Financial Management: Small and Medium Business Enterprises - Essay Example

?Financial Management Part Identify and explain the objectives and general principles of Panel of Takeovers and Merger The panel of Takeovers is an independent body which was developed in 1968 its objective is the fair treatment of shareholders and an opportunity is put in front of them to determine the general benefits of a takeover and that an offeror provides same if not better treatment to shareholders of the same class (Hicks & Goo 2008, p. 569). It essentially provides a structured framework through which takeovers are carried out and to uphold the reliability of the financial markets in combination with regulatory regimes of other places. Matters of financial or commercial merits or demerits of takeovers are up to the company and its shareholders to decide, it is not concerned with them (the panel). The general principles are not followed to the letter rather they are applied in spirit. The following is a brief summary of some of the most important Rules: Favorable deals are banned and will not be provided to selected shareholders. Same information must be given to all shareholders. The issuer is responsible for the contents of takeover circulars by attaching a statement taking responsibility for the contents. All forecasts relating to profit and valuations of assets must be reported on by professional level advisers and be made as per specified standards. If any unproven or incorrect statements have been made then they need to be immediately rectified by way of public announcement. If an offer has been made then it must be brought to the attention of both the staff of offeror and the offeree. All those actions which might frustrate the offer during the offer making process by the target company are generally prohibited unless shareholders approve these plans. The disclosures of dealings in relevant securities during an offer have established stringent requirements. B. Identify and examine the economic reasons for acquisitions and mergers and discuss why the expected economic benefits may not be reached. The economic reason for acquisitions and mergers is based on the idea that there are two separate companies alone they have limited potential and can offer limited profit on share holder investment hence the primary motivating force for acquiring a company is to generate greater shareholder value for the shareholders. The proponents of acquisitions and mergers are of the view that one separate company on its own has less value but when two companies are merged together they become more valuable. It can also create greater cost efficiency via economies of scale, can augment the company’s profits through gaining a greater market share and tax gains can also be generated. This logic is very appealing to companies during trying times say an economic recession. Those companies with a strong financial base will move to acquire rival companies to ensure a more competitive, cost-efficient company. By acquiring or merging with other companies they will hope to attain a larger market share or to attain greater efficiency say by acquiring a particular technology or production process (Sloman & Sutcliffe 2004, pp. 325-330). Due to these potential benefits, companies targeted for acquisition will often agree to be acquired when they know their going concern status is in jeopardy. The expected benefits of acquisitions and mergers may not bear fruit because if we were to look at historical trends they confirm that roughly 66.6% of big merger’s value will decline on the stock market due to its bullish trend or that both the companies who have merged have different corporate cultures. One of the reasons that an acquisition or merger fails is because of the flawed intentions of the parties involved. They might be instituting merger or acquisition because one of their competitors has undergone a merger, which pushes top executives of other companies to imitate this move and when this happens chances are the merger may often have more to do with seeking glory instead of pursuing business strategy (Maps of India 2009). A merger or acquisition may also have been initiated to satisfy the executive ego as they would be excited with the prospect of buying their competitors and at the same time setting aside the company goals and these goals would become more obscure with the combined influences of bankers and lawyers who are only interested in earning big fees from clients engaged in mergers. Part2: Identify the long term funding options available for unquoted small and medium business enterprises and discuss the advantages and disadvantages of these funding options. Small and medium business enterprises need capital to sustain their daily operations hence it is vital to have sound financial backup. Monetary resources are required to encourage growth and development of products and services right from day one additionally equipments are needed and employees salary and wages have to be paid, Following long term funding options are available: Venture Capital Funding: Venture capital firms are ideal for those companies who do not have a financial performance history to submit to banks so as to secure a loan. Venture capital firms focus mainly on the growth potential of a company, if they are satisfied they will provide seed money. Following are its pros and cons: PRO: Professional guidance to help avoid common pitfalls in a certain markets. On account of having a stake in the company they can provide sound managerial expertise. Provision of consultants for hiring the best man for the job. CONS: The venture capital may not be interested in investing in what the company has to offer. May ask for a large percentage in the profits. Asset Based Financing Under this scheme a lender is willing to provide a loan against collateral which here will be the assets of the company. PRO: Quick access to significant amount of cash Provision of valuable services by lenders such as processing of accounts receivables, invoicing, and collection services. It does not confine growth rather encourages the purchase of capital equipment. CONS: A major drawback of asset-based loans for financing are the expenses involved i.e. the use of assets to generate cash flow increases the costs of funds and decreases the profit margin. Higher Interest rate compared to traditional loans. Due to price fluctuation of the inventory the small business may have to pay more as on the day the loan is secured the inventory is worth 1000$ but when the time to pay approaches the inventory is worth only 600$ hence more inventory has to be liquidated. Long Term Debt: usually spans over a period of five to ten years or more PRO: If a debt is secured for a longer period of time then it will have a lesser monthly payment Ownership of the company is not shared and this in turn provides a greater degree of control. The interest on borrowed money is tax deductible CONS: Repayment of installments is necessary irrespective of whether or not any profit has been made. Company’s breakeven point will rise on account of payment of installments. Risk of insolvency is increased and cash flows may be restricted during financial crisis like a recession. Lines of Credit: It is a maximum approved amount which a company or small business can withdraw without any security for a decided period of time. PROS: Interest paid on only the amount which is withdrawn. There is possibility of tax deductions. More beneficial for the borrower as he can withdraw money any time during the predetermined time period. CONS: Decent credit score is required. Timely payments have to be made or credit score will be damaged. Small Business Administration: SBA loan agencies are independent agencies of the federal government that endeavor to assist small businesses to grow, a business can borrow 5,000$ to 50,000$ depending on the lending agency. PROS: They have the financial backing of state or a federal agency which ensures that the lender will be paid hence the borrower has to pay a lower interest rate. No extra ordinary qualification requirements needed to secure the loan. CONS: It requires collateral or security for the loan Additional paper work is required as the government is involved. Processing time may span over a month or more. Money may be given in stages. Part 3: Discuss the arguments for and against the director’s proposal If we base our arguments on the Clientele Effect theory then the Family Care Direct plc should declare the dividend as the only reason why the shareholders have purchased the shares of the company is because they expect a high dividend payout if the company decides not to declare the dividend the shareholders will sell their stock which will result in decline of company’s share price. In light of Modigliani & Miller's theory of dividend the company should not declare the dividend as according to this theory dividends will have no consequence on a company's share price or capital structure. This theory assumes that investors have the ability to change their return on a stock irrespective of the declaration of dividends and they are not concerned with the dividends policy followed by the company as they pursue their own dividend policy meaning if the dividend declared is too big they will use it to purchase additional shares and if it is too small they will sell some of the shares to generate the required cash (Besley & Brigham 2008, p.536). Identify and describe alternatives to cash dividends. Following are the alternatives to cash dividends: Stock dividends: Existing shareholders are paid in the form of shares which are essentially allotted in place of or are an add-on to cash dividends. Under this method the value of each share is reduced while at the same time allowing the profits, total value and the assets of the company remain unaffected. Stock splits: they increase the amount of shares held by each shareholder however this results in reduction in stock price. The reason why a stock split is undertaken is because the price of the company’s stock is much higher compared to other companies in the same sector in which they are operating. Share repurchases: ensure that the shareholder value is improved and hostile takeovers are discouraged (Werner & Stoner, 2007, pp. 748-752). Discuss the advantages and disadvantages of share repurchases, i.e a company repurchasing its own shares. Advantages: Nowadays share repurchases are replacing cash dividend and the primary reason for this trend is because capital gains are taxed at a lower rate as compared to dividends. Employee stock option plans dilute the share price hence share repurchases enables a company to counter that effect, it even provides management with an opportunity to discourage a hostile takeover bid by increasing the share price to a higher rate thus making the takeover bids to be more expensive. If management decided to repurchase its shares with new debt then the earnings per shares will rise at the cost of higher risk. Disadvantages: Share repurchases have been largely criticized as it is considered as a means to enhance drowning share price, or management may be using it to cover its poor performance. It may also highlight the fact that the company’s management has run out ideas for investing its excess cash (Hunt 2009, pp. 375-382). Some critics are of the opinion that stock repurchases leaves non-selling shareholders with an unfair advantage. Those companies which are debt-ridden should not indulge in share repurchases as it will put strain on their already burdened resources. Alternatively manipulation by the management via collective trading, depressed prices and tempting investors to sell their shares can also not be ruled out. Bibliography HICKS, A., & GOO, S. H. (2008). Cases and materials on company law. Oxford, Oxford University Press. Top of Form SLOMAN, J., & SUTCLIFFE, M. (2004). Economics for business. Harlow, FT/Prentice Hall. Maps of India. (2009). Failure of Mergers and Acquisitions. Available: http://business.mapsofindia.com/finance/mergers-acquisitions/failure.html. Last accessed 8th Mar 2011. BESLEY, S., & BRIGHAM, E. F. (2008). Essentials of managerial finance. Mason, OH, Thomson/South-western. WERNER, F. M., & STONER, J. A. F. (2007). Modern financial managing: continuity and change. St. Paul, MN, Freeload Press. HUNT, P. (2009). Structuring mergers & acquisitions: a guide to creating shareholder value. Austin, Wolters Kluwer. Bottom of Form Read More