberry or doom it to further failures.
Thorsten Heins has obviously decided that it was in the companies best interests to keep producing Blackberry devices but it is yet to be seen whether this move will be successful. The innovation will no doubt impress shareholders but is it enough? Can it compete at the highest levels with the iPhone and android models that have come to dominate the smartphone markets? Has he done enough to safeguard the interests of shareholders in the long term? Only time will tell....
Research in Motion (RIM), the company behind Blackberry, was for many years a very successful global contender with its modern devices with high functionality that proved to be very popular among business' all over the world. However, in recent years it has had a number of failures that have caused the share price to fall through the floor. While the company still sells a large amount of devices (14.1 million last year) its failures are most often contributed to the management team.
The Co-CEO's Mike Lazaridis and Jim Balsillie have delayed release dates and have faced great public ridicule regarding the failures of the many services for up to three days at a time. Their share of the smartphone market has fallen (from 19% to 12% in 2011) and there is a growing number of people who would rather use their own smartphones for work and email rather than the company issued Blackberry. The release of the Blackberry Playbook tablet was an unmitigated disaster with serious design flaws which appeared to have been rushed off the production line to compete with the top shelf products already flooding the market. 500,000 models were shipped in the first quarter after the release but only 200,000 in the following quarter.
This string of failures by management have led to many questions regarding their competency to run the company. Have they lost sight of objectives to increase shareholder wealth or were those objectives even evident in the first place? More recently the share price of RIM took a hit after the 2012 summer riots throughout the UK which it was believed were organised using the Blackberry messenger service.
On January 22nd 2012, Thorsten Heins became the new CEO of RIM. This change at the top had been a long time coming and it came at a time when things for Blackberry were looking pretty dire; in the last year the share price had fallen by 70% and RIM was being badly beaten by competition from the Apple iPhone and Google's Android smartphones.
The questions now being asked are what kind of changes are required from RIM for it to start making a recovery? Market analyst's were calling for RIM to consider selling the handset production business and concentrate on what it was originally good at: the corporate customers.
In the last few weeks, RIM has changed its name to Blackberry and has presented it's newest product, the Blackberry Z10, to the market. This product is running the new operating system, Blackberry 10, which is either going to take back part of the market for Blackberry or doom it to further failures.
Thorsten Heins has obviously decided that it was in the companies best interests to keep producing Blackberry devices but it is yet to be seen whether this move will be successful. The innovation will no doubt impress shareholders but is it enough? Can it compete at the highest levels with the iPhone and android models that have come to dominate the smartphone markets? Has he done enough to safeguard the interests of shareholders in the long term? Only time will tell....
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