Reasons for adopting particular dividend policies & Case with Apple

Managers and shareholders often got differentiation of dividend policies which link to shareholser value and long-term strategy. As far as i am concern, the reasons of managers adopting particular dividend policies is varieries.

First of all, i think, how long the company being set is much more related to the dividend policies. If the company was new, it is important for the company to save more earings for expansion and invest into projects. If the company is stable, which may need rise the dividends for strength shareholder confidence.
Secondly, faced the dynamic global business enviornment such as financial crisis and creit crush, the company may have to adopted the dividend policy in order to survival.
Ultimately, the operating condition of the company is the heart of factors. Once the make the wrong choice about dividend policy, it might decrease share price or not sustain for developing long-term strategy.

Take Apple for example, as the Financial Time reports at 25th April 2013, that its $45b cash return has delayed by three years. The direct result of tight dividend policy would influence share price, which be forecasted by analyst that the earnings per share of Apple would be $10.09.  Considering the reason of this phenomena is because the decreasing sales income of iPad and iPhone in the first season of 2013. Tim Cook, the CEO of Apple, has demonstrated that the under pressure from activist investors as iPhone growth slows, tries to assure shareholders and customers that Apple has lost none of its magic touch.

Apple always concentrate on technology innovation, which would be part of long-term strategy of future development. They are cope with new products and service updating such as iOS 6.1 and iPhone 5. However, Tim Cook said:“We’ve got some really great stuff coming in the fall and across all of 2014. The most important objective for Apple will always be creating innovative products and that is directly within our control. We will continue to focus on the long term and we continue to be very optimistic about the future.”

sources: http://www.nasdaq.com/symbol/aapl/revenue-eps

In order to ensure the reinvestment of technology innovation, Apple may need to cut its dividends return. If take the angle of Tim Cook, considering more about lond-term development or shareholder value would be the future orientation of Apple. The pervious CEO--Steve Jobs would consider more around technology innovation and products updation. However, IT especially smart phone market is full of competition, which samsung and Sony are update new products and updating service system for strength competitive advantages.Since the market capitalisation of Apple increasing significantly in recently years, more public attention is paid onto sustaibability and sharehoders wealth of this orgainsation.

As far as i am concerned, the competition of smart phone by now is globally. To survival and cope with new products would be better for the long-term development. However, to deliver such a information that Apple still full of strength and magic power for customers need to ensure the confidence of shareholders. New investors would also be considered the earning per share. Therefore, I think, despite the capital investment of technology innovation and service updating, to justify spending would be more important for Apple.

Choosing particular capital sructure

Modern capital structure theory  be defined as in perfect markets, capital structure should have no influence on the value of a firm. Therefore, choosing particular capital sructure become more and more important. Optimal capital structure are find balance between debt-to-equity range and lowest cost of capital. 

Lloyds which be reinforced as the UK's largest retail bank by the end of 2008, is now considering to selling part of its assets manager named Scottish Widows Investment Partnership for increase its capital. According to Financial Times, there are 142billion pounds of assets beneath management of Scottish Widows Investment Partnership. 

At the hardest time in financial market within UK, the Lloyds take the strategy to scale back the size of the bank and simplify the structure of business, is focusing on the  retail market. Meanwhile, Lloyds sold out a 20% stake in wealth manager St James's Place for earn money as its market price grow up. 

In the case of Lloyds TSB bank, there are particular strategy that the organization raise its capital. The organization is focus on investing in retail market. However, what is the factors influence managers choose particular capital structure?

My opinion is that there are three aspects.

Firstly, I think for all organisations, excluding debt and business risk is the basic risks. It is unirversity acknowledge that the higher business risk, lower optimal debt ratio which investors are tends to believe this company are able to be response with this capital structure in both good period and bad period.

Secondly, the tax exposure makes big differents for the companies as well as the financial flexibility. Because when the company in the good times, it is easy to raise capital, however, when it is bad times, the company may need to borrow funds, if there is too much funds, the investors would doubt the ability of the company whether it can pay back the funds or not.

Thirdly, the management and operation strategy of the company influence the capital 
structure significantly. Because if the company is achieving its expansion strategies, it may be much funds for raise money. For the situation, the earning per share would be higher because the funds are invest into projects for creating profits.

family business & regulation of global financial market

After Western financial crisis in 2007, most of the corporates are get negative influence of crisis, particularly for family business. The expectation of family business is not only growth or employees, but also stability profitability. 

However, once mention the growth of a company, raising capital would become initially important for mangers. The negative and difficult for family business to raise capital, is that the no measurement to ensure shareholder value. Family businesses are closed environment with no annual account. The other big issue is agency problem, when the founding members or managers server their own needs rather than those of the investors an agency problem. Besides that, the conflict relationship between different arm of families members would be barriers of the measurement. 

How often family business conflict will occur? According to summary from Family Business Institution, 20% of family businesses report weekly conflict, another 20% report monthly conflict, and 42% report conflict three to four times per year. You can draw your own conclusions about the 18% who report no conflict at all! It’s worth noting that not all disagreements raise to the level of conflict. Disagreement is a difference of facts, perceptions, beliefs, or expectations. Conflict is a higher level of disagreement; it’s the belief of two or more people that their positions are mutually exclusive.

The role of the regulator is in public interest who need to corrects for market failure. Meanwhile, it could be be as agency approach to seeing profit, maximizing firms exploiting information advantage. 

The financial crisis that originated in the USA last summer has had major repercussions in 

Europe. Calls for stronger regulation of financial markets and their actors have increased for about ten years ever since the Asian crisis sent shockwaves around the world. As of yet, the extent of the current credit crisis cannot be estimated and central banks continue to be faced by an opaque network of shady credit constructions. The present crisis could therefore serve as a catalyst for tightening regulations globally.  The aims of an integrated global financial market can be achieved only if an efficient global supervisory structure and adequate regulation of complex investment vehicles are developed and given the necessary support.

Considering the future challenges of regulation of financial market, I think there are two aspects, which are considering structure credit risk and tight capital requirement.

Is corporate governance of bank system important?

Bank industry in western country act not only regulator, but also an important financial institution. However, after Western financial crisis in 2007, bank industry get a huge destroy, even some famous bank get totally failure in this "war" such as Lehman Brothers.

According to the Financial Times, on January 7th 2013, the Basel Committee on Banking Supervision, a club of the world’s main bank supervisors, announced greatly softened rules on the “liquidity coverage ratio” (LCR), the amount of cash and liquid assets they want banks to hold as a buffer to ensure obligations can be met if there is another freeze in funding markets.

The Basel committee’s original 2010 proposals on liquidity were much tougher, as was the timetable. The revised rules allow banks to hold a wider range of assets in the liquidity buffer, including equities and mortgage-backed securities, as well as lower-rated sovereign and corporate bonds. This has lead to banks will have to hold enough cash, and easily sellable assets, to tide them over during an acute 30-day crisis. Some experts think that the rules are part of efforts to prevent another shock to the financial system like that prompted by Lehman Brothers' 2008 collapse.

However, only regulation restriction is not enough for rebuild bank industry. The crporate governance in bank is significant for bank industry. Initially, banks play a vital role in the economy: a bank is the medium between individuals and capital is able to bring enormous benefit to both consumers and business. In the financial systems of developing economies, banks as the engines of economic growth are extremely significant and have a predominant position, for example, the bankruptcy of Lehman Brothers is one of the main reasons for the USA subprime crisis. Similarly, The Royal Bank of Scotland (RBS) failure of October 2008 provides a counterexample of bank corporate governance.
 
The Financial Services Authority (2011) reports that the main reasons leading to RBS failure in 2008 are: poor management decisions, deficient regulation and a flawed supervisory approach. It can be seen that poor bank corporate governance caused this failure. The FSA  points out ‘‘a deficient global framework for bank capital regulation, together with an FSA supervisory approach which assigned a relatively low priority to liquidity, created conditions in which some form of systemic crisis was more likely to occur’’. Therefore, a perfect corporate governance system and strengthening regulation can prevent bank failure.

The most of CEOs may only focus on the profits of shareholders in the build-up to the crisis and take actions which they consider the market would welcome. In fact, the outcomes were not good and these actions were costly to the banks in question and their shareholders. Moreover, their findings shows that bank CEOs did not reduce their stock holdings in expectation of the crisis, and that CEOs did not hedge their holdings.

Therefore the relation between corporate governance and the performance of banks during the subprime crisis, it is significant for banks and bank regulators to recognize corporate governance problems and decide what remedial actions are required

How was the future of Volvo's Chinese market?

Sweden’s Volvo AB has struggling nearly $1 billion in order to acquire a 45% stake in a new venture with China's Dongfeng Motor Group Co. for 5.6 billion yuan ($900 million). This was claimed by 26^th January 2013, which stand for the 7-year-negotiation finally ended with success.

 

This M&A would bring both advantages for Volvo and DongFeng Motor Group Co.  Volvo has entry to Chinese market several years ago, however, no good commercial vehicle development.

Universal acknowledge that maximazine shareholders wealth and increase market price are main reason that organisation choose to merger and acquistion. After claim of this news, the share price increase from $95.5 to $100.5 per share, at the beginning of the comming Monday.

Another important reason that companies combine is to improve their competitive market position. This negotiation would not only bring acquisition but also share core technology and create new R&D Centre in order to occupy Chinese big truck market. Merging with a competitor is an excellent way to improve a company's position in the marketplace. It reduces competition, and allows the combined firm to use its resources more effectively.According to wall street journal, "Volvo's Mr. Persson said the alliance signaled a long-term commitment to China's growth that would outlast year-to-year market moves. 'We will see markets going up and going down for years to come,' he said. He also cited Volvo's know-how in reducing vehicle emissions."

 

In order to open new market and being more competitive within industry, there are a long way that Volvo need to considering. On the one hand, the incresing of market price after acquisition is commen, which donnot stand for strength confidence of shareholders. On the other hand, subsequent expenditures might influence the purpose of the organisation.

 

 

Yum's big plan in India, success? Or failure?

Foreign direct investment inflow is significant to the economic growth of developing countries. There are several advantages of invested abroad:

• econimies of scale and scope arising from enterprises' size 
• managerial and marketing expertise
• superior technology owing to company's heavy emphasis on research
• financial strength
• differentiated products
• ompetitiveness of company's home market

Multinational enterprise direct oversea market in order to get more profit also increase market share. Not only the company need to prepare a large sum of money but also strategies for open new market. The first and most important issue is decided where to invest. In my opinion, companies might need to do background search like market imperfections, ownership advantages, internalization advantages and location advanatages.

Yum Brand Inc (Yum), an America based fortune 500 coroperation, which operates or licenses of worldwide restuarant Taco Bell, KFC, Pizza Hut and WingStreet. WSJ has reported the big plan of KFC. It reported that Yum will increase to $1 billion in sales for more retail stores in India. Their target of this FDI in India is to make india be "the largest consuming class in the world, ahead of U.S and China, by 2030."

The main reson that Yum decision making is the potential maket of India. This due to conclusion of reasearch illustrate " nearly two-thirds of Indians now ear out at least once a week." Besides that, as 70% of the market is consist by "small mom-and-pop stores rather than restaurant chains". The second reason is the 25% decreasing revenue of China between January and February. Yum tends to relocated their main market which is long-term strategy.

Similarity of Chinese market, Yum realized that more earlier in opening Inidan market would be considered as competitive advantages. In order to achieved the plan, not only need large sum of money but also specific strategies.
Firstly,  this "big plan" is based on the chain include Pizza Hut and Taco Bell, not only KFC. Meanwhile, Yum has changed and create new products for occupy local market. For instance, the vegetarian chickpea patty sandwich and hot wings with chili lemon sprinkles. And changes some of the ingredients to Indian counterparts.

Although there are large potential market of fast food in India, more consideration should be put on the political risk and cultural risk. Cultural and Institutional risk is more about religious heritage and human resources norms. Considering the strategy like changed the ingredians and looks somewhat more Indian food need to trying many times. However, FDI in new market or relocated the main market is a long-term strategy associated with influence of Group. Despite of that, for managers, more risk, more gain.

Corporate Risk Management & Multinational Tax Management

Shifts in foreign exchange rates have the potential to undermine the competitive position of the firm and destroy profits. It is necessary for managers to be aware of the consequences of currency risk, not only because it influence economic growth, financial influence such as income to be received from abroad and competitiveness but also firm's survival.

There ate three types of exposure for firms that operate in an international market: transaction, translation and economic exposure. Transaction exposure is for the enterprise tends to have commitment in a foreign currency both receiving and paying. This type of risk is usually associated with imports and exports.Translation risk arises because financial data denominated in one currency are then expressed in terms of another currency. A company's economic value may decline as a result of forex movements causing a loss in competitive strength.

Ingredion Inc, starch and sweetener maker, the earning of current quarter were declined 20 cents a share. According to Cheryl Beebe, the CFO of the company, the weakness of Brazilian real, Argentine peso, British pound and euro is the main reason. There are might be more 7cents reduction according to Beebe's expects which with the real accounting for about half of the total. The currency risk of Ingredion Inc is transaction risk. There are some of strategies of reduce the risk, such as invoice the customer in the home currency, netting or do nothing. However, Ingredion Inc not expect to change their hedging strategy significantly. When managers choose this strategy usually because of the worry about the gap between net cash flow and hedging. Besides that, hedging would influence shareholders attitude about foreign gains or loss. That, so some extent, would impact the future foreign acquisition and exploitation.

The explanation of  this strategy is because of the main hedge of Ingredion Inc are using for ensure any dollar-denominated transactions between its U.S. operations and foreign units, like royalty or dividend payments. "You have to be very, very careful, it's expensive to hedge."says Ms. Beebe.  Many firms adopt this policy by taking "win some, lose some" principle. Choosing increase the hedge strategy for against currency risk might help or hurt the values of foreign sales and earnings when translated into dollars. Critics of hedging currency risk often cite companies which have come a cropper from dabbling in derivatives.

As far as I am concerned, for multinational enterprises, the changeable currency of different countries would have much more influence on their balance sheet. However, to choose which strategy to against the risk is simple due to the how worried need to about the forex transactions. If $1m is a large part of   subsidiaries turnover which may be a quater of total revenue, then the forex risk is need to be considered. If $1m is small part of the annual turnover and is much less than profit, then may be the managers should save hedging cost. Do nothing is main due to different enterprises, there are not rules or regulars for the judgement.

When discuss about multinational tax management, i take Google as an example. It is reported that Google managed to avoid $2 billion in worldwide income taxes within 2012. They accomplished it by shifting about $9.8 million turnover to Bermuda shell company simple because there are no income corporate tax. A lot of companies make strategy of transfer pricing to overseas subsidiaries which located in none income tax area such like Bermuda, HongKong, Dublin. 

Transfer pricing is more often strategy by big multinational corporate which own overseas subsidiaries. Managers tends to ovoid the income taxes to income tax free area. However, this is coming under pressure around the world. More and more governments such like UK, France, Italy, Australia  are put more efforts in investigate if multinational corporate due more money to abroad.

Certainly, managers utilize the currency differentiation between headquarter and subsidiaries for avoid tax and achieve cost control. The tax which ought to be paid or not is not only an ethic issues of business environment, but also important strategy of managers. It is only theorical that this issue would be solved as ideal model, most of the companies would still transfer globally for creating and protect shareholder value.

Debt financing or Equity financing?

Debt and equity financing are two basic options for company to raise money for moving on business. Debt financing is a method raise money through long-term bank loans or borrowing money from financial institutions. Meanwhile, equity financing is raise it from investors like selling shares.

 

 
  
Dell the third biggest PC manufacturer announced to signed a mergers agreement with Michael Dell, the chairmen and CEO of Dell, in partnership with global technology investment firm Silver Lake, will acquire Dell.  

 

 

According the details from Dell:

   "A Special Committee was formed after Mr. Dell first approached Dell’s Board of Directors in August 2012 with an interest in taking the company private. Led by Lead Director Alex Mandl, the Special Committee retained independent financial and legal advisors J.P. Morgan and Debevoise & Plimpton LLP to advise the Special Committee with respect to its consideration of strategic alternatives, the acquisition proposal and the subsequent negotiation of the merger agreement."

 

"Dell shareholders will be offered $13.65 in cash for each share, a 25% premium to the share price when the deal rumours first surfaced. Dell will be values at $24.4 billion."

  

The advantages of debt financing, is less expensive to the firm than equity finance, not only because the costs of raising the funds are lower, but because the rate of return required to attract investors is less than for equity. Debt finance shows advantages of growing aggressive strategy because it can low the interest rate of the company. Besides that, when compare with equity financing, the company do not need to give up any of the ownership of shares or business controlling rights. However, the method would raise the interest which loan money from bank. This to some extent would influence the company raising their assets or equipments. Last but not the least, this strategy would impact the annual reports figures like cash flow and long-term borrowing.

When considering equity financing, the positive would be no debt payments which contribute a low debt-to-equity ratios in their annual reports. Whilst the shareholders are share the risky of the strategy of new investors. But, obviously, the interest should be share with new investors. Quite normally, that the company need to give up portion of ownership.

  

As far as i am concerned, without the regulation and limitation exposure of multinational enterprises, dell could be more will to transit into service company. Or it is advantages of the private company debt restructuring. More important it is good for the investors less worry about its business transition.
 

Investment opportunity behind income distribution reform in China

China has estimates documents about reform of income distribution recently. Once the plan is put into effect, it could represent a substantial change in economic direction.
Article from WSJ 6^th January 2013 has viewed

“Estimates of income distribution by Gan Li, an economics professor at Texas A&M University, put China in the ranks of the most unequal African and Latin American countries”.

“The income inequality plan takes aim at two of the main causes of China's weak consumption—low household income and a burgeoning divide between rich and poor”.

 Liu (2011) has viewed:

    “An efficient financial system increases saving rates (McKinnon (1973) and Shaw (1973)), reduces information and transactions costs (Gurley and Shaw (1955, 1960 and 1967)); and improves the allocation of resources.”

Latest figures from the IMF show that China’s personal savings rate has become the world’s highest. At more than 50%, it’s well above the global average of 20%. Main reason causing this higher figure is increasing price of house and inflation. The saving rate of China make large sum of money being inefficiency associated with decreasing in consumption and investment. 

How to encourage small-scale investor slide down household savings into purchase bank economic products or stock is urgency. It is general acknowledge that Shanghai stock market and Shenzhen stock market has reached Weak-Form Efficiency stock market standard. Despite some of the investors are slow or over reaction. The AL-locational efficiency would help located the resources associated with the pricing efficiency move the investors into risk-adjusted mode. As an investor, it is important to analyse the value of investment without invisible information. In order to encourage citizens reduce their household into investment, more people need to know fundamental financial knowledge.

The reform of income distribution would impact Chinese stock market. Firstly, increasing the household income would influence consumption a lot. Examples of this consumption used start with commodities consumption. It would contribution to the diverse forms of ownership fair competition, improve the efficiency of economic  market. The development of private economy will provide a new source of profit to Chinese stock market.

Besides that, the luxury industry such as car, cloth brand would be encouraged to invest in.  This sort of upgrade industrial would bring much more investment opportunities.With the acceleration of the process of economic re-structuring, social investment would become more perfect and diverse residents finance and investment activities will become more prevalent.

Thirdly, combination with the household income increasing, the requirement of living environment would be rise. Thus, to some extent, keep the development of environmental friendly industries.  From the long-term angle, the insurance industry, hotel and travel industry, entertainment, medicine and medical care industry would get advantages from this reform.  

It can be predicted that the reform of income distribution would be provided as an important reference for the future reform of the stock market. The reform of the income distribution system and the reform of the financial and taxation system would offer more public confidence to encourage investors continue invest in the stock market.

Reference:

1.       Gurley, John, and Edward Shaw, 1967. ‘Financial Structure and Economic Development’, Economic Development and Cultural Change, 34 (2), 333-46.

2.       Liu, T.S., (2011), ‘Market Efficiency in China Stock Market and Hong Kong Stock Market’, International Research Journal of Finance and Economics, 76, PP. 128-137

3.       McKinnon, R.I., 1973. Money and Capital in Economic Development, Washington: The Brookings Institution.

4.       Shaw, Edward S., 1973. Financial Deepening in Economic Development, New York: Oxford University Press.

Shareholder value maximization? OR Long-term strategy?

Once mention the shareholder value maximization, the first consideration would be share price or dividends. However, as a senior manager, when mentioned the value creation, is the shareholder maximization the first point being considered?

Or, senior managers even trends to make financial reports more “beautiful” than realism. EPS and ROCE becoming the most considerable figures are used to cover up the company’s operating situation. The exposure of a series of multiple company of Enron, WorldCom and other accounting scandals, contribute sharply decreasing of U.S stock market within that time. Most seriously, public confidence keep landslide.

As I am concerned, the acquisition should be focus on a standard which is future value maximization. I’ll use the case Geely’s acquisition of Volvo support my view.

Zhejiang Geely Holding Group which is now the largest private-run car maker in China agreed on March 28^th in 2010 to buy Ford Motor's Volvo car unit for $1.8 billion. This, to some extent, becomes the country's biggest overseas auto purchase. Greely has claimed participate into buy Volvo when Ford was give the information to sell it in 2008 in public. This news has attracted worldwide media attention simple because even most of the foreigner not heard about Geely and its product. After getting the support for Chinese government, Geely was named as the preferred buyer of Volvo Cars by Ford on October 28^th of 2009. However, between December of 2009 and March of 2010, Greely has been through a long and difficult negotiation.

How about Geely? Can it holding the huge chain and manufacturer in Sweden, besides that, Volvo keep lost during the acquisition? The advanced technology shall be the key director drives Geely with the opportunity to be the leading role in China’s car market. For more than that, is this overseas acquisition is a represent for the growth of China finally get into main strength of world-car-maker.

How did this acquisition influence Geely’s shareholder value? Geely’s chairman Li  has been confident that Volvo would make significantly growth within two years for making profit in the fast growing Chinese market. Just profit? Obvious not. What Geely brings to Volvo is more than this turning point, but deeper and wilder understanding of Chinese market. According to Li, there will be local manufacture chain and factories which using for cutting down the cost of Volvo to make profit.  He can help Volvo reduce the cost by establishing its Chinese local supply chain. “I see Volvo as a tiger: It belongs to the forest and shouldn’t be contained in the zoo,” Li said. For these reason, achieve the shareholder value maximization is not only the share price or EPS from the financial reports. But also the goodwill, huge development and prospect market of one company. For the shareholder of Geely, the luxury car market is main profitable part of whole industry. Geely try to exploit its own luxury car, but with not so much good result. Not only because of the competition of three German car makers, but also the technology, brand recognition with advanced management and sales system. Meanwhile, the confidence from suppliers and retailers shall be the part of environmental fctors.

 Organisational capabilities: help from government

Strategy: acquisition and using Volvo exploit luxury car market

Finance: $1.8billion for acquisition, predict total $2.7 billion into operating Volvo

However, three years later after the Geely’s acquisition of Volvo in March of 2012, how did this acquisition been judged? Journal from WSJ on December 3^rd 2012 illustrate that Volvo—“the tiger” has dropped its profits by 84% in the first half of 2012 even this, Volvo will be lucky to sales 47,000 cars for reach the level of 2011 modest.

What’s going wrong with this situation? Had Geely rushed to promote its brand recognition? Without changed management strategy of Volvo really could change it into making profit?  The results here are more encouraging. Geely is now viewed as China’s leading independent car maker, with the best designs and reliability. In 2011 Geely even assigned Peter Horbury, a talented Volvo designer, to work on Geely products in China. In the original acquisition plan, Volvo was to fund investments in new products from its own profits. That’s no longer realistic. Fixing Volvo could get extraordinarily expensive, which raises a new question: Does Geely possess the billions of dollars, the branding know-how and the political clout necessary to make Volvo a winner in the global luxury car market?

Now, for consider the value management. There is no denying that Li has increased not only the reputation but also drive the company into the leading car maker in China.