General Motor (GM) give dividend payment to its shareholders.

Creating a dividend policy is important because it signal the company's performance and reputation to the investors and it increase shareholders' confidence in their business and the future of the business itself. Normally, dividend payment will be given in successful financial period or by how much liquid assets they have either by how much they produce or number of loans.

Dividend payment is important to investors because the future is always volatile and held uncertain future gains. That's make the investors being paid or have money rather than get involve in uncertain investment. Thus the dividend policy create the reputation of company's market value.

Giving high dividend payment to the shareholders shows good benefits such as +NPV(Net Present Value), good financial year, high market value and share price. But be careful not every high dividend paid shows good signs of the company because high rate of dividend can signal the firm having less attractive investment project because investors  wants high future investment return not less. Thus, some investors prefer companies with low dividend or none at all because it is more secure and stable.

Therefore, it is important for the firm to justify and clearly explain to the shareholders and investors about changing the dividend policies/ amount to avoid any misunderstanding of the company's decision and its reputation. Also it is important to have stable and reasonable dividend payment to show that the shareholders can invest safely, good strategies and stable market value.

For example, General Motor (GM) announce that it will resume their dividend payment to its shareholders since 2008. The reason why the GM have not pay any dividend to its investors or shareholders was because there is financial recession or global financial crisis during 2008-2009 in the US. The company almost went to bankruptcy but it is rescued after the US government bailout them.

With the government's lends and supports the have a high jump recovery sales in the US and China Market. Therefore, this year the company will pay 30 cents per share for the first time since 2008.  The firm has sold 9.71 million vehicles in 2013 and its an increase of 4% compare to last year.  According to the data over the past few days, auto sales in China jumped 14% in 2013 to amount of 21.98 million vehicles. Furthermore, the US have hit 15.6 million units last year compare to 10.4 million in 2009.

"This return to shareholders is consistent with our financial capital priorities and is an important signal of confidence in our plans for a continuing profitable future," Dan Ammann, GM's chief financial officer, said in a statement.

"They are doing exceedingly well in countries like China and India, as they have come with models that are better suited for developing markets," Vivek Vaidya an auto analyst with consulting firm Frost & Sullivan told the BBC.

The payment and decision GM makes does not mean that the company is lack in better future and attractive projects but it shows that the GM cares and rewards their investors and shareholders that keep investing and helping the company's growth.  In my opinion,  their decisions not paying the shareholders for many years its reasonable because during 2008-2009 global crisis started and the following year the US's auto company having difficult and uncertain financial year. And according to my opinion, the owner pay the dividends to its shareholders now even though their profit rise up after the US government help is because the company also wants to retained its residual profit to invest in the company for future investment project, to secure the company's financial growth and increase shareholders' confidence for the future.  It is wise to give dividend payment when the market value continuously growing over the years rather than giving dividend after the company is bailout from bankruptcy.

Capital Structure

In the previous blogs, I talk about Equity Finance and related to it to Facebook share price in the stock market. The old blog is actually focusing on type of  financing for corporate financing and the topic focus was debt or equity finance but i choose equity finance.

Capital structure is how company finance its assets through debt,equity or hybrid securities. It is not surprising that previous blog was related to capital structure because capital structure is the "type of financing for corporate finance". So in a sense corporate finance is actually a system or area dealing with sources of firm's financing. But last week topic does not talk about corporate finance but type of financing sources for it.

in this week blog i'm going to talk of how debt finance and equity finance impact optimal capital structure. Most companies preferred get sources through debts because it is cheaper, less risky, lenders require low rate of return than ordinary share, debt interest is reduced by tax paid and debt is suitable for issuing and transaction costs.  But not matter how much profit you have or good financial year, companies still need to pay huge amount of debts which can be a burden even in a bad year. But debt decrease WACC and increase cost of equity as shareholder  demands more in return. So debt has two folding side.

For financing through gearing, it can increase shareholder wealth but it is too risky because Ke outweigh the extra debt (Kd) and the WACC rises and share price and shareholder wealth falls. There will be financial risks and bankruptcy risks if the firm finance too much in equity.

But it depend on the capital structure of each company. Some companies like to finance using equity because of illiquid assets but other through debt. Market industry that focus on retails chain or supermarkets suitable for debt finance because equity will be risky for them. But companies in related to banks or any share player like to used equity to finance their profit by attracting investors or sell share or buy share. Like Facebook that sells high shares to finance the business, attract investors and pay off their debts.

Family business doesn't have problem in raising funds.

I define family business as one in which more than one family member either owns or works in the
business and there is intent to keep the business in the family.   Family business focus on expanding their ownership level, succession and developing the business.  Family business can be small firm owned by entrepreneurs or private firms. Family business are different from public companies as they do not funds by share but instead by families or friends or other family members. The size, age, profitability and experiences define if the family business belong to the private or public sectors.

Family business raise funds differently than public firms. They do not find capital using the shareholders' equity or stock market as they are very private about their family secrets, illusive and closed environments. Thus investors or shareholders have problem getting inside of the family business.
The capital source of family business are loans from friends or family or other informal ways. External source can be given depending the maturity of the business.


Based on my perspective, family business doesn't have any problem on getting funds to raise capital for their firm or profit. It is because there are a lots of family business company are very successful and produced profits.  For example River Island that is a private company and still owned by the Lewis Family. This business has grown from just nine stores to 70 stores in 1985 and now over 300 stores in the UK, Republic of Ireland, Russia, Netherlands, Poland, Belgium, Middle East, Ukraise, Georgia, Armenia and Singapore. It's website has successfully ships goods to over 100 countries worldwide.  River Island is one of the great examples of a private, family business and successful companies worldwide.

The birth of River Island is that the Lewis family formed the Lewis Trust Groups which one of the family member run the hotels, property and investment business while Bernard (the founder) in charge of the retail operations. Thanks to the source of funds and finance the business got from other type of business the family owned. The company able to expand into menswear in 1982 and then finally merged with Chelsea Girl to become one retail that focus on mens and women clothes under the brand name of River Island in 1988. In 2010, the introduced kids-wear.


As you can see from the examples above,  family business proved not having difficulty finding funds to grow their business.  They don't have to find financial sources only externally such as banks loans or wait the business to be mature. The family members provide the financial source by giving loans or support the business. It can be said that getting loans from family is less risky than banks.

Crowdfunding: Kickstarter

In this week lecture, I learn about Crowd-funding and it's my first time i encounter this kind of topic.  In general, crowd-funding is a type of service of an open call that let people make projects or seek financial resources in the form of donation or rewards form and/or voting rights in order to support the plan for specific reasons. Crowd-funding essentially through the internet so it is like customers of specific product category (music, bands, technology, dance, movies, etc) will joined a project that match their interest and pay/give money to this project. In return, the companies or people who start this project will give the donators a reward.  Crowd-funding has two types of reward based  platform which are Kickstarter and Indiegogo. Kickstarter is the most famous and common crowd-fundung platform for companies to get financial needs or funds of a project.

The recent examples  of kickstarter project are the Veronica Mars Movie project. This project has reached  around $5,700,000 millions and it's the all time highest funded project in FILM category with the most project backers in any project in Kickstarter history. The target goal was $2 million. Veronica Mars movie is showing on 14 March 2014. The backers who support or funds this film will get rewards in various forms such as t-shirt, dvds, posters, premiere screening, a role as the supporting characters, shooting scripts and watch online in Flixster or Ultraviolet. This movie was a tv show that only receive 3 millions viewers. The tv show ended in 2007 because the provider cancel it and so Veronica Mars stuck being a college girl. In this movie, Kristen Bell reprise her role again as Veronica and now Veronica is not a school girl anymore but finding works or you can say the movie is about the future life of Veronica.

With the help of Kickstarter, this project was able to be recognized and share it to fan movie. But truly what makes the movie reached $5 million and became the highest fund project was the customers or the loyal fans of this series. The important aspect of crowd-funding is "word mouth marketing" which mean that people (fans in this case) spread the news and share it to other people with similar interest. They can do it through social media such as Facebook, Twitter, Tumblr and many forms.

For those backers who have problem watching online with Flixster or Ultraviolet, Warner Bros (WB) will fully refund the price charged on another platform service or $10 refund of their Kickstarter pledge for digital download as their reward.

This is my first time encountering topic of crowd-funding and getting money using online donations. What i know so far to get money is in the form of loans or equity. There is advantages and disadvantages of doing online funds, issue equity and loans.  Crowd-funding is one of great ways to finance money and reach project goals even though at times it can be risky or forfeit the bid. It brings many good opportunities such as the Veronica Mars project because getting money from studios or loans from bank will be expensive rather than getting funds online from widespread of fans. Also one of the best way to word mouth-mouth to fans in same category (music) or specific category (Harry Potter fans) in different part of the earth.

Complication and benefits of Merger and Acquisition to Cerberus Capital and Safeways.

In general, when company merge and acquire other company it will either used cash or stock to do it.  There are pros and cons of using cash and stock for doing merger and acquisition.

The advantages when firms used cash are: 

• The parent's shareholder or the acquirer's shareholders maintain the same level of control over their company and subsidiaries. 
• There is a simplicity and preciseness in the company's structure and environment  which give a great chance of success
• The recipients can spread their investments

The disadvantages of cash are:

• Shareholder may be liable for capital gains tax (CGT)
• There will be stress or tension of acquirer's cash flow and difficulty of adjusting financial gearing 

The advantages to target shareholders of receiving shares in the acquisition process are:

• capital gains tax can be postponed
• maintain an interest in the combined entity
• for the acquirer the advantages of offering shares is that there is no immediate outflow of cash

However the disadvantages of that are:

• the price earning ratio game can be played
• there will be dilution of existing shareholder's position
• capital structure of the firms can have bad effect from the changes

Though at first acquiring and merging with other companies using cash or stock sounds good and can improve the company's performance and market competitors, there are always risks and down side of it. 

Cerberus Capital Management would acquire Safeway for $9.4 billion. This M&A was planned to help both companies cut cost and expand their product selections which enables them to compete with big box retailers, convenience stores and grocers. 

"This combination will improve our ability to respond to increased competition and customers' changing needs." said Safeway Chief Executives Officer Robert Edwards. 

Combining two supermarket chains create a total of 2,400 stores, almost double size of Safeway today and slightly little than its rival Kroger's roughly about 2,600 stores. The merged will create a quarter million employees, 27 distribution centers and 20 manufacturing plants across the country. 

Safeway shareholders get a healthy payday out of the deal because the company will pay investors $40 per share which is 72 percent increase over Safeway's stock price a year ago. Also Safeway shareholders will get $32.50 per share in cash plus other distributions with a value of $3.65 per share. 

This M&A brings a lot of potential benefits for both companies to compete in this tough supermarket and grocery retail competitions. Also this can help Cerberus Capital Management to distribute their brand further and cut cost because Safeway is the second largest US Mainstream Grocery Operator which can help Cerberus Capital, a private equity firm, to operate their business and improve their performance and create opportunities for them to attract investors. From this acquisition, Safeway's shareholders get higher earnings and shares. This is a good sign because these shareholders get benefits from the M&A process. 

However there will be complication arises for this M&A such as Safeway or Cerberus's chain Albertsons have to closed their stores. Even though the Executives said there are no plans to closed down any stores but analyst said there will be many redundancy that stores sooner or later will inevitably close. This is true because purchasing $9.4 billion in cash is not an easy thing. Companies have to pay debts somehow even Sobeys has been ordered by Competition Bureau to sell its 23 stores to approve the $5.8 billion(which is lesser than Cerberus deal) purchase Safeway Canada grocer.

Chinese Resources Enterprise discuss with Tesco about joint venture Tesco's supermarkets in China.

Foreign Direct Investment (FDI) is became one of the most common and popular tool for business to invest in host country. FDI enable companies to obtain overseas resources, increase access to return markets, increase local capital markets and drive economic growth. FDI have 4 types of method:

1. incorporating a completely owned subsidiaries or company anywhere 
2. acquiring shares in an associated enterprise
3. through a merger or acquisition of an unrelated enterprise
4. participating in an equity  joint venture with another investor or enterprise

 The example I give  below is related to joint venture. 

China Resources Enterprise (CRE) talks with the UK retailer Tesco to merge the Tesco's hypermarkets and supermarkets in China. This joint venture is created so that both parties would be the leading multi-format retailer in China. CRE would control 80% of the new chain while Tesco only got 20%. 

CRE said the venture would benefits "deep understanding of local customers, establishing nationwide infrastructure and proven track records as a partner with Tesco's global retail expertise, international sourcing scale and supply chain capabilities". 

An analyst said that the joint venture will allow Tesco to reduce the amount of committed capital  to its China business.

Tesco started to operate in China in 2004 but over the years Tesco has been struggling in China and lose money. This is similar to Carrefour because they had issues in their home market that they had to resolve. 

"This may look win-win, but in reality , Tesco is saying ' I can't figure out China'," said one of Hong Kong based banker to Reuters news agency. 

My opinion  regarding this joint venture between Tesco UK markets and China Markets that  Tesco should do joint venture with CRE because this can increase business profit and improve market performance in China which Tesco have problem in the past years. Moreover , Tesco can be the leading multinational retailer company in China because with the help of Chinese Retailer Enterprise they can know better of the local customers, the infrastructure of China and many others that can improve the Tesco's products in China and the distribution methods.

 Also, this opportunity can help Tesco to reduce their debts, minimize amount of capital, increase stock prices and improve their weak business performance in China since it is forecast the Chinese markets will grow 50% in the next three years. Even though there are many tough competitors such as Sun Art supermarket , this joint venture can bring benefits and advantages for Tesco, UK retailer. Also this joint venture might help Tesco not to closed down their overseas markets like In Japan and US. 

Increase of price app in Japan and the issue of transfer pricing for multinational companies.

Economic exposure happens when business doing abroad. Common risks for economic exposure are fluctuation of exchange rates, unstable governments and shaky economies. These factors have an effect on company's cash flow and earnings. But from long term view the potential for doing business abroad makes the risks acceptable to most businesses. 

On October 16, 2013 Apple gives notification to the developers that Japanese iOS app store will increase. This is due to likely the economic hardship and continued restoration against the dollar. Though Apple have not yet given detail how fair it plans to adjust the price but it could be similar to a 2011 price jump that effected UK. At times, the price apps bounce from 0.59 pound to 0.69 pound. The new Pricing Matrix for Japan can be viewed on iTunes Connect and the updates of Paid Applications contracts will available after the price adjustment goes live. The new prices should be mount soon. The iOS and Mac App Stores in Japan have not yet receive Apple's new prices. 

The weak yen and the restoration against US dollar make Apple decide to increase the price of Apps. Apple. Apple decide to do this because if they don't their profit in Japan will gain losses and because  Japan gaining restoration with US Dollar the company decide to grab these opportunities to increase the prices and gain more earnings and cash flow.  So the pricing matrix and paid applications contracts will be changed and it will be available and viewed after the company decide the fixed price adjustment since the unstable of Japan currency rate cannot make the company decide directly the fixed price. It will be risky for Apple to do this because this can make the Japanese consumer buy Apple's apps less. 

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Transfer pricing are charges for goos and services between controlled legal entities within an enterprise or companies. In the principle of transfer pricing, the transfer price should be according either what the seller would charge in an independent, arm's length customer or what the buyer would pay in an independent, arm's length supplier. Today transfer pricing is misused by multinational companies such as  transfer pricing is used to lower profits in a division of an enterprise that is located in a country with high level of taxes or raise profits in a country with no or law taxes as a tax haven. Transfer pricing is also a major tool for corporate to do tax avoidance. 

Companies such as Google, Starbuck and Amazon used transfer pricing to avoid paying high taxes. It is because those multinational companies have complex tax structure and will pay more taxes amount (billions) compare to small or medium companies. In addition those companies are undoubtedly under competitive pressures from local and foreign competitors. 

Starbucks had sales of £400m in the UK last year but does not pay corporation tax at all. It transferred some money to their sister company in Dutch in royalty payments, bought coffee beans from Switzerland and pay high interest rates to borrow from other parts of business. 

Amazon which sales in the UK is £3.35bn in 2011 but only reported pay tax expense in £1.8m. Moreover, Google's UK unit just paid £6m to the Treasury on UK turnover  of £395m

In my opinion, these companies does not do anything illegal because avoiding tax is legal for them since they are large companies with multiple locations. Also, multinationals companies have more opportunity to make locational decisions and each locations or countries they decide to operate have different tax regulation. In addition, those three companies also face with competitive pressure and these cause their expenses to be expensive. For me they avoid tax or pay lower tax because of legitimate business reasons. 

Facebook raise capital by equity finance. The company sells $55.05 for 70 million shares each.

Equity finance is another way for business to receive capital other than loans or debt.  Company sells their stocks to investors to raise capital and in return the shareholders receive ownership interest. Small or startup business used debt finance to start their business since they do not have sufficient revenues, cash flow or hard assets to act as collateral. Equity finance can attract capital and make early stage investors to willingly take risk with the business because investors are interested in acquiring ownership interests. For investors, equity financing is an important method of acquiring ownership interests in companies. Investors are always wary that subsequent rounds of equity financing usually require them to dilute some portion of their ownership as well.

Multinational company like Facebook Inc and Chief Executive Mark Zuckerberg sells stocks at $55.05 each for 70 million shares. Sound like a good share deal for investors. This make the largest stock offering for U.S public company since a sale of $7.6 billion in American International Group Inc shares in Decemver 2012. With that Facebook make a comback to S&P 500 cements after its stock plunged in the wake of its IPO but this will make the company trigger demand from index funds and other institutions to own a company’s stock.

The offer price give a 0.1% discounts to Facebook closing share price at Friday. The market participants expected the deal to price just below where the stock finsihed the week. Facebook's shares have increased to 107% in 2013. The deal include rally of consumer and mobile-oriented internet business.

The company explained it will use the profits from the sale for working capital and other corporate purposes. But currently the company does not have specific purpose of the net proceeds planned. Zuckerberg's will take $2.3 billion to pay his incurred taxes as a result from exercising an option to buy 60 million Facebook shares of Class B common stock. Facebook sells 27 million shares while company baord member Mark Andreessen sells 1.6 million shares. Mr. Zuckerberg will give 18 million shares to Silicon Valley Community Foundation and this able to reduce his taxable income by $990 million. So this make Zuckerberg owe taxes about $1.2 billion and the remaining $1.1 billion he can keep.

 This might be a good decision to increase company's performances and financial health because if Facebook used debt finance then the company will faces a lot of interest loans and this  decision can give higher return rate for shareholders and investors since they are the source of funds for the company. Also using banks can make the amount of debts higher than its assets which is not a good sign for multionational and big company like Facebook. So overall, Facebook using equity finance to find sources of finances and increase its financial performance is a good choice in my opinion.

In addition, Facebook can create opportunity to improve their social business such as invest in new products and acquire other companies to increase competition. Facebook also can used to bost popularity of its own mobile messenger app.

BT plan of investing £50m to increase broadband coverage doesn't bring sharehodler value creation.

Shareholder value creation is not about making profit, increase share price or manage earning but its about long term cash flow bigger than the cost of capital and vice versa. But high return does not mean create better value instead it increase the costs of capital. To get good actual return and value creation the rate has to be >11%pa.

BT announce to invest £50m to expand their fibre broadband for their customers and will operates in more than 30 cities for the next three months or so. This is part of the company's plan to  provides fast internet services for two-thirds of UK consumers.

BT  already allocate £2.5bn to deploy their plan of providing better fibre broadband service to 400,000 homes and businesses in more than 30 cities. Consumers can look forward for superfast broadband connections. The group now has reached 18 million homes and businesses.

The Managing Director of Network Investment at Openreach, Mike Galvin expressed that "Our fibre programme is going extremely well, with our engineers connecting homes and businesses across the UK. "Some city areas have proved challenging in the past, but we are returning to those and will pass hundreds of thousands of additional premises."

The company has successfully required £530m funds from the government's Braodband Delivery UK programme (BDUK).  The £539m funds are used to extend coverage approximately 90% of the UK by  late 2015 or early year of 2016. The government will also give extra £250m so that by 2017 it will reach to 98% of premises and areas that are not covered by BT will have better internet service. Although there are no decision on how to allocate the funds in the best way even though given by critics that the first offer given to BT fully. 

So example like BT, BT only focus on creating profits or shareholder's wealth by investing £50m with additional funds from the government. This is contradict to the shareholder value creation because by doing that BT cost of capital will be bigger than its long term cash flow. Thus BT attained a high return and destroyed the shareholder's value instead of creating it.

In addition, BT is in risky position because investing in a huge amoutn can bring big debts since not only the company invest but they acquired funds from the government which include additional funds. In short term outlook the plan is going well and customers can enjoy the new broadband thus giving profits to BT but if you consider the long term outlook there will be challenges and problem along the way such as technical difficulty or the price of the broadband is more expensive and customers change other product to avoid paying high prices. Also having a risky investment can attract less the investors or does not guarantee good dividend payment to the shareholders. By that, less investors will be interested in invest in BT in the future because of the uncertain financial health BT will have.

 

 

 

 

Introduction to this Blog

This blog is made for doing my International Finance and Finance Management Course. It is requested by my tutor and ever week I updated this until the end of my course.