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.