Time for Goverment's Action

Recently, the news about the US government proposing about lower the top corporate tax rate and make it up by using the lost from the reducing the tax break like the loopholes that business organization was trying to avoid the tax.

The reason for the government in doing this, is the effective corporate tax rates were decreasing annually. This brings the government’s notice.

This was not only happens on the US as well as in the UK. But, since the high corporation tax, the business organization was using different way to avoid tax. The most popular way for Multinational Corporation is restructuring the organization to reduce their tax amount. Normally, organization can restructure their organization based on three ways in avoiding tax- ownership, transaction and transfer pricing.

From the case of Nabors Industries, it could be found that,  organization using the ownership method to restructure its company by moving their head office in to Bermuda. Nabors Industries was used to be an American corporation, while the high tax rate in the US, force the Nabors Industries move to the Bermuda, which is a zero tax rate country. The company was still trading their business in US (on shell). In the year 2005, the company announced generates $428.4 million in profit and based on that it ought to pay $86 million on tax, but the company only paid $30million in actual.  And, this was the reason why so many corporations want to avoid tax. It simply means that, by reducing their tax cost, it creates more shareholder wealth.

However, every coin has two sides, the bright sight brings more dividend to the shareholder and makes the company become more profitable and competitive, while in the opposite side, it reduces the government income. The same reason is applying in  US government in trying to rearrange their tax regulation to reduce that shell off game to improve their effective of corporate tax. 

From my personal view, I think it is time for the government to take some measures to reduce this phenomenon. Firstly, it is unfair for the small organization, as the multinational company will make use of their advantage in avoiding tax, which may leads unfair competition. Additionally, this will also encourage the small organization using other methods to avoid their tax in order to compete with the large company and this would not good for the government. Furthermore, as the large multinational companies using this method, it will also bring a kind of wind to follow, which might also has huge negative impact for the government economic, especially in this recession period. However, it is true that it is difficult to measure the taxes for multinational company and different countries have their own regulations. As a result, US government need to consider more when they trying to rearrange its tax.

(Annual report of Nabors Industries, daily mail, CNN news

http://www.dailymail.co.uk/news/article-2057306/Thirty-biggest-U-S-companies-paid-zero-income-tax-years-despite-making-combined-profits-160billion.html

http://www.focus.com/fyi/10-big-businesses-that-have-moved-abroad/#)

Debts finance or equity finance

Since the variety source of finance for corporation to choose, it has been a big problem for them to make decision. The debts finance and equity finance are two major methods of financing. Although they are quite similar in some way, they still have some unique advantage. Some small firm prefer to finance from debts finance, because it can provide the company needs with the low interest cost. In terms of the equity finance, although the company can get large number of capital from the capital market, it lose the control about the company. Moreover, it will cost a lot for them to make the initial public issue from the capital market.

However, most of the company more prefer to financing from the capital market. This is because not only the capital assets will not need to pay back but also the liquidity risk will no be a problem for the company. Especially, it was very suit for the large corporation, which always need to finance a large sum of money. This could be seen by Tullow, who is an international oil and gas company (Tullow.com).

After Tullow has noticed the natural decline production from the main exploration area, Tullow has changed its strategy and mainly focus on its exploration programme. Moreover, based on its new strategy, its new finance strategy is financing from the surplus cash flow or equity. Hence, it could be found that the company issue the shares annually, which leads the gearing ratio decreasing significantly. However, the ratio did not dropped dramatically in 2010 because of the company also bank loan to support the programme of acquisition of 50% stake in Uganda, which could be found from the cash flow. The reason for Tullow did not follow its finance strategy, because of the unexpected event of delayer finalising transaction in Uganda, which increase the needs of financing. Moreover, the reason for Tullow did not finance from the equity again is the amount of share issue in 2010 is larger than the pervious issue and the liquidity ratio is quit health in Tullow. Therefore, Tullow have to choose debt finance.

Overall, from the case of Tullow, it could be found that priority financing method is finance from the equity. The major reason for this is the company did not need to pay back the capital and the company only has to pay the annual dividend as the interest cost, which is a great deal for the large company. On the contrast, the bank loan always be the last choice for the big company like Tullow. This is because of the bank loan will increase the company’s liquidity risk and if there is any unexpected event happened, the company will meet the problem of bankrupted. However, from my personal view, the decision about whether to issue from the equity or debts more depends on the current situation of the company. For the small firm only small sum should go for the debts finance and the large sum which are more than 500,000 pounds than the company could consider joint venture. The equity finance are more suit for the large firm because of the equity finance needs large sum of transaction cost. Moreover, it is vital for the corporation to take the liquidity risk into consideration before they go for the debts finance.

(All the information are based on the website and the annual report of Tullow)

The Secret in Stock Market

Since the stock market created, it brings the solution for the needs of long term capital from corporation and the wish of investment for small group investors. As increasingly investors join in the market, people begin to analyse the regular of the stock market. Some  people like Kendal (1953) believed that the price of stock are random could not easy to find the rule and it will reflects the all the information in the world. However, the person like Fama (1970) suggested that the stock market could be divided into three types each with special characteristics: weak form efficiency, semi-strong form and strong form. And I more prefer with the later theory. 

The semi-strong form is the normal type of market in current period. The characteristics for this type of stock market is the share price reflects all historic and publicly information and it react quickly and rationally to new information (Arnold, 2008). This could be proved by the case of NIKE.

From the share price of NIKE in 2011, it could be found that after NIKE announced only 5% increase in net profit in the first period, the share price closed down 5.2% by that day. As the BBC said that the major reason of decreased share price is because of the increase rate in net profit could not achieve the exception level from the investors. Moreover, it also released the current problem of NIKE of the lower profit margin because of the high tax burden and manufacturing cost. Hence, although the net period increased, share price still dropped. This could be found that in the semi-strong market, the share price reflect all the public information, not only the information about the company’s profit but also the information of evaluation by the the third party.

Moreover, it could also be seen that after the second period announced that the well performance (13.8% increase in net profit) the share price jump up in hours after trading. Since the profit increased by rose in revenue, the market still worried about the problem of the cost. Similarly, in the third period, NIKE announced that that the net profit up 15% compare with the same quarter in last year. As the well performance and fantastic figure convenience the analyst that the problem will not affect NIKE significantly, the share price jump more than 5% after hours trading. This agreed with the semi-stock market will quickly reflects the public information. 

The company like NIKE operating in the semi-strong market, the investor will keep an eye on the operational condition within the company all the time; and this monitor will encourage the manager to achieve the shareholder values maximisation. On the other hand, for the investors in this kind of market, the high return are not easy to achieve and the fundamental technique skill could sometimes not so useful to apply in analyse. However, as the stock market always reflect the actual performance of the business like the case of NIKE, the investor should back to this point to chose the company, which they  was convinced by their management and operation, to invest.

Arnold, G. (2008) Corporate Financial Management

http://www.bbc.co.uk/news/business-12780790

http://www.bbc.co.uk/news/business-13937501

http://www.bbc.co.uk/news/business-15029850

Shareholder Theory

With the increasingly analyse on the business, the objective of company as the direction for the corporation arise investor’s attention. The company could not run well without a clear and correct direction. However, what is the good objective for a company? There are several suggestions based on this, the shareholder theory, stakeholder theory and so on. Shareholder theory is more preferable. This is not only because of the shareholder takes high risk but also the only objective enhances the effective of the company. Although the company would be greed at first stage, but after the company grow mature, the company would think about the customer relationship and supply relationship in order to create more value for the shareholder from the long term prospect.

  

This could be found from the case of the BP company oil spill in gulf of Mexico in year 2010.  From the annual report of BP, it could be found that the report in year 2009 and before is more focus on the shareholder value creation than the stakeholder’s value. However, after the oil leak gulf of Mexico, the strategy in 2010 is solely focuses on  stakeholder’s value, which act legitimate to the event. 

This is because BP cared about the shareholder’s value, and did not respond to the event immediately. After the small issue before a big event, the BP company only realise the importance of the stakeholder’s value after the customer boycott the BP’s product. This leads the share price of BP decreased from 636.40p on 2nd April to the lowest 302.90p on 29th June, more than half value has been disappeared. The shareholder value has been destroyed significantly.  

Moreover, the BP has costed $40.9 bn in bearing the responsibility of oil leak in the Gulf of Mexico and it led the company loss $4.9 bn in 2010 (first year loss since 1992) (http://www.bbc.co.uk/news/business-12333594). The CEO of BP has been changed by Bob Dudley. Furthermore, the change of strategy in 2010 also means that the company realised that the stakeholder’s value plays a vital part of shareholder wealth maximisation.

It has been argued that, company holding stakeholder’s value as the objective is difficult to achieve. This is cause of the multiple objectives is not objective. Company should apply the shareholder theory and take the stakeholder’s value into consideration before making decision. It is undeniable that shareholder’s value is critical for a company, however, company should take into consideration of the stakeholder’s opinion in tandem. This is due to, as if the same case happened again (such as Mexico oil leak), company ought to pay more towards the stakeholder, for instance, changing the impression of public towards the company, getting back the company’s reputation, increasing the market price and so on. Thus, in long term view, company should consider the stakeholder’s value, as they were the customers of the company and potentially become one of the shareholder in any time and the company could not operate along without any customers or suppliers. 

Since stakeholder’s value cannot be apart from the business organisation, in order to create the shareholder’s value maximisation, the company should therefore, also based on the value of stakeholder to achieve the long term corporate value. Hence, the better strategy could be the company focus on the shareholder theory, but need to make decision not only from the short term but also long term and consider the business environment.