Week 9: Family Business Financing

This week I had a guest lecture on the topic of family business financing. It is sounds interesting for those who have a family business to learn this topic. The topic was about how an individual in the family business (FB) can make an effective decision making to finance their business or raising the capital of their business. It is important to consider such as; what the family do in order to raise the firm's capital and how they choose the approach in terms of financing. Thus, there are two key areas in order to ensure the successful of the family business; it is probably by having an appropriate governance structures or corporate governance and good financing. Family business is also important because it has owned a large control from time to time in the UK and US.

So, what kind of the themes that we expect to see in the family business in the future? Family business is expected to expand or growth their business perhaps to become a large firm, to make sure employment is continues, a stability environment is important to support the business,a continuous on numbers of trajectory in order to growth and perhaps we expect them to be listed in the stock market because it would be easy for them to gain the finance or raise the capital in order to expand or growth their business.

However, if they cannot get any finance and capital, how they can grow? They will be limited to be able to continue on upwards trajectory in terms of the continuation of services whether in local, national or internationally, could be difficult to get special treat from the community as family business often involve in local community because that is how the business is growth when they have the close relationship with the community; it is also not just  about the employment but related to the stakeholders issue because community is the big stakeholder in the local community.

But, why is getting fund be the major problem for FB? why is this happen? Traditionally, the public companies are not difficult to raise the capital because they are listed in the stock exchange. Unlike the family business, it is facing the problem to growth the business because they do not listing their companies on the stock market because they most probably do not want to produce any detail documentation regarding their financial accounts due to they are very closed environments and the nature of them being protective of family secrets and illusive. Therefore, it may leads to the reluctance from the capital borrowers because of they cannot see the business's activities that can convince them whether they have made a right investment, whether the company will use the money well or even whether the investor could receive their return of their money. Hence, in order to get the capital easily, the firms must be transparency the way the accounts and finance are presented as this issue is very important for the shareholders.

In addition, not all family business is a small business. There are also a larger family business who wish to get the outside equity capital which also tend to have a problem in financing their firm or has difficulties to raise the capital; agency problem- where the members or managers act for their own interest only instead of maybe to increase the shareholders wealth, this cause to the lenders not trust the business because the firm tend to forget the value of the particular outside investor. Therefore, they end up with the problem which it will be hard for them to expand or growth or to perform their business activities.

Apart from this, family business also can face with relationships and conflict problem in the business. The relationship problem among the family members itself could occur the conflict i.e. when the fundamental issue of the way an equity or capital should be raise as the conflict matter. Some of these goes around if there are multiple sons conflict in which son will takeover the business; to be the primus inter pares, insufficient reflected by the incumbents which then effect to the frustrations and thus they are not allowed to make any mistakes that restricting on the personal growth probably for the children who are going to takeover the business. Therefore, perhaps, by sit down together and discussed the issues or problems could resolve the conflict.

Consequently, by monitoring several aspects such as considering value of differential generation and behavioral issues are important and may impact on an effective decision making to finance their business and avoiding a conflict:; value= differing values in individuals for instance, younger generation that they might have a different or better view on how to finance the business and behavioral issues; for FB which are close relationship with the employees itself, it is important for the business to remain stable of this element in order to get the right financial planning. Overall, there are a lot of factors that might effected the financing decision making by the family business such as, the firms' culture itself, the business goals that need to achieved, the right attitudes towards the debt financing and so on...

Week 8: Credit Crunch !

Since in the 2007, there has been a serious phenomenon that people had to face which was the credit crunch problem! They thought that it was similar like the term recession (due to bad of economy) while it is not. What is meant by credit crunch actually? The credit crunch is regard as “severe shortage of money or credit” where it is the outcome of selling the debt badly. For instance, when the banks lend money to those who are need it and then they could not be able to pay back their loans, and as a result, the borrowers need to mortgage their property such as house to recover the bank’s losses however, it still cannot help much and the lenders still lost their money in the end, therefore, there was a credit crisis because of banks or lenders cannot give out the loans for they to survive! So from now, those banks and lenders are more likely to be cautious of lending money to others.

Can we determine the roots of the crisis? Well yes, because the current financial crisis has occurred from 2001 due to the Internet boom and the shock of September 11 from the terrorist attacks. Other than that, the Federal bumped money into the US economy and slashed its main interest rate where the rate is too low for too long! But, what was the cause of this continuous credit crunch? It is begins with the sub-prime borrower in United States in which this kind of people has a lower level of particular earnings that may lead to not capable to endorse their earnings which thus carry the household with a  lack of credit history. Probably, it was a wrong decision when the United States mortgage industry aiming this type of people in order to help them by promised them with the opportunities to purchase their own house with less strict of the repayment loans.

Therefore, it could tell that the mortgages have been wrongly sell to those who are not certain of what they are doing; buying. This is happened perhaps due to the shortage of an effective rules in the industry which then permit this industry to provide vast amount loans to the sub-prime with less concern of the borrower's ability to used the loans well and facing with the dropped value of the security/salvation.

As I have found the recent news in The Telegraph News (2013), in Italy, the country is nearly facing with the phase 3 of credit crunch which has happened in 2008-2009 and 2011. Many of the companies are run out of critical funding, threatening a slide into deeper depressions because of the banks are too frightened to lend money to them. As a result of this, most of the companies are lack of liquidity and predicted going to bankrupt every day due to difficult to obtain the capital of investment for their organisations. Why is this happened? It is because of some particular people are not paying the debts on time therefore, the late payments are lead to the serious problems across the board in Italy and thus, also leads to the suffocated economy in this country.

It is clear to determine the consequences of the credit crunch where it will cause the prolonged recession or slow recovery of the economy, reducing the availability of borrowing and increase the cost of bank lending and bond & equity finance, depressing the share price and houses that could adverse wealth and collateral effects on household spending and business investment, a general increase in uncertainty feeding through into reducing the business and consumer spending and confidence and lastly, could lead to bad impacts on UK exports to US, other economies may have the direct or indirect effects due to the credit crunch problem.

However, there are some ways for business to operate during the financial crisis; i.e. the Italy companies might avoid this crisis by understand and maximising the company's current cash as the cash is very valuable in a company. Other than that, they could try to identify and minimising their business's operational risk, providing or producing several scenario planning for the business to be prepared well to facing with the crisis if it is happen in some time and lastly, maintaining the confidence of the main stakeholders by open lines of communication with the major bankers and always be transparent (business's financial accounts and activities) to them in order to convince them that they are not make a wrong decision to lend the money.

Week 7: Mergers and Acquisition

Last week I have discussed regarding the foreign direct investment, how a company (International Business) can invest abroad. This week, I am going to share about the other opportunity for International Business to make an investment abroad in order to expand or growth their business; an activity of mergers and acquisitions by another company. It is an essential role of the mergers and acquisition of a company in corporate finance because it is also regard as the external growth for most companies while other companies feel that it is a constant threat of their independent existence. The term acquisition as define by Arnold (2008;865) "a purchase of one firm by another with the associated implication of financial and managerial domination" which also known as takeover where a company acquire for another company's ordinary share capital, financed by cash payment, issue of securities or a combination of both.

 

In reality, acquisition's process is quite hard rather than simply purchasing the machinery or build a factory. It must target the company and considering the potential benefits of acquired that particular company, also need to bid the target company that might involves a big amount of the price. While mergers' definition by Arnold (2008;865) is " combining of two business entities under common ownership" which also regard as a friendly reorganisation of assets into a new organisation. This activity is still focusing on a certain economic sectors where there will be based on the sector concentration which based on the same industries. For instance, the financial services industry i.e. bank wants to acquire another bank, healthcare sector with the healthcare firm and etc.

 

Why there are mergers activity in business world? It is perhaps because of these reasons:

1) synergy: when the assets and /or operations of two companies are complement to each other, so that may

be able to reduce cost. But however, it is difficult to quantify before companies combine and difficult to realise once combination has occurred.

 

2) bargain buying: where the target company's price is low than its present value

 

3) managerial motives: this activity occurs because of the managerial interest where the managers might want to pursue base on their interest rather than to increase the shareholders' wealth.

 

4)third party motives: it is about receiving a high dividend paid that advisers may want to achieve behind this activity.

 

Other than that, there are also some causes behind the current merger and acquisition activity's trend in the some particular period; firstly, the mergers & acquisition occurred in 1999-2000 due to they want to increase in mega deals and global corporations, secondly, due to UK peak periods in the late 1980's and 1990's, the Merger & acquisition activity is reasonable to level of the economic risk and due to the economic uncertainty, the uncertainty of political also affected thus, link to this activity in order to levels of political risk. However, effect from several issues such as the US and world recession fears that have been reduced the corporate activity, the reduction in bank lines of credit, the market's confidence is declined and some business tend to focus on their own core business made the mergers & acquisitions activity became slow in 2000-2002.

 

As a result of the slowdown in M&A activity during that period, Mergers and acquisition activity is possibly useful only if it can increase the acquiring company shareholder's wealth. So, probably by merging and acquiring other company in the slowdown period of M&A during the bargaining of low share price, deregulation of market and turnaround situations and restructuring are the best time to do this M&A activity and also may give a potential benefit to the acquiring company shareholder's wealth. Nevertheless, during 2004 onward, the M&A activity become active because of the major economic factors; the increase of the GDP due to the strong and vibrant economies are suitable to make the FDI which has strong linkage between FDI and GDP growth, the weakening in Dollars make the investment more attractive in US as the US companies become cheaper and easy to acquire and due to the increasing in oil /resource prices which then increase the viability of previously unprofitable locations.

 

In contrast, M&A's process also tend to fail to generate value for the acquiring shareholders while Jensen and Meckling (1976) stressed that any activity in the financial management, there should be include the aim to increase the value of shareholder ; that is the basic principle of it . Why is this happen? It is because of there is misguided of strategies (strategic plans are being value destroyed instead of creating the value), over optimism (underestimate the investment required in merger activity) and failure of integration of management in the firm which intend to do the merger activity. In spite of this, there are also other group who might influenced by this activity especially the various stakeholders such as the employees itself, management and directors, government, society (job losses), local community (loose major employment) and suppliers (cutting cost happen which is not good for them) and customers (get benefit from the combination of business).

 

In current activity of M&A, regarding the Business Times (2013), in which the Japanese lender (Bank of Tokyo-Mitsubishi UFJ) probably wish to improve their finance by purchasing another Indonesian Bank as the Tokyo-based lender is maintaining focused in Asia when it comes to expansion, said the deputy president in Bank of Tokyo. They are also intended to buy Philippines ' banks, however there is no discussion or deal yet with the local lenders. Therefore, they are trying to improve their network and commercial banking business to run this activity quickly if there is the best target and timing for them to do so. From this activity, it is reports that Mitsubishi's move could create the acquire shareholder wealth where they could help the Indonesian central bank's plan to consolidate its banking system. If this is really happening, they probably successful in this activity as they are be able to create value for the acquire shareholder.

 

In my opinion, the most serious situation where there will be job loses in this activity. Therefore, perhaps, by comply with the Arnold's (2008) ten golden rules for eliminate the 'acquire' employees might satisfied all parties and the managers could set a proper strategies in this activity to meet the interest of all stakeholders within or around the company..

Week 6 : Foreign Direct Investment

On the blog this week, I am going to reflect my learning regarding the how the multinational enterprise involves in the foreign direct investment and the reason behind its involvement in FDI. A classic example which was explained in the Moffet, M., Stonehill, A., and Eiteman, D. (2006) book, Trident became a multinational companies (MNC) after it set up the strategy such as to establish a greenfield market-seeing manufacturing in Germany (may want to satisfy local demand or to find export market instead of their home market), a market-seeing acquisition in Brazil and a production efficiency-seeking joint venture in China (in which motivated to get the lower wage in foreign country) which also had lead them to undertake the foreign direct investment.

Those are also actually the reasons of why a company may want to be a multinational company (MNC) and other reasons also include;

1. Raw material seekers in which the certain raw material could get only from foreign country such as oil, and mining.

2. Knowledge seekers operate in foreign countries to obtain the technology and managerial expertise.

3. Political safety seekers acquire or establish new operations in country that less problem.

Back to the lead of Trident to undertake the FDI, the Foreign Direct Investment (FDI) might occurs when an enterprise wants to purchase the assets or a significant amount of stock (to acquire ownership) of foreign company in order to obtain a measure of management control or in a simple words, an entity who made an investment to another country's entity. It could be in two methods which are Greenfield investment (a parent company that started new venture in foreign country is investing in the building of physical facilities to run the business in foreign country) and international of merger and acquisition activity (where the benefits could be obtained by merge or acquires of foreign subsidiary in foreign country which already got the facilities and manpower). This also can be shown by IKEA who maybe made a greenfield investment in India about $2bn over the next 15 to 20 years to be the first major foreign retailer that wholly owned the outlets (BBC News, 2013). 

The growth of FDI was lead by the increased of international trade, the removal of capital controls, the scale of international capital flows need to grow to support MNC in foreign markets, the world economy become more interdependent, it is also as a closer financial links between countries and greater integration of financial markets. Probably, those are the reasons of why IKEA is doing this type of investment. In addition, the FDI’s growth also impacts the Transnational Companies (TNC) due to the government policy liberalisation, the rapid technology change and need for local market presence as well an increased of global competition for new markets such as Wal-mart where this company is operating in most country   as possibly to meet the demand or need of local community in the particular country . Apart from that, the developing countries are drive to use FDI due to obtaining the overseas resources, to increase the access to return markets, to increase the local capital markets and for their economic growth.

What does a company get from using the FDI?It is perhaps there is an obstacle when to export the goods or production such as the cost incurred therefore, they might want to cut down the transportation costs when exporting the goods and also the effect on the goods being export which may has low value and high weight which can produce easily in any particular location. Therefore, it is better to make a foreign direct investment in other country rather than exporting the goods and production. FDI also is better than licensing because the license will acquire the product knowledge and might become a direct competitor, the company may lose control over product quality and mark down the reputation in foreign markets and as such that know-how skills cannot be transferred. Licensing also tend to be high in agency costs and stealing of technology risk.

The specific benefit that IKEA could get by using the FDI in India as the trade minister of India said the government is encouraging FDI that may create jobs and provide advancement in technology thus could recover their slowing economy (BBC News,2013) therefore, IKEA  could enter the integration into global economy as India nowadays is regard as a huge market that maybe the right opportunity for company to invest in this country to moving forward and thus help this country to boost its economic life or growth.

As a closing, a company that involve with FDI such as IKEA also may gain some advantage which is explained in eclectic paradigm about the nature and direction of FDI that includes; a location advantage ( benefit from locating a particular economic in a specific location), an ownership advantage (benefit that a company has an ownership because it has some significant asset) and an internationalization advantage (internalizing a business activity rather than leaving it to relatively inefficient market).