Capital Structure and Shareholder Wealthy

There is a strong argument on the exist of the optimal structure. Some people suggest that there is an optimal structure in the capital structure, which could help the organization to create more shareholder wealth; while others believe that there is no optimal structure as the change of the capital structure has no effect on the company’s WACC so it do not exist. However, since this was based on the assumption, it only could be used under certain condition. Therefore, it is still difficult for the manager to control the capital structure. From my personal view, I do believe that the capital structure has kind of relationship with the shareholder wealth, which could be proved through the case below.

Like the company Peacocks, which is a clothing retail has gone into administration because of the unsuccessfully to restructure its £240m debts from its total debts. Moreover, based on the figure of the year 2010, it could be found that the debts becomes a burden for the company. It used to make operating profits of £27m, however that was reduced to a pre-tax loss of £56m as a result of £77m in bank loans and overdrafts. Therefore, the high cost of finance make the company go administration. The reason for Peacocks has so much high finance cost is because of the change of capital structure at wrong time. The manager choice to management buy out through the bank loan, which make the company has £460m bank loan in order to reduce the share capital to increase the power of manger. Since the recession continue, it could be found that the bank loan is high interest which make the company has overall debts stands at £750m in 2011. As we know that, during the recession, it could be better to choice the share equity, since the company has no need to give the dividend and the higher bank interest based on the higher risk. Hence, it could be more wise for the company to choice go for the share equity. 

Moreover, the Peacocks now sold to Edinburgh Woollen Mill since the company could not going concern with such high debts. From this case, it could seen the shareholder wealth has been destroyed by the wrongly choice on the capital structure. Moreover, it tells that we need to taking the environment into consideration, if the timing is good, it could be found that sometimes it is more cheaper to choice debt finance like when the government trying to encourage their economic it reduce their bank loan interest, which for the company is a good news to reduce their cost of finance. However, during the financial crisis, as it could be know that the credit crunch, the credit was so high as people are not willing to lend their money and the government bank also increase their rate of reserve. In this time of period, lending is at a extremely high cost.

Therefore, it could be found that in the economic growth period, the debts finance is better and during the recession period the equity and debts finance need to be carefully considerate.  The manager need to careful balanced the capital structure in order to create more shareholder wealth. As the lower cost of finance could reduce the expense,which in some extent is increasing the shareholder wealth and the unhealthy capital structure might the company go administration the the company Peacocks.

http://www.bbc.co.uk/news/uk-wales-16733819

http://www.bbc.co.uk/news/uk-wales-16737580

http://www.bbc.co.uk/news/uk-wales-16580309

http://www.bbc.co.uk/news/uk-wales-south-east-wales-16621080

Social Responsible Investment - New Fashion

Nowadays, the socially responsible investing has become a new fashion for investors.The socially responsible investing (SRI) is invest the money only based on non-financial factor especially the factor that related environment and ethical principles and regarding the profit. The reason for this is based on the improving awareness on the environment. It is used to be based on the different religious like the different culture has their belief on dealing with money. However, now it is more based on personal and social ethical convictions of the investors. Moreover, there are many SRI funds for the investors to chose in current position. 

However, people might wonder that if the fund will not invest based on the financial factor than how could it make money? This is could be answered by the definition of the SRI, the fund manager will chose to invest in those for profit business like tobacco, alcohol, gambling, nuclear power, firearms and military weapons; and chose some other company which more environmental friendly, such as the lush or the body shop. 

The reason for people still have problem on SRI is whether it will make return annually? This could be found through the figure announced by the company. The Appleseed fund, one of the largest SRI funds in the US has produced an annualised return of 6.2% in the five years. Moreover, it could be based on compare the difference of total returns between the MSCI KLD Social Index and the MSCI KLD USA. From the figure, it could be found that based on the graph, the total returns of the SRI is higher than the total average return. 

(Source from: MSCI Inc, 2010)

Moreover, the specific details could be found as follow:

                                                                                                                                                                   (Source from: MSCI Inc, 2010)

From those data above, it illustrates more detail information about the performance and the return for the SRI and the USA. It enhance the pervious figure about the SRI is higher than average return. 

Overall, it could be found that SRI is a good choice for the investor, because of it combines the high ethical investment and the good return. However, some people might still insist that the belief of high risk and high return. To some extent, this was true, however, like the current situation in some industry, it could be found that it was not so ture. This could be seen from the co-manger of Appleseed said that the largest bank are operating in the massive risks, where they making profit and it more like to be a recipe for corruption, cronyism and economic disaster. If one day the risk fail, the bank will going to close or take over by the government. Therefore, as the shareholder, the value of the share might disappear, which could be worse than they expect. Hence, from my point of view, I want to make notice the benefits of the SRI will far more than other investment and it is becoming increasingly popular. 

http://online.wsj.com/article/SB10001424052970204542404577158791058719100.html?KEYWORDS=Socially+Responsible+Investment

MSCI KLD 400 Social Index

http://www.mscibarra.com/products/indices/thematic_and_strategy/esg_indices/MSCI%20_KLD_Factsheet_Nov2010.pdf

The shareholder wealth and the financial crisis

With the financial crisis continuing, people begin wondering about the cause of the financial crisis. Many arguments suggests that the reason for this is the greed of the managers. However, some believes that it more related to the shareholder wealthy. 

This could be found from the company of HBOS, which illustrated as follows. The HBOS plc is a banking and insurance company, it used to be a well know company in the UK. During the financial crisis, the company meet the problem of credit crunch, which is a suddenly tightening of loan condition. The reason is because of the manager of HBOS use their bank loan invest in some high risk projects. However, suddenly the project failed and then the debtors worry about their money could not come back, so they are careful with their money and not willing to lend any of their money. This problem lead the company’s share price fell down 17 per cent in March 2008. Moreover, it fluctuated between 88p to 220p per share during the September 2008. Finally, in order to avoid another Northern Rock style collapse, this company was took over by Loyds TSB at 232p per share, which is much lower than the BBC estimated 300p per share. 

From this case, it could found that how the shareholder’s wealth has been destroyed through the financial crisis. From my point of view, after taking this into further consideration about the reason of the financial crisis, it could be found that the reason of financial crisis might be the greed of the shareholder. In order to create more shareholder wealthy, the manager uses all he could to make more profit of the shareholder, such as invest in some high risk project. For example, the manager of HBOS choose to provide their loan to some low creditworthy in order to make more profit. However, once the bad debts increased to a great level and met the problem of credit crush, the company in the position of bankrupt or take over by other company.

Therefore, I believe the purpose of the shareholder wealth sometimes lead some kind of misbehaviour like the financial crisis. Instead of creating more shareholder wealth, it destroy the shareholder wealth. However, all of those are depends on the manager’s operation. Hence, it back to the pervious problem that the manager should choose the right direction to create more shareholder wealthy instead of destroy it.

Does M&A destory shareholder wealthy?

Angwing (2007) point out that during the period of 1996 to 2005, the total amount of global mergers and acquisitions (M&A) is more than $23.4 trillion. The increasing amount and size M&A arose public attention about whether the M&A is really good for the organization and increase the shareholder wealthy. In particular, sometimes it destroys the shareholder’s wealthy, such as the case of the Time Warner and AOL. The merger of two companies seems to be great news to the industry in 2000 and the share price move up to $34.75, however, after the annual loss has been announced after the merger, the share price decrease immediately and in 2002 it has reported $98 billion loss, which destroyed 97% shareholder wealthy.

Moreover, it could also be found in the case of the Lenovo & IBM. In 2005, Lenovo take over the PC department of IBM by $1.25bn (£668m). As the failing PC price and squeezed profit margin in China, Lenovo using the way to take over IBM to develop the overseas market. After the acquisitions, Lenovo become the third computer manufactory. However, the bad news comes is the continue loss in IBM PC. In 2006 Lenovo announce a net loss of $116m compare with $21m profit in previous year. Moreover, although the operation become well in recent year, the overseas market still the loss part of Lenovo.

(Source from: Lenovo 2010 annual report, the segmental report)

(Source from: Lenovo 2009 annual report, the segmental report)

According to the case of Lenovo, it illustrates that the M&A did not success, because it did not achieve the primary aim of the Lenovo. Moreover, it becomes a burden of Lenovo. Therefore, it might found that the M&A sometime destroy the shareholders’ value. Then why do many managers still go for M&A? Most of people argue that it is because of the market power, survival problem, or egoism. From my point view, in the case of Lenovo, it should be market power. Although it was not their primary aim, it now becomes their advantage in China market. After it takes over IBM, it has more competitive computer manufactory in China (17.6% increase in profit in China market in 2010). This also could be found that Lenovo becomes the third computer manufactory just after Dell and HP. Therefore, although M&A sometimes destroy the shareholder value in the first stage, it will brings other benefit to the organization in the future such as the market power.

http://news.bbc.co.uk/1/hi/business/5015776.stm

http://news.bbc.co.uk/1/hi/business/7871664.stm

http://www.bbc.co.uk/news/business-11023642

Lenovo 2009 annual report and 2010 annual report

Whether India should apply FDI in its retail chain

The Foreign direct investment (FDI) is quite welcome for the developing countries such as China. The reason is because of the FDI encourage the local economic and create more working opportunity for the local residents. However, it is not always good for the local economic, because of the strong competitive multinational company might also become a threat to the local industry. 

The recent argument about wether the India should choice FDI in retail chain brings public notice. The reason is the India government trying to reform its FDI plan in India’s retail chain. The reason for the government to reform the economic might from several reason. Firstly, the repaid decline in FDI in India, FT (2011) has point out that the overseas investment decrease annually to $14bn for the first eight months of the fiscal year. Additionally, the messy current situation in India’s retail sector, the low efficiency and decelerating annual growth in domestic product (BBC, 2011). Thirdly, it will provide millions of new jobs.

However, this was resist by some small shopkeeper, they believes this will destroy their benefit event led them lose their job. This is because it is difficult for them to competitive with the supermarket giant like Tesco and Wal-mart. Furthermore, this also worried by the local farmers, because of the multinational companies might squeeze out their profit by drive down their price. Nevertheless, this has been argued that introduce the large companies will not reduce the local supplier’s profit and on the other hand, it will brings more benefits to customer and supplier by reducing the retail chain and improving the market efficiency.

Overall, from my point view, I strongly agreed with the opinion that it is time for India to introduce FDI. This is not only because of the huge benefit that the FDI will bring for the countries but also it is a global trends. The reason for me to suggest this opinion that although FDI will increase the market competition in India and left small market share for the local business. However, the competition will also bring the efficiency to the countries. What is more, the India government really want from FDI is to improve the current situation in the retail sector-- too much wholesale trader and small retailers not only low down the market efficiency and the lack of adequate cold storage and refrigeration in deliver chain. This will boost up the economic in India. As it is general knowing, china was a successful example for FDI. From the Bloomberg (2011) it states that the FDI in China in 2010 has reach to $105.7 billion (17.4% increased from last year). The huge inflow invest boosted up the economic in China as in 2010 it surpassed Japan becomes the second-biggest economy in 2010 (Bloomberg, 2011). According to  the case of China’s FDI, it could be found that the FDI will boost up the country’s economic and brings more benefits than drawbacks. 

However, some arguments about the multi-national company will be too power to be a threaten to government. This warns the government although it will brings lots of good for the country, the well regulation still need to be complete in order to achieve the original goal of the country. In other words, for india, it need to well monitor the FDI and apply the adequate regulation to control it develop towards the mutual benefits.

http://www.bloomberg.com/news/2011-01-18/foreign-direct-investment-in-china-in-2010-rises-to-record-105-7-billion.html

http://www.youtube.com/watch?v=AwsD1tBHg-o&feature=relmfu

http://blogs.ft.com/beyond-brics/2011/02/16/india-fdi-what-fdi/#axzz1nuKjz0oa

http://www.bloomberg.com/news/2011-12-07/india-s-reform-by-stealth-derails-wal-mart-choudhury.html

http://www.bbc.co.uk/news/business-16046394

http://www.bbc.co.uk/news/world-asia-india-15869378