Managing External Environment - Essay Example

(PART A) (a) Discuss the Steps a Company Takes When First Established Like Survival Putting into account the fundamental uncertainties and volatility of a company in the markets of finance, it is thus impossible for an entrepreneur to rest assured that his/her company is free from any rapid and financial losses that are likely to bring it in its knees. Thus, to avoid this, corporate planning is called for to put up a stable firm, which is able to override all upturns and downswings in an environment of business. Here, the owners of the business need the services offered by professional planners for the survival of a business. Basically, the survival of a business requires strategies like; assets’ diversification, total cash reserves’ revving up, products’ quality, part-time workers’ employment, and application of cheaper materials as well as employer options. (Sahoo, 2009) Breakeven In the process of building a business there is the point of a business’s break even and this is the point at which the costs of the company equal the sales revenue of the same business. At this point it is vital to note that the business has neither made gains nor losses. (Pinson, 2008 p98) Breakeven involves a technique of pricing applied to ensure the minimum volume of sales that a given commodity has to generate at the set level of price so as to ensure coverage of all cost outlays. This calls for strategies like, firstly, penetration pricing which refers to setting a low price as the main weapon of marketing especially for new commodities. Secondly, there is the skimming pricing which is the setting of a bit higher prices for a commodity in comparison to the competing ones. This aids in making marketers set price levels that differentiate a company’s products from the rivals’. There is also the strategy of discount or low pricing that maintains products at low prices thus attracting many customers. (raritanval.edu, 2009) Profit Subsequent to breakeven, a company crosses over to the zone of profits. For instance, according to Tracy, taking that a company’s breakeven point is at the level of sales revenue at USD 10 million, anything beyond that like a sales revenue of USD 12 million is in the zone of profits. After breakeven point all the margin becomes dedicated to profits. For example; if margin is 25%, profits at sales revenue of USD 12 million is $500,000. (Tracy, 2008 p84) Maximizing profit and Growth At the profit maximisation stage, a business sets output and price level that ensures that it earns the biggest profit. If a firm successfully ensures survival through; demand of its commodity, production as well as inputs’ supply, it makes profits. To maximise the same profit, a firm should make sure that marginal revenue product is equal to marginal resource cost and marginal revenue matches marginal cost. (ingrimayne.com, 2009) At the point where a business is experiencing marginal returns at a diminishing rate in the opportunities of internal investment, the firm is said to have reached maturity and the aim of the management is to run a growth-oriented business to maximise growth. (Marchildon, 1991 p500) Maximisation of profits requires pricing strategies. However, the pricing strategies depend upon several factors like whether the firm wants to maximise short-term profits, or maximise profit margins over the longterm. Maximisation of profits in the short run is usually an approach by companies that are small and which are seeking to attract venture capital by showing that they are profitable. Here, cash flows are the company’s overriding consideration. Profit margin maximisation is called for when the sales volume is expected to be low and also over the long-term. (about.com, 2009) (b) How Does a Company Grow Internally with Examples? According to the business dictionary, a company’s internal growth is the organic growth that is built from within a business like the invention of new types of products which follows that it raises its market share. This is attained through producing more reliable products, giving a service that is more efficient unlike its competitors’. This can also be through an aggressive approach to marketing. (bnet.com, 2009) As per the argument presented by Wickman, internal growth can assure future greatness or success as would external growth that is usually emphasized by most companies. Majority of companies thus need to shift focus to internal growth before looking at external growth. If focused internally, companies can achieve a more rapid external growth in the long-term. (Wickman, 207 p18) The rate of internal growth is considered to be the maximum growth rate of any business that it achieves without the outside funding sources; internal financing sources include funds from within the business. That is, those obtained from its operations. (mimi.hu, 2009) Campbell and others emphasise this further by saying that it involves reinvestment of previous annual retained gains. (Campbell, et al, 2002 p459) A good example of focus on the internal growth is the Hub’s International updates of 2003. The CEO, Hudges of the company expressed his urge for organic growth. (encyclopedia.com, 2003) Other examples of companies that have shown internal growth are; the Garda Company, and Microsoft Company. (c) How do Companies Grow Externally Through Mergers and Acquisitions? Companies can grow externally through three major ways; mergers, acquisitions and takeovers. The answer to this question is going to concentrate upon mergers and acquisitions as a way of external growth. Mergers as well as acquisitions’ main aim is to raise the levels of shareholders’ wealth if such strategies lead to the escalation of profits. The effect realised through mergers and acquisitions is referred in business terms as synergy. This term is often misused by those firms seeking to obtain efficiencies in operations. (Fridson and Alvarez, 2002 p73) In growing businesses externally, the expansion theory, the learning role based upon internal human capital as well as other resources, the part played by he administration productions’ diversification as well as the part played by acquisitions and merger- all play a significant part. There are profitable business operations for international firms unlike non-international businesses. These opportunities of more profits, however, carry with them special kinds of obstacles. Big companies usually acquire small ones like the case with Hercules Company. In case where acquisitions are done for small firms as well as relatively specialised businesses in the in the areas that relate to the acquiring firm’s businesses operation interests, these make integration and absorption processes simple. This company, Hercules acquired its first acquisition in the year 1914. (Penrose and Pitelis, 2002 p28, 98) Examples of external growth include Nestle’s taking over of Rowntrees in USA and internationally there has been British’s BOC Group and Germany’s Linde, Arcelor of Luxemburg and Mittal Steel and Japanese UFJ Bank Holdings and Sumitomo Mitsui among others. (Lipton, 2006) Acquisitions are almost similar to mergers and they sometimes are referred to as mergers. They involve companies being bought out by others. Often, the firms of acquisitions that are most popular involve a company purchasing another by way of cash or stock or both. A small type of acquisition has a company purchasing the assets of another while the company whose assets have been purchased either liquidations or ventures into another business type. The company that is left after the sale of assets, which now is a shell, can be utilised by a smaller or privately owned business, which is seeking to get publicly listed. This kind of acquisition is referred to as a reverse merger. The shell company has its company’s share listing as its most vital drawing card, in the process letting the private firm to merge with it to form a drawing card, in the process letting the private firm to merge with it to form a brand new public company. (learnmergers.com, 2009) One of the biggest acquisitions in the UK is the Centrica’s plc acquisition of venture production plc amounting into a transaction of ₤1.2 billion, in 2009. (statistics.gov.uk, 2009) In the 1980s through 1990s mergers of banks dominated the air as these financial institutions were seeking to get a more effective competition in an environment that was less regulated. (Downes and Goodman, 2003 p1032) A merger is a way through which corporations get legally unified in terms of asset ownership which were previously subjected to separate ownership. A merger follows that two businesses combine and one of which becomes totally engulfed in the other. In this case the company that is considered less important less important loses the original identity it owns and forms part of the important one. The important company retains identity. Mergers automatically do away with the competition between the firms that get merged. If the original companies are competitors they can become restrictive to output as well as increase prices. Governments that are concerned usually thoroughly scrutinise mergers sure they are said to reduce competition. (jrank.org, 2009) There are several classes of mergers like conglomerate mergers, horizontal mergers, vertical mergers, and congeneric mergers. There are also other types of mergers like dilutive mergers, reverse mergers and accretive mergers. Conglomerate mergers are the merger types where both the merging firms belong to totally different sectors of industry. Horizontal mergers refer to those mergers that involve two merging firms that trade with similar goods and belong to the same industrial sector. Examples include Nestle’s taking over of Rowntrees in USA, if Time Warner would merge with Walt Disney or even, if British American Tobacco would form a merger with Japan Tobacco Inc. Vertical mergers involve two firms producing similar goods. However, the two companies have to belong to varying levels of production. Vertical mergers may take practical examples like a tea bags retail chain forming a merger with a tea processing factory or even a milk supply chain forming a merger with a dairy products factory. Lastly, congeneric mergers where the merging firms are of the same industry. These have differences when it comes to commonality in buyers, suppliers and customers, though. (finance.mapsofworld.com, 2009) A good example of this type of a merger is Unilever, which is a company that has indulged in other operations apart from manufacturing detergents. That is, animal feed, plastics, paper making, and also transport. A hostile takeover is a type of a power governance way since they involve the offering of the possibility of the management’s bypassing to take a permanent company’s control by way of concentrating the cash-flows right as well as the rights of voting. (Constantinides, et al 2003 p84) In the UK a hostile takeover is bound to happen after the America’s Kraft bid of offering to pay USD 17billion to takeover Cadbury was refused. (portfolio.com, 2009) (PART B) Are Mergers and Acquisitions a Strategic Option for Growth? (a) An analysis of a Recent M&A Activity- Bank One Corporation by JP Morgan Chase and Company in 2004. Challenges that faced the two companies’ managements may be with the inclusion of interests’ conflict. These could arise from the already existing business deals and the business deals that would follow for the coming months before the merger. Roles of management were also set to change since not the merger. Roles of management were also set to change since not the whole management would call the shots and the merger would call for changes in roles or even the layoff of some management’s members. (secinfo.com, 2004) According to Golembiewski, mergers do not always mean a rose garden to every stakeholder. This is since some people like common shareholders may lose their relative control of the bigger company, workers may lose job positions to pave way for others and yet still customers may not continue getting a lot of attention as would have been the case prior to the merger. (Golembiewski, 2000 p406) Found in the filings of Bank One and JP Morgan Chase merger’s unaudited pro forma as well as the two quarters’ financial information for the period ending in June 2004, is the purpose of this merger. The information serves in showing investors that the essence of the merger was to create a position that is firm in the market for the now big company and also allowing of proper management as well as synergy in the entire firm. (umass.edu, 2004) Fasnacht writes that mergers of huge institutions like Bank One and JP Morgan Chase have been seen in the recent past. History has, however, evidenced failure of such mergers especially with regards to expected value creation- part of mergers have even led to value destruction. He stresses the point that there is optimism of synergy activities surpassing costs of integration, though. More specifically, synergy has been seen not to work for acquisitions of cross border and thus synergy for JMPC merger was set to succeed. (Fasnacht, 2009 p23) The transaction’s rationale was that merger would result into an establishment of the second biggest of US’s banking that would lead to a stronger company’s position in the finances. This would impact on the stakeholders synergistically. For instance; shareholders would realise an increase in value through balanced business mix, competitiveness, enhanced levels of efficiency and an overall greater scale. This merger was set to impact on competition in that despite the fact that the two parties took part in banking activities, Bank One had no interest the area of South Africa. Thus, there was no product overlap in banking. The two parties also take active roles in the bigger packaging sector. In spite of taking part in packing, their activities in the packaging sector were also different and thus avoiding an overlap. (saflii.org, 2004) (b) Analyze what Happened Before and After Mergers and Acquisitions Activity by Looking at Financial Statements (Ratios to be assessed) JMPC was to purchase Bank are for approximately USD58 billion in this merger that would lead to the combination of the US’s biggest banks. This would result also into a big bank that would rank in position two after Citigroup and merged company would have assets worth 1.1 trillion USD as well as 2,300 branches in the US’s seventeen states. (cnn.com, 2004) As per the 2003 financial reports, the ratios of JP Morgan Chase and Company were as follows: Table 1: Ratios and other financials of JPMC Year Ratio 2003 2002 2001 (All figures in million USD apart from ratios) Total Capital Ratio 11.8 12.0 11.9 Return on average common equity 16% 8% 9% Average allocated capital 19,134 19,915 - Average assets 510,894 495,464 - Operating revenue 14,440 12,498 - Total assets 770,912 758,800 - (investor.shareholder.com, 2009) Table 2: Ratios variations after the merger Year Ratio 2005 2004 (Million $ apart from ratios) Total capital ratio 12.0 12.2 Return on common equity 10% 10% Average assets 1,198,942 1,157,248 Average allocated capital 107,211 105,653 Operating income 54,533 43,097 (investor.shareholder.com, 2009) As seen from the figures obtained from the investor.shareholder.com website, various figures changed a great deal while other just fluctuated to a small extent. For example; the figures about return on average common equity changed slightly from the 2003’s 16% to average at 10 % in both 2004 and 2005. Also total capital ratio did not change a lot. Average assets generally doubled in value while operating income basically also rose to a high extent. Other figures that rose highly as well are the average allocated capital’s. The ratios reflect several notable issues. Return on average common equity shows the amount of net income that is returned in portion to the common shareholders’ equity. It evaluates the profitability of a firm by showing a percentage of profitability returns made from the shareholders funds. Since it showed a slight fall in this scenario, it does not necessarily mean that profits magnitude fell, but rather the average profits to the shareholders declined. Total capital ratio measures the part of long-term funds that come from loan or debt. The ratio gotten from the records shows that the portion of debts funding the merged firm’s operations did not necessarily change. Average assets doubled in value since Bank One brought in synergy into the whole organisation. Thus, the new organisation of business had a bigger proportion of balance sheet assets than before. (c) A conclusion on whether Mergers and Acquisitions are a strategic option to growth Through mergers and acquisitions, as seen earlier, are the main way utilised by companies for external growth, they have started to become unpopular. According to Sadler and Craig, from year 2000, the usage of these transaction types has to a high extent fallen. In the USA, in the first three quarters of the year 2000, the transactions of Mergers and Acquisitions just constituted a mere 2%. This is as compared to the 1988’s 34% of M&A. Other Mergers and Acquisitions were utilised to make a redefinition of the model of business as a strategy of growth as well. Good examples to this include Time Warner’s merger with AOL in the onset of 2001. However, one cannot just conclude the report without showing the fact that the most recent mergers are a bit ambiguous when it comes to the strategic rationale. This stands to be determined after sometime. Some have even led to failures and the level of expected dividends has even declined. A good example is the acquiring of Winterthur by Credit Suisse Group in 1997 with an amount of USD 2 billion instead of a synergetic workout; the group has been realising losses. (Sadler and Craig, 2003 pp123, 124) From the findings one can see that mergers present opportunities to external growth as seen in the case of Bank One Corporation by JP Morgan Chase and Company in 2004 merger. However, despite the fact that the ratios like return on common equity and average assets have shown relative growth, the undertakings present challenges. For instance, the management is faced with a big handle on who the top management will be and who is to take which roles. Also some of the management team might get laid off and this presents a bigger predicament. Internal growth as seen earlier can also be a way of growth to any given company. This is as discussed that according to the business dictionary, a company’s internal growth is the organic growth that is built from within a business like the invention of new types of products which follows that it raises its market share. This is attained through producing more reliable products, giving a service that is more efficient unlike its competitors’. This can also be through an aggressive approach to marketing. (bnet.com, 2009) Examples of this are; the Garda Company, and Microsoft Company. As mentioned in the findings, mergers form part of external type of growth for companies. More specifically, Fascnacht says that such mergers like JPMC’s aid in the formation of synergies. This is seen to be the case for many companies particularly banks. Synergy may not always result subsequent to merger if banks of different nations merge, though. Reference list: about.com. (2009). Pricing Strategy. Retrieved December 9, 2009 http://entrepreneurs.about.com/od/salesmarketing/a/pricingstrategy.htm bnet.com. (2009). Business Definition for: Internal Growth. Retrieved December 6, 2009 http://dictionary.bnet.com/definition/internal+growth.html Campbell, David. (2002). Business Strategy: An Introduction. Butterworth- Heinemann. Edition 2, illustrated. p459. Constantinides, George M. et al. (2003). Handbook of the economics of finance, Volume 1. Elsevier. Edition illustrated, reprint. P84. Downes, John and Goodman, Jordan Elliot. (2003). Barrons finance & investment handbook. Barrons Educational Series. Edition 6, illustrated. p1032. encyclopedia.com. (2003). Hub International Updates EPS Forecast for 2002, 2003; Cites Successful Market Penetration, Cost Control and Acquisitions. Retrieved December 6, 2009 http://www.encyclopedia.com/doc/1G1- 96963692.html Fasnacht, Daniel. (2009). Open Innovation in the Financial Services: Growing Through Openness, Flexibility and Customer Integration. Springer. Edition illustrated. p23. Fridson, Martin S. and Álvarez, Fernando. (2002). Financial statement analysis: a practitioners guide. John Wiley and Sons. Edition 3, illustrated. p73. Golembiewski, Robert T. (2000). Handbook of Organizational Consultation. CRC Press. Edition 2, illustrated revised. p406. ingrimayne.com. (2009). Overview: Maximizing Profit. Retrieved December 6, 2009 http://ingrimayne.com/econ/MakeProfit/Overview10mi.html jrank.org. (2009). Mergers and Acquisitions - Types of Mergers, Corporate Merger Procedures, Competitive Concerns, Federal Antitrust Regulation, Merger Guidelines. Retrieved December 6, 2009 http://law.jrank.org/pages/8550/Mergers-Acquisitions.html#ixzz0Ys1UPzRZ Lipton, Martin. (2006). Merger Waves In 19th, 20th And 21st Centuries. Retrieved December 6, 2009 http://docs.google.com/viewer?a=v&q=cache:7pyU59Huv3MJ:osgoode.yorku.ca/ media2.nsf/58912001c091cdc8852569300055bbf9/1e37719232517fd0852571ef0 0701385/%24FILE/Merger%2520Waves_Toronto_Lipton.pdf+EXAMPLES+OF +RECENT+MERGERS+IN+THE+USA&hl=en&pid=bl&srcid=ADGEESiwDy4 IEQ- avND4VWsGkp6qr9edxTXTsDjpSXQCK335Yo9fDy_nmjUS8nwtuMbKmExR RFd7RyPbKXxQwC1WNlBdQfEkyrJpBL-DjIbRe4k6S2mgAmP-- sV3DIXQG2Bkpio36JRM&sig=AHIEtbTxfbHbB9fevOV4yj6Zd1ZkpMtJ3Q learnmergers.com. (2009). Acquisitions and Valuations. Retrieved December 6, 2009 http://www.learnmergers.com/mergers-acquisition.shtml mapsofworld.com. (2009). Mergers And Acquisitions. Retrieved December 6, 2009 http://finance.mapsofworld.com/merger-acquisition/ Marchildon, Gregory P. (1991). Mergers And Acquisitions. Edward Elgar Publishing. Edition illustrated. p500. mimi.hu. (2009). Internal Growth. Retrieved December 6, 2009 http://en.mimi.hu/business/internal_growth.html Money.cnn.com. (2004). $58B Bank Deal Set J.P. Morgan Agrees To Buy Bank One In A Deal That Would Combine Two Of The Nations Biggest Banks. Retrieved December 6, 2009 http://money.cnn.com/2004/01/14/news/deals/jpmorgan_ban kone/ Penrose, Edith Tilton, and Pitelis,Christos. (2002). The Growth Of The Firm: The Legacy Of Edith Penrose. Oxford University Press. Edition illustrated. pp28, 98. Pinson, Linda. (2008). Anatomy Of A Business Plan: The Step-By-Step Guide To Building Your Business And Securing Your Companys Future. aka associates. Edition 7, illustrated. p98. portfolio.com. (2009). Going Hostile. Retrieved December 6, 2009 http://www.portfolio.com/business-news/portfolio/2009/11/11/going-hostile-in- the-merger-business/ raritanval.edu. (2009). Breakeven Analysis. Retrieved December 9, 2009 http://209.85.229.132/search?q=cache:msLRcJFzBpkJ:www2.raritanval.edu/depa rtments/busadmin/part-time/Griffing/PowerPoint/Ch14- IntrotoBusiness.ppt+strategies+to+breakeven&cd=18&hl=en&ct=clnk Sadler, Philip and Craig, James C. (2003). Strategic Management. Kogan Page Publishers. Edition 2, illustrated. Pp123,124. saflii.org. (2009). South Africa: Competition Tribunal. Retrieved December 6, 2009 http://www.saflii.org/za/cases/ZACT/2004/30.html Sahoo, Sambit. (2009). Financial Planning For Your Companys Survival . Retrieved December 6, 2009 http://ezinearticles.com/?Financial-Planning-For-Your-Companys- Survival&id=2538729 shareholder.com. (2009). Annual Report. Retrieved December 6, 2009 http://investor.shareholder.com/jpmorganchase/annual.cfm statistics.gov.uk. (2009). Transactions in the UK by UK companies. Retrieved December 6, 2009 http://www.statistics.gov.uk/pdfdir/ma1209.pdf Tracy, John. (2008). Accounting For Dummies. For Dummies. Edition 4, illustrated. p84. umass.edu. (2004). JPM Future Prospects and Evaluation from an Investors Viewpoint. Retrieved December 11, 2009 http://www-unix.oit.umass.edu/~kazemi/papers/rep4.pdf Wickman, Gino. (2007).Traction: Get a Grip on Your Business. Amazon.com. Edition illustrated. p18. Read More