Financial management & corporate acquisitions - Essay Example

Financial Management & Corporate Acquisitions A firm or Corporation is a legal body that is separate and dissimilar from its owners. Corporations must have an owner, but there is not upper limit. The owners are called as share holders or stock holders. The interest of the shareholders in a corporation is divided into units called stock, shares or shares of stock. The rules for corporations along with the advantages and disadvantages apply equally to corporations owned by one or more than one shareholder.

Corporation like an individual have rights and responsibilities like entering into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. But the most important feature of a corporation is limited liability. This means share holders have the right to participate in the profits, through dividends and the admiration of stock but are not personally liable for company's debts. Most firms acquire other corporations with the main purpose being to make the most of shareholder value.

The other reasons for the acquiring of firms can be entering new markets, increase market share, increase profit, and attain new products. Acquiring firms means an increasing amount of opportunity for the employees and managers. The profitability of the firm is in the hands of the executives, if they handle the company properly than the profitability will increase for the shareholders. Managers are informed one of the main tasks they have is to control cost, they may be overhead cost or cost of capital.

This is done to make sure that the firm develop and cut cost for each and every category. An example being: Adidas-Salomon and Reebok announced that their boards have unanimously approved a definitive agreement under which Adidas-Salomon would acquire all of the outstanding shares of Reebok for U.S. $59.00 per share in cash. The offer price represents a premium of 34.2% over the closing price of Reebok's stock on August 2. The transaction value is approximately EUR 3.1 billion ($3.8 billion) including the assumption of net cash of EUR 69 million ($84 million).

The combination of Adidas and Reebok accelerates the Adidas Group's strategic intent in the global athletic footwear, apparel and hardware markets. The new Group will benefit from a more competitive platform worldwide, well-defined and complementary brand identities, a wider range of products, and an even stronger presence across teams, athletes, events and leagues. The new Adidas Group has pro forma aggregate 2004 revenues of EUR 8.9 billion ($11.1 billion). The deal doubles Adidas's sales in North America.

Analysts say the merged company ought to be in a better position to challenge Nike, the leading sportswear company. The deal also brings together a global lineup of celebrity endorsers, including basketball star Allen Iverson and rapper Jay-Z of Reebok, and soccer's David Beckham, an Adidas man. Not all acquisitions turn out to be a good one. Most of them fail. There are many reasons for the failure of acquisitions of firms. There can be a Lack of an assessment before the agreement. There is a lack of experience in mergers and acquisition.

The company is Slow and non effective in selecting a management team to run the merging activity. A poor communication with employees, suppliers, customers and shareholders can result in the acquisition to fail miserably. If the acquisition is to be turned successful experience counts a lot. If a company has a significant merger experience than the merger or acquisition has a chance to be successful. Another thing is the management team which is the key to success of an acquisition. Marginal Cost is the Increase or decrease in the total costs of a business firm as the result of one more or one less unit of output.

Also called incremental cost or differential cost. Determining marginal cost is important in deciding whether or not to vary a rate of production. In most manufacturing firms, marginal costs decrease as the volume of output increases due to economies of scale, which include factors such as bulk discounts on raw materials, specialization of labor, and more efficient use of machinery. At some point, however, diseconomies of scale enter in and marginal costs begin to rise; diseconomies include factors like more intense managerial supervision to control a larger work force, higher raw materials costs because local supplies have been exhausted, and generally less efficient input.

The marginal cost curve is typically U-shaped on a graph. A firm is operating at optimum output when marginal cost coincides with average total unit cost. Thus, at less than optimum output, an increase in the rate of production will result in a marginal unit cost lower than average total unit cost; production in excess of the optimum point will result in marginal cost higher than average total unit cost. In other words, a sale at a price higher than marginal unit cost will increase the net profit of the manufacturer even though the sales price does not cover average total unit cost; marginal cost is thus the lowest amount at which a sale can be made without adding to the producer's loss or subtracting from his profits.

Managers and external users of financial information are more concerned with what the future holds for an organization than its past history because what has happened has happened and reporting systems are incapable of changing history. Financial forecasts on the other had can be used for budgeting as well as planning purposes. The forecasts offer expected results based on historic facts. Investors and share holders around the world base their decisions on financial and economic forecasts. Public companies are special under constant pressure to perform according to budgeted expectations and forecasts.

Failure to do so results in lower stock prices and financial difficulties. Forecasting comes under the broad subject of predictive accounting. The four main aspects of predictive accounting are: - It improves projecting financial performance by monitoring whether processes are in control. In-control processes are predictable; out-of-control processes are unpredictable. - It seeks to understand the future. - It is based on the premise that the actions of an organization are repeatable processes.

- It uses processes that describe the way the organization works. Financial forecasts assist firms in identifying finance (external and internal) requirements as well as asset requirements. In short financial planning is a process by which firms identify their goals and cost and plan how to meet them. One of the main advantages of financial forecasting is that it identifies interactions between various elements of a firm, for example how inventory changes affect finance costs. It also makes clear which financing options are more suitable in the long term and which ones would cause problems.

By incorporating external factors such as the rate of inflation and interest rates in to the forecast, the organization is able to avoid surprises. Financial plans are of various types and vary according organization structure, size and the market in which it operates. A business that is just starting out should ideally make a 2 or 3 year forecast whereas a business which is well established can make a reliable 5 year forecast. A magazine publisher should only forecasts its sales for the following year since it cannot predict changes in the market and consumer trends in the coming years by its current state of sales.

A manufacturing company or a company which has long lead times regarding construction of new plants, long lead times for development, approval and testing procedures can rely on a 10 year forecast. The time period should be long enough to ensure that any periodically paid material cost has not been ignored and the time period should be short enough so that variations in the level of activity are not averaged out. Before any extrapolation techniques are used the past data should be examined to determine their appropriateness to their intended purpose.

its current state of sales. A manufacturing company or a company which has long lead times regarding construction of new plants, long lead times for development, approval and testing procedures can rely on a 10 year forecast. The time period should be long enough to ensure that any periodically paid material cost has not been ignored and the time period should be short enough so that variations in the level of activity are not averaged out. Before any extrapolation techniques are used the past data should be examined to determine their appropriateness to their intended purpose.

BIBLIOGRAPHY firms and corporations..Omnivorous-GA http://answers.google.com/answers/threadviewid=566993 Adidas buying Reebok for $3.8 billion http://www.bizjournals.com/portland/stories/2005/08/01/daily24.html How to Prepare a Financial Forecast http://www.flexstudy.com/catalog/index.cfmlocation=sch&coursenum=9522a Marginal cost http://en.wikipedia.org/wiki/Marginal_cost