Objectives And General Principles Of Mergers Finance Essay - Free Essay Example

The panel of mergers and takeovers was established in 1968, in U.K, and since then has worked as an administrating body of the city code on mergers and takeovers. The fundamental objective of this body is to ensure that all the shareholders are treated fairly, on an equal basis, in cases of mergers and takeovers. The panel of takeovers and mergers is a chief body in U.K who acts as a regulator on these issues. The pillars/ proposition on which the code rests are: Equal treatment of all the shareholders belonging to the same class of shares. Basically, this proposition ensures the fair treatment of all the shareholders involved To enable the shareholders to make the best decision for themselves, the code ensures that they have timely information which is accurate and relevant, and may influence shareholder decision for their best interest The code also ensures that true market mechanisms are the only reflective of the prices of the security and no artificial factor affects them i.e. no false markets The board will not take any decision without prior knowledge of the shareholders. General principles The six general principles are the pillars on which the code rests upon. These general principles are basically the statements of good standards of commercial behavior. Besides, the general principles are further branched out into 38 rules, which are elaborated by their respective notes. The notes serve both to expand and explain the respective rule. The following figure highlights some of the vital rules of the code: rrrr.bmp  [1]  Adapted from General principles and rules, the Takeover Panel. Economic reasons for acquisitions and mergers Reasons There may be many motives behind the merger or acquisitions of companies. Each company may have its own set of unique reasons for going for either merger or acquisition. However, the reasons that may be common to all cases include: One possible reason behind merger or acquisition may be the consolidation of markets. The products most firms today are similar in nature, differentiated only to slight extents. The merger or acquisition may be a possible option in face of competing markets that would reduce the number of firms competing in the market and make them more consolidated. Merger or acquisition is a quick way of increasing the capacity of the firm. In addition, the acquired or merged firm both is from the same industry, and therefore would have similar expertise. No costs are incurred on training or obtaining machinery etc. Mergers and acquisitions also present the advantage of decreasing long run average cost as it begins to realize the economies of scale due to larg e scale production. A firm may feel that a gap exists in its existing portfolio and it is not catering fully to the market needs. A firm may sometimes want to counter a decline in sales of one industry by acquiring a firm in another industry. A firm may also wish to counter seasonal trends. All this can be achieved through mergers and acquisitions. A firm may merge with, or acquire another firm in a different industry, or selling products that the firms existing portfolio lacks. Another motive behind mergers and acquisitions is the forward and backward integration, towards the distribution channels, or backwards towards the sources of raw materials. In both cases, the motive is to have a stronger hold on the stages of the value chain, and may also be to restrict the supply to competing firms. Firms may also wish to have a greater access to technology, skills or sources of finances. The amalgamated firms of course have more vistas of opportunity when they operate as a single entity. Tax aversion may be another motive. Most countries laws levy more tax on idle cash than on operating businesses/assets. A merger or acquisition would not only enhance the operations of a firm and provide more sources of income, but would also provide tax exemptions. Reasons why expected economic benefits may not be achieved The potential advantages of mergers and acquisitions presented above may not offer the same benefits to all the stakeholders, and therefore a conflict of interest may not lead to benefit of all. The mergers and acquisitions are mostly from the organizations perspective, seeing only its economic gain, and therefore may overlook other stakeholders such as the customers and employees. One issue that must be addressed is that whether the management will be able to run both businesses simultaneously. Also, there remains a question whether the combined entity will be a as efficient as the two businesses operating independently. The clash of organizational cultures, structure and design further aggravate the problem and the economic benefits may not materialize. The change in the work environment, management and employee behavior might stop the firm from gaining the desired benefits. The firm must, therefore, try to arrive at a compromise which addresses the interests of all stakeholders. To sum up, the probable reasons which might stop the merger or acquisition to deliver the economic benefits that the firm may be expecting are: Human factor Difference in cultures Lack of integration Transition carried out without regarding employees sensitivity Lack of productivity due to unhappy workforce The company must have an integration plan in place for the post-merger or post- acquisition situation, to smoothly lead the transition from being a single entity to a combined one. Failure to incorporate an integration plan may cause the potential benefits of the amalgamation to transform into drawbacks and losses. To say in a nut shell, any decision to carry out a merger or acquisition should consider not only the legal and financial implications, but also the human consequences the effect of the deal upon the two companies managers and employees. It is upon them, ultimately, that the fate of the newly-merged company will depend. Part II Long term funding options available for unquoted Small and Medium Business Enterprises, and discuss the advantages and disadvantages of these funding options The following figure shows the long term funding options available to small and medium business enterprises: Type of funding Advantages Disadvantages Internal funds No accountability to third party Flexibility since there are no payment terms Credit score ratings are not affected Limited sources of finance Unlimited liability Loans bigger amounts can be borrowed Lower interest rates than overdrafts Regular repayments help to forecast cashflow Less flexible than compared to overdraft Inability to pay during designated time leads to further financial problems Overdrafts Borrowed amounts is flexible within limits Interest paid only on borrowed amounts Easy availability in time of need Quick and good source of cash backup Cannot be used for large borrowing Higher interest rates than loans Bank can ask for repayment anytime Overdrafts are secured against assets, and therefore put assets at stake in case of non payment Leasing and hire purchase arrangements Medium term funding regular nature helps plan cash flows payments are fixed, and therefore easy to plan payments Hire purchase and leasing agreements are long term commitments Variable rate payments makes it difficult to plan Stock market equity and corporate bond issues Source of cash flows finances can usually be kept for an indefinite period A Company can raise more capital than it could borrow. No repayment of principle amount Loss of Control Responsibility to shareholders for dividend payments Asset Disclosure Risk of takeover by rivals Dilution of value Venture capital or private equity Funding is restricted to the business project Venture capitalists can bring important skills, links and knowledge to your business. Venture capitalist can aid with secisionmaking and strategy In case of growth and profitability, further funding can be provided by the same investors Raising equity finance is time consuming and costly Have to provide info to potential investors Loss of decision making power Asset-based finance such as factoring and invoice discounting Small companies can usually get more cash more quickly than they could from a traditional bank loan. Asset-based lenders and factors offer a variety of services that encompass accounts receivable processing, collections and invoicing. Using assets to raise money causes profits cut. Part III Arguments for and against foregoing distribution of dividends and investing the funds saved The dividend policy always has some tradeoffs. Sometimes paying dividends means retaining little from the income. Conversely, as proposed by the director, not paying the dividends means that the profit is retained and invested. This means a lesser reliance on externally generated funds. The tradeoff should be made keeping in mind the firms objectives, whether paying dividends to the shareholders is more important, or whether investment would be more beneficial in long run.The two cases are a tradeoff between shareholders receiving dividend in short run, and the value of their stock increasing due to the investment. The residual dividend theory states that dividends should only be paid when there are residual earnings after investment purpose. However, if the shareholders are not happy with the no-payment policy, they may sell their shares to obtain an income. The arguments against the nonpayment of dividend are that shareholders are not usually pleased when they are not pa id dividends. However, if it is communicated to them that the income would then be used to finance investments projects, they might as well support the nonpayment as the investment ultimately improves the value of the firm and its shares. According to the corporate document repository  [2]  , the major reasons for using retained earnings to finance new investments, rather than to pay higher dividends and then raise new equity for the new investments, are as follows: The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. (Basic finance for marketers, 1997) The dividend policy of the company is in practice determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the share holders or any outsiders. (Basic finance for marketers, 1997) The use of retained earnings as opposed to new shares or debentures avoids issue costs. (Basic finance for marketers, 1997) The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. (Basic finance for marketers, 1997) Alternatives to cash dividends Dividend may be paid out in the form of stocks, and therefore is not a true dividend as it is not paid out in cash. This has the effect of diluting the share value by increasing the number of outstanding shares. Dividend reinvestment policy, DRIP, is another alternative to cash dividends. DRIP gives shareholders a chance to reinvest the money they would receive as cash dividend into additional shares of stock. DRIP is attractive as shareholders do not have to pay brokerage commission on stock purchase. Spin off shares are also referred to as property dividends in which a corporation gives out some valuable property to shareholders instead of cash dividends. The spin off shares may be shares of a subsidiary that the company owns. Past trends show that mostly spin offs are better than the parent company in terms of performance, and hence shareholders are better off. Shareholders may go for a no-dividend or low-dividend policy when it is communicated to them that for companys health and stock price, they may have to forgo cash dividends. Advantages and disadvantages of share repurchases, i.e. a company purchasing its own shares. Share repurchases reduce the number of outstanding shares of a company, thereby giving the shares a larger ownership in the company. The advantages and disadvantages of share repurchases are as follows: Advantages There is no additional tax imposed on share repurchases, and therefore it is a good way to increase the capital of shareholders. The equity/ownership of the shareholders increases and this means a greater potential of profits and dividends on shares. The share repurchases basically reduce the number of outstanding shares of the company. This is favorable as it reduces the dilution of the shares. Share repurchases reduce the number of outstanding shares. This means that a greater proportion of companys retained earnings are attributable to each outstanding share. Therefore, the EPS(earning per share) increases. Share repurchases reduces the fear from the corporate raiders. Undervalued shares of a profitable company are very attractive to companies seeking to acquire that company. Share repurchases, in effect, reduces this risk as the company repurchases its own shares. Furthermore, the future profit from these shares also goes to the company itself. Share repurchase may give out a positive signal to the public, as they may think management is repurchasing the shares because it thinks it is undervalued. Income received from share repurchases is the capital gain for a company. The repurchased stock can be resold to raise money when needed. Stock repurchases provide an internal investment opportunity to the corporation. If a firm wants to alter its capital structure, stock repurchase is an available option. Buybacks also has the advantage of eliminating minority group of stockholders. Also, it reduces the costs incurred by the firms in servicing small stockholders. Disadvantages There is an opportunity cost for every decision made by businesses today. The money used in buying back of shares could have been invested to a more optimal use, which perhaps would generate return on assets. Different financial metrics have different results of share repurchases. A buy back could result in a higher debt ratio. If the stock buybacks are issued to the companys management, the number of outstanding shares would remain the same and therefore no positive impact on EPS. If the public perceives that company is buying back its shares because it does not have any investment opportunity, this may be unfavorable for the company. Firm may have to pay penalties if the regulatory authorities such as the IRS think that buyback was to avoid taxes. A firm may end up paying a higher price for its own share if it has to bid up the prices of the shares.

What Consulting Firms Pay Biz Undergrads Will Surprise You

What Consulting Firms Pay Biz Undergrads Will Surprise You by: Marc Ethier on January 15, 2017 | 0 Comments Comments 10,075 Views January 15, 2017In an uncertain world, one thing, at least, remains true: Management consultants make bank.In 2016, top consulting firms experienced revenue growth of between 7% and 13%, according to newly released data from Management Consulted, a â€Å"leading resource on all things consulting† based in Redding, California — and that meant a big-time rise in salaries, between 4% and 5%, even as firms ramped up hiring and the Great Recession faded further in the rearview.Even during the recession, says Namaan Mian, Management Consulted’s operations manager, management consulting firms never cut back on salaries — they just hired fewer people. In other words, at least since 2011 when MC began compiling the data, it’s never been a bad time to get hired at a top consulting firm.â€Å"Salaries have been more than just creeping upward,† says Mian, whose company gathers data from industry insiders, clients, and readers. â€Å"The 4% to 5% rise is the biggest year-over-year increase we’ve seen since 2011. As the economy has picked up growth, these Fortune 100, 500, 1,000 companies that take advantage of the services that consulting firms offer, they’ve had more cash flow, more capital to invest in consultants. And that means that these consulting firms have to hire more people and are starting more projects.†BEST BASE: PARTHENON-EY. BEST TOTAL: ACCENTUREConsulting, of course, remains one of the most popular career choices for undergraduate business majors. At Washington University’s Olin School of Business, recently ranked by PoetsQuants the best undergraduate business school in the U.S., 21% of the Class of 2016 went into consulting. At Wharton and the University of Michigan’s Ross School, 22% of last year’s class accepted jobs with consulting firms ( see Where Biz Undergrads Go To Work). Clearly, one reason for the industrys popularity is pay.For newly graduated business students, the top firms for base salary in the first year after graduation are Parthenon-EY, which offers $90,000, Accenture ($80,000 to $85,000), Strategy ($85,000), BCG ($84,000), Bain ($83,500), and McKinsey ($83,000). But with a $10,000 signing bonus and up to $8,500 as a performance bonus, Accenture has the biggest total package of $103,500 — and that’s not even counting the $5,000 maximum for relocation, 6% match for 401k, and 15% discount on Accenture stock the firm offers. (See all firms’ compensation data on pages 2 and 3 of this story.)That’s right. Straight out of school and that four-year degree could be earning you upward of $100,000.â€Å"It’s crazy,† Mian says of the huge salaries at top firms. â€Å"But for the cream of the crop, it’s an even tougher job to get into these firms and they’ve made sure the payoff is worth it — because they knew they were getting the best of the best.â€Å"Parthenon-EY has had a big focus on trying to attract top talent. If you look at Bain or BCG, that base salary blows them out of the water. What they’re trying to do is really establish themselves as a top-tier strategy practice, and they’ve got a great reputation in the consulting world. But with bonuses and other incentives, other firms are offering more in total compensation. Accenture is offering more than $100,000, and that’s just out of this world.†DIGITAL EXPANSION STIFF COMPETITION FOR TALENTManagement Consulted (MC) has two main sources for its data: First and foremost, Mian says, â€Å"we work with thousands of private clients a year, and when they land offers they are gracious enough to come back and share with us the details of their offer, what firm, what position, what office, and we guarantee their anonymity. We’ve got hundreds and thousands of data points for all these different firms and we’ve compiled them.† In addition, the company works with â€Å"friends inside firms† who help shed light on cost structure, bonus structure, and other details.MC attributes the boom in revenue at consulting firms to increased demand for digital consulting services, resulting in widespread recruitment of data scientists and engineers as firms develop their digital practices. Mian says the rise in salaries has come about for several reasons, chief among them competition for the best talent with New York and Silicon Valley. â€Å"All of those factors together are kind of a perfect storm for those who manage to get an offer in consulting,† he tells PoetsQuants.The good news extends across the landscape for undergrads and interns as well as MBAs, Mian says. â€Å"We’ve fully thrown off the shackles of the Great Recession,† he says, adding that MC’s statistics are combined growt h numbers for MBAs and those with undergraduate degrees. â€Å"Undergrad numbers are rising at just about the same rate as MBA numbers are,† Mian says.COMPENSATION RISES FOR INTERNS, TOOThere are caveats to the rosy outlook. Mian says when it comes to bonuses, only the top 5% to 10% of employees receive the maximum amount; you’re more likely to get half that, and if things aren’t going well — if you’re what they call a â€Å"poor performer† — you’ll only get a small bonus, if any. Also, some bonuses, such as signing and relocation bonuses, can be meted out over years.But there’s no question that revenue and salaries at top management consulting firms are on a precipitous rise — and nearly double, or in some cases more, if you get your MBA. (Think that’s impressive? MC shows that consultants who leave their firms to take on banking or trading roles can increase their pay by 50%; those joining corporate Ameri ca can see 10% to 20% bumps in compensation — while probably working less.)The picture is bright for interns, too. Oliver Wyman offers $11,750 plus a $2,500 signing bonus for nine weeks, while McKinsey, Bain, and BCG all offer more than $14,000 for a 10-week summer. A.T. Kearney, L.E.K., and ZS Associates each offer $12,000.‘DEFINITELY A ROSY OUTLOOK’While the data compiled by MC shows salaries across the U.S. are typically flat regardless of location — with the exception of San Francisco, where they are slightly higher — it’s evident that salaries in general are much higher in the U.S. than internationally, Mian says.The reason? â€Å"Especially in the U.S., there’s a lot more competition,† Mian says. â€Å"These firms are competing with Wall Street and Silicon Valley, and so you’ve got to keep up compensation-wise. Most of these firms are U.S.-based, so their heaviest presence is in the U.S. and the average can get ske wed to the higher side because a lot of these positions are the U.S. office.†And even though they are paying more, with revenue outpacing salaries, Mian notes, â€Å"these firms are still pocketing more money every year. So they can well afford to hire more people at higher base salaries. I encourage everybody, if you want to pursue a career in business and leadership, this is a great training ground. It’s definitely a rosy outlook.†See pages 2 and 3 for salaries at each of the top firms, as well as internship salaries. Page 1 of 3123 »