Rio Tinto Plc Market Performance - Term Paper Example

Contents Profitability, growth and overall performance of the company since 2005 Rio Tinto Plc was one of the very few companies in the world which were started on the dual listed companies’ structure. It is because of this reason that the two companies are managed as one economic unit but as two separate and distinct entities with different shareholders, share registers etc. Established in December 1995, it is one of the largest companies in the world involved in the business of mining and extracting natural resources. Starting with 2005, the Riot Tinto has been able to earn profitability level of $4.96 billion, an increase of 118% over the year. The company has been able to generate an overall cash flow of $8.3billion showing an increase of 85%. This increase in cash flow has been achieved after making capital investment of $2.5 billion, a figure which has increase by 13% in the current year. (www.riotinto.com,2005). An analysis of the financial data from 2005 onwards suggest that the company has been able to increase its revenue from $19.033 Billion in 2005 to $29.700 Billion in 2007- an increase of more than 56%. The earnings per share of the company have increased from $3.81 to $5.67 in 2007. Operating Income of the company has been also consistently increasing from $ 6.92 billion in year 2005 to $8.571 in year 2007. (Reuters, 2008). Three years performance of the Rio Tinto suggests a very strong performance of the company. A more closer look at the performance of the company would suggest that the during 2005, company has been able to generate sales mostly through the sales of iron ore and copper whereas the same trend seem to be taking place in the years after 2005 also. Further more the comparison with the industry ratios in the year 2007 suggests that the company has been able to beat the industry in major ratios. The Price to Earnings ratio of 18.94 is higher as compared to the industry PE ratio of 13.62 whereas the other key ratios including the sales growth, EPS growth, working capital management ratios are better than the industry benchmarks. However it also must be noted the total debt to equity ratio of the company is higher than the industry ratios suggesting slightly higher degree of leverage being availed by the company as compared to the industry. On the whole strong stock performance coupled with the strong operational and financial performance of the company suggest a very solid and mature financial strength of the company along with better management of resources. Rio Tinto being one of the largest companies in the industry and being quoted at multiple stock exchanges of the world has been able to return value for its shareholders through improved and consistent performance over the period of three years and future projections about the company further suggest that the shareholders have very strong confidence in the future viability of the company. Treasury Management Treasury Management is considered as one of the most essential functions of the organization regardless of their size, structure and nature of ownership. An effective treasury management framework help organizations to achieve its core business objectives and goals however the precise nature of how treasury can contribute to the overall benefit of the company depends upon the type of organization, the legal regimes under which the company is working and the scope and nature of its operations which necessitate the use of treasury as one of the tools to manage the resources of the firms in their most profitable and efficient manner.(cipfa.org.uk,2008). “Treasury’s ability to impact the bottom line is gaining increased recognition at the C-levels of leading organizations; driving greater adoption of more sophisticated and better integrated treasury automation solutions.”(Celent, 2006). Multinational firms like Rio Tinto face huge challenges of managing the resources across multiple locations and time zones and it is because of this reason the treasury management plays a very critical role in managing the excess resources of the firms. It is because of this reason that firms like Rio Tinto are using technology to overcome the impediments in managing the resources across the various geographical locations. The importance of treasury management become more important now because with the introduction of the Sarbanes Oxley, organizations beside needing the technologies to maintain visibility and control further require the regulatory reassurance also which further complicates the matters if effective treasury management is not being practiced and performed in the companies.( Struzensk,2006). It must therefore be noted that ineffective treasury management can cause companies like Rio Tinto significant losses in interest earnings on the cash surpluses to losses incurred through poor market dealings of the firm. Apart from that for a firm of Rio Tinto stature which has a significant presence on many stock exchanges and deal in many foreign currencies, the treasury management has to be robust, effective and timely otherwise poor managing of foreign currency exposures as well as future and forward hedging of the resources can create significant losses for the company. One real time example of the lack of effective treasury management is that of P&G which incurred huge losses mainly due to its poor treasury management practices and poor derivative management resulting into one of the largest losses in its corporate history. Therefore the perceived notion that the effective cash management can increase the yield on investments as well as the use of derivatives can give the quick gains to the treasury is considered as the core of the problems which many treasuries in the organizations face.( Schwartz,1996) and what is often being neglected is the fact that treasury’s job is to ensure the adequate and timely funds to the organization and not earning for the organization in the case of Procter and Gamble. Hostile Takeover Hostile takeovers and mergers and acquisitions are considered as part of the corporate finance world as they are not being considered as entirely new phenomenon. In order to grow and become more efficient, organizations consider taking over organizations which possess various efficiencies which the firm itself may not be possessing and it is done mostly through the merger and acquisition process between the two companies. However when the merger and acquisition process fail, the acquiring firm may directly contact with the shareholders to bid for a hostile takeover to purchase the shares of the firms from the open market.(Harrer, et.al. 2008). In a hostile takeover, a raider makes a direct offer to the shareholders of the firm through a tender offer without consulting the incumbent management of the firm.( Schnitzer,1996). The apparent reasons as to why BHP Billington may be looking for the hostile takeover of the firm would be to create value for itself and achieve synergies to monopolize the market through the proposed takeover. There are various reasons as to why the shareholders of Rio Tinto may not want to be taken over. The most important consideration for a common shareholder will be the loss of higher potential income in the future. Rio Tinto, over the period of time have evolved its reputation of being one of the best companies in the industries consistently providing and adding value to its shareholders therefore any loss of the value to the shareholders through proposed hostile takeover means striping them from the higher future income. Further to this, with the hostile takeover, the organization will also witness a change in the management of the firm which may serve the interests of the new ownership of the firm rather than engaging itself into value generating activities for their shareholders. There are various ways through which a hostile takeover bid can be avoided by the Rio Tinto however hostile takeover defenses largely rest on two hypotheses. These hypotheses are: 1) Bargaining Hypothesis where target managers resist hostile takeover offer by improving the terms of the takeover. 2) Entrenchment Hypothesis resists the hostile takeover offers. Based on these hypotheses, there are therefore defense mechanism available to the firms i.e.preoffer defenses and post offer defenses. Pre-offer defenses include the use of poison pills where the existing shareholders are issued further right shares thus making the firm less valuable in the eyes of the taking over firm. Besides there is also a poison puts where existing bondholders of the firm may be asked to liquidate their bondholding in the firm thus requiring huge outflow of the cash effectively making the firm less attractive bargain and finally making changes in the charter of the firm and as a last resort using the state rules to restrict the hostile takeovers.( Rosengren,1988). The shareholders of Rio Tinto can either adapt the poison pill approach by offering the right shares to the existing shareholders at much lower price in order to increase their stake in the business. This will potentially allow them to retain their shares rather than selling it to the acquirer firm. Harmonization in Financial Statements Firms like Rio Tinto and BHP which have such huge and diversified corporate structure and presence require a very careful exercise of professional ability in preparing the financial statements of the firm. Firms having dual corporate structures, many subsidiaries, independent segments require harmonization while preparing the financial statements of the firm. Since these independent and diverse corporate structures of the firms are also geographically distinct from each other facing different dynamics especially within the domain of legal obligations, the harmonization in presenting the consolidated financial statements poses a deep and difficult challenge to the firms like BHP and Rio Tinto. However to present a fair and accurate information regarding the group performance, it is therefore necessary that the financial statements should be harmonized by developing mechanisms which nullify the impact of various rules and regulations and present the information under one set of information under uniformed rules, laws and procedures so that single information can be helpful for all investors across the world. References 1. www.riotinto.com. (2005). 2005 Annual Report Presentation. Available: http://www.riotinto.com/documents/Investors/FY2005_presentation_slides.pdf. Last accessed 31 March 2008. 2. Reuters. (2008). Rio Tinto Financial Statements. Available: http://stocks.us.reuters.com/stocks/incomeStatement.asp?period=A. Last accessed 01 April 2008. 3. Celent. (2006). Treasury Management Technology: Optimizing the Cash Cycle. Available: http://www.celent.com/PressReleases/20060817/TreasMgmtTech.htm. Last accessed 01 April 2008. 4. CIFPA. (2008). Treasury Management. Available: http://www.cipfa.org.uk/pt/download/treasurySOPP.pdf.. Last accessed 01 April 2008. 5. Struzenski, Jeffery. (2006). Centralize treasury management to reduce risk, increase control. Available: http://www.allbusiness.com/finance-insurance/874326-1.html. Last accessed 31 March 2008. 6. Jan Harrer, Pavel Hrbek, Radek Zelenka. (2008). Hostile Takeovers: Strategy and Defenses. Available: http://ies.fsv.cuni.cz/storage/sylab/115_hostiletakeoverdefense26-2007.ppt.. Last accessed 31 March 2008. 7. Schnitzer, Monika. (1996). Hostile versus Friendly Takeovers. Economica. 63 (249), p 37-55. 8. Rosengren,Eric S. (1988). State Restrictions of Hostile Takeovers, . Publius. 18 (3), p 67-79. 9. Schwartz,Eli. (1996). Gambling with the Treasury. Public Management,. 78 (2), 4+. 10. Read More