Successfulness of Malcolm Glazer's Acquisition of Manchester United - Case Study Example

FINANCIAL MANAGEMENT TABLE OF CONTENTS PAGES An Overview of Financial Management 03 An Overview of Mergers 05 The Importance of Takeovers 07 Corporate History of Manchester United 08 Corporate History of Malcolm Glazer 09 Battle for Takeover 10 Financial Health Prior Takeover & Major Issues of Merger 13 Financial Position After the Merger 16 Conclusion 17 Reference 17 AN OVERVIEW OF FINANCIAL MANAGEMENT: Management is the art of planning, organizing, staffing, leading and controlling the resources of the organization. All management levels consist of four functions (Cinnamon, 2006): (1) Planning (2) Organizing (3) Leading (4) Controlling Similarly, financial management aims to efficiently and effectively manage the finances of the organization and keep a hawk's eye over the surplus availability. Let's say in a beauty contest for companies the winner is Wall Mart. The other five finalists are Southwest Airlines, Berkshire Hathaway, Dell computer, General Electric and Proctor & Gamble. According to more than thousands of executives these said companies have the highest scores in eight attributes (Bierman, 2008). Quality of management Innovativeness Quality of product and services Employee Talent Long term investment value Financial Soundness and stability Utilization of the Assets. These companies have a tremendous tendency to reduce the cost and enhance the surplus through efficiently usage of technology. In a nutshell, these companies reduce cost by having innovative production processes. They create value for customers by providing high quality products and services and value for employees is created through sufficient training and fostering an environment that allows employees to fully utilize their skills and talents. As we know that the finance department plays a vital role in every organization and ensures that the organization has enough resources and liquidity to meet its legal obligations as well as facilitate its shareholders. The primary goal of the finance manager is to ensure that his company has adequate supply of capital and sufficient statutory reserves. The ultimate goal of every organization is the same "to increase the surplus". But the question is; how the finance manager becomes the part of the success story and how they can maximize the value of their organization There are two ways of looking at the financial manager's role. (1) Minimize the cost of organization, (2) Maximize the organization value through different financial securities. The financial manager or the chief financial officer (CFO) is responsible for financing the enterprise and acts as an intermediary between the financial system's institution and markets. While on the other hand, the business manager is responsible for a different kind of work like investing in plants and equipments, undertake research, hire staff and sell the firm's product. Major financial decisions made by the managers of a business are either investment decisions or financing decisions. In investment decisions, managers consider the amount invested in the assets of the business and the composition of that investment. Investment in assets are more beneficial because it produces cash flows for the entity that are needed to meet the operating expenses, pay interest to lenders and taxes to government. In addition to the amount and composition of investment, managers have to decide how to finance them; it pertains to the financing decision which involves generating funds internally or from sources external to the business. Dividend decisions also affect the financing decisions (Bossaerts, 2006). Successful companies have skilled people at all levels inside the company, including (1) leaders who develop and articulate sound strategic visions; (2) managers who make value-adding decisions, design efficient business processes, and train and motivate work forces and (3) a capable work force willing to implement the company's strategies and tactics. Before going into the details of the merger and takeover of The Manchester United by Malcolm Glazer we must have a very good idea about the mergers, its rules and regulation and its requirements. AN OVERVIEW OF MERGERS: The combination of two companies to form a new company is known as a merger. Mergers can be between two companies doing business in the same industry or doing business in the different industry. Business week published an analysis of 302 large mergers that took place from 1995 to 2001, and it was observed that 61 percent from them led to losses by the acquisition of firm's shareholders. The primary motivation for most mergers is to increase the value of the combined enterprise. Let's say Companies A and B merge to form a Company C, and if C's value exceeds that of A and B taken separately, then synergy is said to exist. Such mergers are equally beneficial for the shareholders of both A and B companies. (Vernimmen, 2000) The effect of synergies can arise from five basic sources, namely; Financial Economics, including lower transaction cost and better coverage Operating economies, which result from economics of scale in management Tax effect, where the combined enterprise pays less in taxes as compared to the entities which are separately paying the taxes Increased market power which ultimately condenses the competition Differential efficiency, which shows the compatibility and efficiency of the firm The best example of synergies is the merger of Wachovia and First Union in 2001, which on an aggregate created the nation's fourth largest bank (Lewis, 2004). Another synergistic merger was the 1997 consolidation of Morgan Stanley with Dean Witter. Morgan Stanley was an investment bank which has specialty in underwriting securities for large corporations, while Dean Witter was a nation wide brokerage house with above 40 million of retail customers. On the contrary, Morgan Stanley has relatively few retail customers that are tended to be millionaires, so the merger was said to be "Uniting Wall Street with Main Street". Takeovers and acquisitions are the different from mergers; we may define takeovers as "Takeovers are important transactions in the market for corporate control. A takeover typically involves one company purchasing another company by acquiring a controlling interest in its voting shares" (Marks, 1997). The market for corporate control is a market in which alternative teams of managers compete for the right to control corporate assets and make top-level management decisions (Jensen & Ruback 1983). Essentially, by changes in control, corporate assets can be quickly redeployed in ways expected to bring economic benefits and value addition for the shareholders. THE IMPORTANCE OF TAKEOVERS: Takeovers are important in that they involve changes in the ownership and/ or control of valuable assets. A representative measure of takeover activity is provided by annual surveys prepared by "Ernst & Young". Ernst and Young estimates that in each year of their survey, the value of acquisitions made 'off-market' is greater than the value of 'on market' acquisitions. The coverage of the survey is broad in that it covers takeovers of other listed companies and 'off market' acquisition, which includes the acquisitions of: Private companies and business Unlisted public companies; and Division or subordinates of publicly listed companies. There are three types of takeovers, let's discuss each one in details and then we will estimate which type of merger or takeover had been set between Manchester United and Malcolm Glazer. Types of takeovers are (Rachev, 2008): i. A horizontal takeover is the takeover of a target company operating in the same line of business as the acquiring company. An example is a furniture manufacturer taking over another furniture manufacturer. ii. A vertical takeover is the takeover of a target company which is either a supplier of goods to, or a consumer of goods produced by, the acquiring company. Example of vertical takeovers is, a furniture manufacturer taking over a saw-mill or a furniture retail store. iii. A conglomerate takeover is the takeover of a target company in an unrelated type of business. An example is, a furniture manufacturer taking over a mining company. We are well aware of the fact that both the companies either Manchester United or Malcolm Glazer are the sports companies, and Malcolm Glazer was willing to take over Manchester united, meaning that they both pertain to the same line of business and they formed an example of horizontal takeover. Let's take a look over the corporate history of both the companies and then analyze their takeovers. CORPORATE HISTORY OF MANCHESTER UNITED: Manchester United football club is one of the most popular football clubs in the world which is merely based at Old Trafford. Manchester united became the member of the premier league in 1992.The club is one of the most successful football clubs in English football history, having won the two big leagues, premium league and UEFA champion league in the same year 2007-2008. The club has a wonderful portfolio of success because it won Premier/Football League 15 times, FA cup 11 times, League cup twice, The European cup twice, the UEFA cup one time and European super cup and Intercontinental cup one time (Davies, 2005). Manchester United has been registered as a public listed company in London Stock Exchange (LSE) since 1991. In 2004-2005, the club had 160 million in its revenue head with 16 million in the bottom line. Manchester United has been one of the richest clubs in the world since 1990 and is also the founder member of G-14 group of Europe's leading football club. The club shows some sort of declination in its performance after 1999, because in 2000 when the club became one of the 14 members of the G-14 group of leading European football clubs they declined to take part in the FA cup which was held in year 1999-2000. The club participated in the 2001-2002 Premium League but was awarded a third place. The Coach of the club, Ferguson, adopts all kind of strategies to keep the club on the success track but he failed to help the club to win the 2001-2002 Premium League. CORPORATE HISTORY OF MALCOLM GLAZER: Malcolm Irving Glazer who was born in May, 25 1928 in Rochester, New York is a famous American Businessman and owner of a sports team. He is also the Chief executive officer of First Allied corporation. He has a number of stakes in England and has a control over England's Manchester United Football Club and Tampa Bay Buccaneers which is the national league team of football in Florida, United States. The first corporate takeover of Glazer attempted in 1984, when he intended to buy the bankrupt freight rail company named US Conrail in US$ 7.6 billion but the deal became unsuccessful. Unfortunately, he failed in the attempt when he tried to takeover the kitchen designer Formica in 1988. A company names Zapata, which is an oil and gas company and founded by George H. W Bush, was the first company on which Glazer's successfully took over. Glazer has a huge portfolio and which comprises on different nationwide investment like marine protein, health care, banking sector, natural gas and oil and Stocks and Bonds. Tampa Bay Buccaneers which is a National Football League franchise was taken over by Malcolm Glazer in 1995 and immediately declared the team's home field. In Glazer's ownership, the performance of the Buccaneers improved dramatically which was facing consistent loses since decades in the National Football League in the US and Canada, but, after acquisition, after 2002 they won the Super Bowl. Malcolm Glazer paid $192 million in 1995 in order to takeover the Tampa bay Buccaneers. BATTLE FOR TAKEOVER: Manchester United has been registered with the London Stock Exchange since 1991 and due to its financial stability investors have a lot of confidence on the club's stock. Because of its financial soundness many companies are willing to take over the club. Since 2003, many companies are indulged in the battle for taking over but Malcolm Glazer is the one who succeed in the merger, let's see the actions taken by Malcolm Glazer in chronological order. Glazer comes into play in the battle in March 2003, when he bought his first shares of Manchester United and purchased 2.9% shares for a lump sum amount of 9 million. Until that, Glazer had no intentions to become the majority stakeholder of Manchester United. With the passage of time the attraction of Glazer got stronger and on 25th September they further added 0.27% of shares which made them a 3.17% stakeholder for the Manchester United. At the end of the day, on 25th September, the shares of Manchester United gained 195.5 points which manifested a rise in the value of the company by 500 million (Garrahan, 2004). A statement release to the London Stock exchange (LSE) on 1st of October which intimated them that Glazer red football ltd is now holding 5.92% shares of the club which again urges the value of the share to rose and consequently, the value of the shares increases by 198.25 points. Malcolm Glazer rapidly increased its stake in the club and almost doubled it to 30 million in less than a week (Garrahan, 2005). A mysterious investor purchased 11.9% percent shares of Manchester United on November 29, which resulted in increasing the value of the club by 690 million. The club is cautious to know that, which the suspicious buyer was. Commerzbank later admitted that they had brokered the deal of 4.5% block of shares which valued 30 million but they were reluctant to furnish the investor who purchased the shares of the club mysteriously. Chief executive of Manchester United Mr. David Gil reviled that "Mr. Glazer of the, Glazer Red Football Ltd is willing to invest in the shares of Manchester United and he might be the mysterious buyer, who purchased 11.9% shares of the club on 29th November". After the proper investigation, Manchester United confirmed on 1st December, that Glazer was the mystery buyer which increased their stake to 14.3% from 3.17% which showed an increment of 11.3% in less than one month. Glazer is now seriously looking forward to takeover the club as soon as possible but the major threat they face when they hear that a "Cubic Expression" which is an investment company, is also after the Manchester United to takeover it and on 2nd December Manchester United revealed a heart throbbing news for Malcolm Glazer that Cubic Expression had a total share of 24.24% in the club (Garrahan, 2005). On February 2004, Manchester United board stressed on the takeover panel, after they saw the intentions of Cubic Expression who were dominating in the quantity of shares and held 29% shares of the club and requested Glazer to clarify their intentions regarding the takeover concern. Cubic Expression continuously increases its stake in the Manchester United and on 25th February it increases the shares of the club to 17%. Glazer again cautiously intends to increase its stake in the club and about a month later, Glazer bought an additional 4.1 million shares. Manchester United club's takeover panel announced on 31st of March that they wanted to wrap up the offers of takeovers as soon as possible. On 27th April 2004, Glazer increased its portfolio by purchase 1 million shares from Maurice Watkins, which is one of the directors of Manchester United and increased their stake in the club to 18.25%. Glazer was worried of choosing the best one for making a takeover bid; Either J.P Morgan or Credit Suisse First Boston (CSFB). By evaluating the performance of both the companies, Glazer observed that they should go with CSFB rather than J.P Morgan. Continuous increment was reported in the stakes of Glazer which stood on 28.11% in the first week of May. On 28th April 2005, the takeover panel of Manchester United sets a deadline of 17th May to bid for the takeovers. On 12 May 2005, Malcolm Glazer won a majority stake in Manchester United and controlled over 56.9% shares of Manchester United (Davies, 2005). Now it is the legal right of Glazer to make bids for the remaining shares, then he buys the remaining shares from Cubic Expression and increase their stakes to 74.8% which further tightened their position on Manchester United. By June 14 2005, Glazer's red football Ltd had received acceptance form 89% of the shareholders which as a result increased their stake to 98% on 22nd of June. Next, we will discuss some major issues which induce the merger to occur. FINANCIAL HEALTH PRIOR TO TAKEOVER & MAJOR ISSUES OF MEREGER: We are not saying that financial crisis is the only one issue which becomes a major issue in the merger. Obviously, Malcolm Glazer took over the club just because of the goodwill of Manchester United and persistently made profits in the market. The team is no doubt doing a wonderful job in the ground but from a financial point of view the players are not satisfied with the salaries; although the club spent 74 million on salaries and wages in FY 2006 which facilitates the players mostly. One of the issues is a higher expenditure of the club which is merely an expense out to entertain their players and resist them to stay in the team (Larsen, 2004). Even football clubs like Manchester United can hardly rely on the money, they earn from T-shirts, poster and footballs; they really have to broaden their mind to earn the money from different resources rather than just depending upon solely one source. Manchester United shows a consistent growth year to year and reported a 30% increment form every preceding year. Operating and fixed expenses are the ones which intervene the heavy profits, although comparatively from the last year, the administration had done a great job in keeping the expense under control by which the club is back on the success tract, after a persistent gross loss of 4 years. The big challenge was yet to come for the Manchester United which was financial cost. The club incurred a mounting financial cost of 81 million during the accounting year, which is more than what the club had paid the people who made the club. It can be observed that the management of the company is not sufficiently equipped with all the relevant tools which are used to condense the cost and enhance the surplus; it can be said that the club tend to use a highly inefficient and unsustainable cost structure. The deal to buy Manchester United was worth of 812 million, but the final deal was made up of 790 million. Out of the total deal money of 790 million, 265 million were from the debts which were pledged against the tangible assets of Manchester United (Smith, 2005). The main concern for Malcolm Glazer was the high interest payments which is about 90 million a year that Glazer would have to pay by hook or by crook. Below mentioned chart furnishes more about the debt financing of the club. Financing Amount (Million Pounds) Interest % Bank Loan 265 6 Additional Bank Loan 109 Unknown Preference Shares 210 20 Preference Shares 65 14 Others 88 Not Applicable Total 812 It can be clearly seen from the above table that Malcolm Glazer had to bear a huge amount of debt which was amounted to 812 million, which was much higher than the amount on which he took over the club. Before the takeover, the financial statements of Manchester United were portraying figures which were of high concern for the club as well as its shareholders, because every year the gross profit and net income of the club was deteriorating. The Gross ratio of the club shows a declining graph every year from the year 2002. The gross income of Manchester United in FY 2003 and 2004 decreased by 41.6 million or (39.3%) and 1.38 million (2.85%) respectively, as compared to the same period of prior year. Net income also shrunk in FY 2004 showing a decline of 34.7% as compared to the net income in FY 2003. The main aspect which was cautiousable for the club was its mounting debt or liabilities. The debts of the Manchester United in FY 2003 and 2004 increased by 9% and 6.2% respectively as compared to the prior years. Precisely, we can say that the increasing liabilities affect the net income to be abated consistently. Continuously mounted debts push the Giant club on the brink of bankruptcy which compels them to merge it with the Malcolm Glazer to sustain in the market. FINANCIAL POSITION AFTER THE MERGER: After the consistent loss year by year the club loses its financial value as well as some of their best players and in order to exist in the market they merged the club with Malcolm Glazer. Manchester United needs a takeover in order to meet its financial promises and legal obligations. Almost all banks criticized Manchester United to repay the principal amount which stood at 666 m pounds in 2006. Although after the merger, the joint venture club showed a big loss in their financial statement comprising of 135.283 million FY 2006 due to the large amount of debts; but in 2007, the joint management was able to condense the corporate loss to a short level and reported a loss of 57.807 million and showed some sort of improvement in the financial health and stability. The recovery of the club from the losses doesn't implies that we can be optimistic about its performance in the future as well because the continuous loss is alarming and if loss in financial year 2009 will go above 80 million then the club will have negative equity. It's the biggest challenge that the Joint club is facing and one has to understand the buyout of Manchester United. Shareholders are still optimistic that the club will make money for their generation to come, but it is quite evident that there is a huge risk is involved. Precisely, we can say that the deal of Manchester United with Malcolm Glazer is really a inefficient one because it compels most of the people to think that Manchester United was the biggest club of its time. CONCLUSION: Mergers are some times beneficial for the entities and some times they become worse. Similar situation is faced by the Manchester United and Malcolm Glazer, which hopes to form the biggest football club of the world, but continuously mounting debts and persistently shrinking net profits have resulted in lowering their expectations they had of the merger. Now the Joint club has to implement such strategy which helps them to get them out from the current catastrophic situation. The positive point is that the club will not have to pay principal in the next 5 years. Now Malcolm Glazer should take appropriate steps to get back the club to making profits but firstly they should appreciate and encourage the outstanding team and some great fans who continue to buy season tickets despite the current credit crisis and increasing unemployment and inflation rate. REFERENCES Bierman, H.Jr (2008), Lesson on Accounting & Finance, World Scientific Publishers, Cornell University, USA. Bossaerts, P & Degaard, B.A (2006), Lectures on Corporate Finance, 2nd Edition, World Scientific Publishing Company. Cinnamon, R & Larsen, B.H (2006), How to understand Business Finance, British Library Publications. Chris, F (2004), Glazer exempt from Man Utd Takeover restrictions, Financial Times, 31 March 2004. Davies, P, (2005), Malcolm Glazer wins control of Manchester United, Financial Times, 12 May 2005. Davies, P, (2005), Man Utd to Delist next month, Financial Times, 23 may 2005. 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