Citigroup and J. P. Morgan Chase and Stocks of Enron and WorldCom - Assignment Example

Running Head: [short [institute of affiliation] Case 1. To what degree, if any, should investment banks, such as Citigroup and J. P. Morgan Chase, be held liable for debt and equity securities that plunge in value, such as the bonds and stocks of Enron and WorldCom? The degree of liability of investment banks in these kinds of situation rests on the knowledge of the bank about the financial turmoil within the issuing company. The plunging of value of debt and equity securities of a corporation is beyond the control of the investment bank. Therefore, in many cases where situations like Enron and WorldCom result in plunging values, the bank would only be held liable if they happen to know about the turmoil, yet they continued and pursued on selling those securities. Of course, the degree as to what the bank would know about the corporation that issues the security would be hard to determine, and will entail a lot of investigation. But banks should at least have checked the financial position of the issuing corporation before it issues them to institutional investors. When fiduciary relationship is given a thought, the investment bank as the corporation’s agent should act according to the corporation’s best interest. However, the bank, being the financial intermediary does not have a fiduciary relationship with the corporation only, but to those supplier of funds who are the investors or the public. Therefore, banks should also be liable to them as an intermediary. 2. What changes to investment banking rules would you propose that would help to avoid such situations in the future? The fiduciary relationship to the many stakeholders a financial intermediary such as the investment bank should be highlighted in proposing policy changes for banking rules. For one, who to protect? The investment bank definitely should protect the corporation as its principal, however, the corporation is just one side of the equation—those who need funds. On the other side, there is the supplier of funds, or the investors. Banks should also be accountable to them. Therefore, in changing the banking rules, I propose that the rule should include rigorous background check of issuing corporations, as well as the investors. This way, the investment bank can safely declare that it has done its duty in qualifying credible sources of funds, as well as credible borrower of funds. By seeking independent audit and checking well the financial position of the company—all incorporating this to the standard operating procedure, will an investment bank release itself from liabilities arising to plunging values. If the bank has done its homework well enough, then the plunging of values is beyond is control if it has proven that prior to the issue, the health of the organization was good for investment. Case 2 Part 1 1 1. Who is the target company and who is the acquirer? The target company is Anhui Kouzi Wine Industry Co., Ltd. and the acquirer is Goldman Sachs Group, Inc. 2. What is the size of this deal? The size of the deal was 25% of Anhui Kouzi Wine Industry Co., Ltd, but the value is not specified as ‘not applicable’ is written. 3. What acquisition technique is being utilized Goldman Sachs Group, Inc utilized the technique financial acquirer. 4. What is the nature and type of business conducted by the acquirer versus the target firm? According to its business description, Goldman Sachs is “is a bank holding company headquartered in New York, New York. It provides investment banking, securities brokerage and asset management services, to diversified clients that include corporations, financial institutions, governments and high-net-worth individuals. The company operates in three segments namely, investment banking, trading and principal investments and asset management and securities services. Its Investing Banking segment underwrites equity and debt instrument and provides financial advisory services for acquisitions and mergers. Trading and Principal Investments and Asset Management segment, facilitates customer transactions and trading of fixed income and equity products, currencies, commodities and derivatives. Asset Management and Securities Services segment, provides investment strategies, advice and planning across all major asset classes and provides prime brokerage, financing and securities lending services. It maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world. The company has offices in over 25 countries and was founded in 1869 (CNNMoney.com).” Goldman Sachs is the acquirer. According to Anhui Kouzi’s business description, the target company “is headquartered in Anhui, China, produces wine and other distilled spirits (CNNMoney.com).” 5. What firms are serving as advisors on this dea? In the section for the advisors, null is specified. 6. From other resources, determine what the rationale for this deal was, and whether the financial construction of the deal makes sense in relation to the reason(s) for it. Accoding to SinoCast China Financial Watch via COMTEX, no information has been further revealed by Kouzi as regards the deal. 2 1. Who is the target company and who is the acquirer? The target company is GPT Group and the acquirer is Stockland. 2. What is the size of this deal? The size of the deal is 346.8 million U.S. Dollar or 544.2 million Australian Dollar. 3. What acquisition technique is being utilized? The acquisition technique that is being utilized is privately negotiated purchase. 4. What is the nature and type of business conducted by the acquirer versus the target firm? The acquirer is Stockland, and according to its business description, the company is “headquartered in Sydney, New South Wales, provides real estate investment trust and development services, while also actively engaged in construction of commercial buildings and townhouses. Its principal activities include investment and development of retail, commercial, industrial and office park properties as well as dealing with development of residential properties, property trust management and hotel management. It operates in New Zealand and Australia, and was established in 1952 (CNNMoney.com).” GPT Group is the target company, which is “based in Sydney, New South Wales, is a real estate investment trust focused on properties in the Australian retail, office, industrial, and hotel/tourism sectors, with an investor base of about 48,000. It is also involved in developing retail, commercial, industrial and office park properties, managing property trust, and managing property, funds and hotels. Established in 1970, the firm maintains operations in Australia, Europe and the US (CNNMoney.com).” 5. What firms are serving as advisors on this deal? As for the advisors, null is specified in the section on it. 6. From other resources, determine what the rationale for this deal was, and whether the financial construction of the deal makes sense in relation to the reason(s) for it. Stockland is a major real estate investment player in New Zealand and Australia. In order to expand its value, it acquires a part of GPT as it aims to create more value for shareholders with a firm that is in line with its business. The deal makes sense in that the acquiring company is a company that is in the same industry but larger. It aims to take control of the Australian assets of the company, so the strategic move does make sense to me. 3 1. Who is the target company and who is the acquirer? The target company is Business Ventures Investments 1232(Pty)Ltd and the acquirer is ApexHi Properties Ltd. 2. What is the size of this deal? The deal size has a value of 35.7 million U.S. Dollar or 374.0 million South African Rand. 3. What acquisition technique is being utilized? Divestiture is the acquisition technique that has been utilized. 4. What is the nature and type of business conducted by the acquirer versus the target firm? According to the acquirer’s business description, “ApexHi Properties Ltd, located in Rosebank, South Africa, is a real estate development firm. The group manages portfolio of commercial, retail and industrial properties. Its portfolio consisted mainly of office buildings located in the inner cities of Johannesburg, Pretoria and Durban. The Company manages risk by growing the size of the property portfolio with revenue enhancing purchases, spread throughout the nine provinces in South Africa (CNNMoney.com).” The target company, as according to its business description is “Business Ventures Investments 1232 (Pty) Ltd, located in South Africa, is a special purpose acquisition vehicle that holds 110 mil ordinary shares in Ambit Properties Ltd (CNNMoney.com).” 5. What firms are serving as advisors on this deal? As for the advisors, null is specified in the section on it. 6. From other resources, determine what the rationale for this deal was, and whether the financial construction of the deal makes sense in relation to the reason(s) for it. According to the deal chart in CNNMoney.com, the merger is to acquire this special investment vehicle from Cape Empowerment Trust, Ltd. However, there are no relevant sources as to the rationale for the deal. Case 2 Part 2 Article summary The article that I chose is the “XM-Sirius merger approved by DOJ,” dated on March 24, 2008. The article is about the merger of two of the largest satellite radio broadcasting network in the United States. While after more than a year that the merger deal is announced, the Department of Justice finally has its ruling. The DOJ approves of the XM-Sirius merger for the primary reason that, the two companies are ‘anti-competitive.’ According to the article, Assistant Attorney General Thomas Barnett said during a conference call that “our data confirms that there was very little switching between companies after a person subscribes to a particular service (Goldman 2008).” According to the article, Barnett added that “many satellite radio users dont have much choice of which service to subscribe to since they simply wind up with the service that is preinstalled in the new cars they buy (Goldman 2008).” The two satellite radio broadcasting companies have different deals with various car companies, i.e. Chrysler and Ford for Sirius, and GM, Honda and Toyota for XM. DOJ has ruled that the deal is anti-competitive, and because there will be additional services that will be offered on the internet in the emergence of satellite radio services for mobile phones, for example, there would be much more competition in the future. This deal will not therefore hurt the consumers by killing off competition. While the two satellite radio broadcasting companies have merged, consumers will not yet get a complete programming from the two stations at the time the article is written. Aside from it, the Federal Communications Commission is yet to approve of the deal. Questions • Do you think that it is ethical for a large company to continue to acquire its smaller rivals? For companies that operate in an environment where growth is only possible through inorganic means, the best possible way in order to grow is to acquire the smaller rivals for consolidation. This is usually the case in industries like banks. It is best to distinguish rivals from competitors only. As for competitors, I believe there is nothing wrong in acquiring them especially is the company aims to include the portfolio of the competitor (not rival) in its businesses, so that the acquirer will get the benefits of the brand as well as the know-hows of the little companies, while being able to provide financing for the smaller competitor, and allowing it to flourish as it has started. But to acquire a rival for the purpose of killing off competition and monopolize the market, I think that one places the line for what is not ethical. By killing off competition through mergers and acquisitions, consumers are punished as well as the society at large. As the number of players becomes smaller in the market, they have influence over the price which could hurt the consumers. • Should the government step-in to prevent some mergers? If you answered yes, then when should the government intervene? If you answered no, then is it all right for a large firm to buy all of its rivals thereby removing the competition? The government should regulate some mergers if they are from the same industry, or offering competing products in the market, even at least in part of their portfolio. The reason for this is to avoid competition. Monopolistic tendency, oligopoly, or natural monopoly will punish the people by price and inefficiency. In order for the market to become fully efficient, and to bring out the best for the consumers, the government should regulate mergers if they belong to the same industry. By keeping one company from acquiring a rival in order to kill off competition, not only does the government trying to protect the consumers, but it lowers down the barriers to entry which will enable the industry to expand with the help of many players competing. Reference List “Anhui Kouzi Wine Industry Co Ltd & Goldman Sachs Group Inc.” CNNMoney.com. 13 November 2008. 15 November 2008. “Business Ventures Investments 1232(Pty)Ltd & ApexHi Properties Ltd.” CNNMoney.com. 12 November 2008. 15 November 2008. Chong, Florence. “Stockland spends $544 million on strategic 12pc GPT stake.” TheAustralian.news.com.au. 13 November 2008. 15 November 2008. “Goldman Sachs Said to Enter China Liquor Market.” Tradingmarkets.com. 14 November 2008. 15 November 2008. < http://www.tradingmarkets.com/.site/news/Stock%20News/2023893/> Goldman, David. “XM-Sirius merger approved by DOJ.” CNNMoney.com. 24 March 2008. 15 November 2008. < http://money.cnn.com/2008/03/24/news/companies/xm_sirius/index.htm> “GPT Group & Stockland.” CNNMoney.com. 12 November 2008. 15 November 2008. Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005) Financial Management: Principles and Applications. New Jersey: Pearson Education, Inc. “Stockland gets 12.7% of GPT Group.” BusinessToday.com.au. 12 November 2008. 15 November 2008. Read More