Mergers and acquisitions Three and O2 to be owned by the same company

Mergers and acquisitions Three and O2 to be owned by the same company

O2 is one of the UK’s powerhouses in terms of the mobile industry. With already relatively few players competing in this market, what is going to happen to the UK mobile providing services and will this acquisition end up costing the UK public?

The parent company of Three is the Hong Kong based conglomerate Hutchinson Whampoa and is owned by the richest man in Asia worth a very impressive £25.5 billion. The deal to take over O2 in the UK will cost the company £10.2 billion and it is reported that this is to be predominantly paid for in cash. (Rankin, 2015). The use of cash in the takeover provides Hutchinson Whampoa with a number of advantages. Firstly it makes the proposition more attractive to Telefonica (O2’s parent company) as the compensation is more certain compared to a shre for share transaction (Arnold, 2013). Furthermore using cash doesn’t dilute the company’s own shares and therefore it retains more control of its business.

This takeover will provide the conglomerate with many advantages associated with horizontal takeovers. Operational synergies will be easily achievable as together the brands have over 30 million customers and about 41% of the wireless market (Thomas, 2015). Alongside this the takeover will allow for greater economies of scale with purchases of supplies such as mobile phones being able to be bought at a significantly larger scale, allowing for bulk buying reductions to come into effect.

The most prominent advantage the company is likely to achieve as a result of this takeover is the power and market share it will obtain within the telecoms industry. This merger will result in the number of major competitors falling from 4 to 3. What this means is the company will be able to achieve monopoly profits (Arnold, 2013) as the lack of competition will allow the remaining competitors to increase prices without any consequence or loss of demand.

This lack of competition is concerning for the UK public as it is almost certainly going to negatively affect them. In addition it is unlikely the deal will be stopped by competition regulation as the EU has already allowed similar takeovers with similar consequences to occur elsewhere in Europe (Thomas, 2015). However it is not all bad news for the general public, the merger of BT and EE, Vodafone pushing into the broadband market and Sky planning on entering this industry, all will be offering bundle deals. This may result in sufficient healthy competition to force the main players that cannot offer bundle’s to keep their prices down in order to attract custom.

References

Arnold, G. (2013). Corporate Financial Management. Harlow: Pearson .

Rankin, J. (2015, January 23). Mobile network Three to buy O2 in £10bn Deal . Retrieved March 31, 2015, from The Guardian : http://www.theguardian.com/business/2015/jan/23/mobile-network-three-to-buy-o2

Thomas, D. (2015, March 24). Hutchison Whampoa agrees to buy O2 for £10.3bn from Telefónica. Retrieved March 31, 2015, from Financial Times : http://www.ft.com/cms/s/0/9d43d52c-d250-11e4-9c25-00144feab7de.html#axzz3aP02brml

How will shareholders react to Morrison’s plans to axe dividend pay-outs?

How will shareholders react to Morrison’s plans to axe dividend pay-outs?

After years of sticking to their commitment of steadily increasing dividend pay-outs, Morrison’s is set to heavily cut dividend once the final promised pay-out is completed at the end of the 2014-2015 financial year. What this situation highlights is the issue of what priorities businesses should take in terms of dividend pay outs, and what is the most important? Is it shareholder wealth or should the company itself that should take precedence?

The 2014-2015 financial year has not been kind to Morrison. The introduction of the discount supermarkets has seen the company having to slash prices in order to remain competitive. This in turn has resulted in a pre-tax profit fall from£785m last year to £342m this year (Ruddick, 2015). As a result of this performance drop the company has deemed it necessary to invest earnings into addressing the issue of the discount supermarkets instead of paying out the high levels of dividends it has done in the past. Dividend is set to be cut by 44-60% of the current figure (Felsted, 2015), which will greatly disappoint any institutional investors that rely on a constant stream of pay-outs and obviously prefer them to remain high.

However the argument of dividend relevance or irrelevance is at the forefront of this discussion. Changing to a fixed rate dividend policy that is estimated to be one third to half of earnings is a far more sustainable dividend policy, compared to the current steadily increasing dividend policy,  as it allows the company to utilise the rest of the retained earnings to invest in the future of the company. It also will help the business maintain a healthier liquidity ratio as dividend pay-outs are cash transactions and should not be associated with profit performance of the business. (Arnold, 2013, p. 326). Investing in the future of the business is a more sustainable approach and incorporating a dividend policy into that with a fixed rate pay-out will ensure long term investor satisfaction through consistent dividend returns that are not detrimental to the company. 

The issue with this situation is how the investors will react to their dividend being cut. Now at first glance investors should be disappointed with this decision. However when analysing the business’s performance alongside future prospects, investors should realise that in order for them to receive sustainable long term returns from the company, investment needs to be made into the business and the best way to do that, in this situation, is through cutting dividends. In addition dividend irrelevance theory and additional empirical studies have shown that dividends does not affect the share price (Arnold, 2013), what has a more drastic effect on shares, is the performance of the business and without reinvestment of equity into the business, that performance will fall and share price will plummet which in turn would upset/cost investors significantly.

References

Arnold, G. (2013). Corporate financial management. Harlow : Pearson.

Felsted, A. (2015, March 02). Morrison poised to take axe to dividend. Retrieved March 18, 2015, from Financial Times: http://www.ft.com/cms/s/0/62dc2054-c0ff-11e4-876d-00144feab7de.html#axzz3aP02brml

Ruddick, G. (2015, March 7). Morrisons to slash dividend to fund rescue plan. Retrieved March 18, 2015, from The Telegraph : http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11455839/Morrisons-to-slash-dividend-to-fund-rescue-plan.html

Cost of capital and why BT decided to sell its shares

Cost of capital and why BT decided to sell its shares

It has recently emerged that BT have sold £1bn worth of shares to various investors through the stock market in order to raise the finances in order to buy the company EE, which will cost in total approximately £12.5bn.  When looking at all the available options businesses have to raise capital why has BT chosen this method as part of its source of capital, and where else is it finding the capital to invest from?

Businesses can access capital from issuing shares, debt and cash equity. In order for BT to minimize its weighted average cost of capital (WACC) and therefore maximize the returns it makes for its investors (Watson & Head), it has to access capital from all sources and at varied amounts.

Originally BT raise £2bn through share placing in order to assist the financing of this deal, however its since that original decision in December, it’s stock rose 15pc meaning it was able to increase capital put towards the deal from company equity and reduce the share placing. (Roland, 2015). In addition T-Mobile is proposed to be receiving a 12% share in the merged company, with one non-executive board member position, and Orange a 4% share. (Thomas, 2015)

Although BT has used other sources of finance to fund part of this deal, it will still have to raise some capital through debt. This along with the debt the company will absorb from EE will take the company’s debt levels to 1.4 times earnings before tax and depreciation. (Roland, 2015).

The significant increase of 0.4 times earnings, however this has been carefully scrutinized by the business and this still allows them to maintain their current credit rating. As a result manipulating the sources of capital funding has allowed the business to maintain it’s credit rating, which will affect interest payable by the business, and any future borrowings the company may wish to undertake. Leading on even further, it has successfully minimized the WACC of this acquisition and therefore maximized the returns for investors.

In addition although increasing debt levels may seem undesired by businesses as it increases their liabilities, it does draw benefits to the business. Increasing debt levels allows the company to reduce tax liabilities and in the current financial market, where interest rates are so low, it is a relatively cheap source of finance. Apple, for example are the largest public company in history and have cash reserves of over $100bn. However they recently borrowed $6.5 for general corporate purposes, which also allowed them to avoid heavy US Tax bills. (Williams, 2015)

Overall the cost of capital is complex, but if correctly managed can ensure maximum returns for investors. BT have clearly analyzed all sources of capital and created a formula whereby they are able to achieve the best possible outcome for their investors.

References

Roland, D. (2015, Feburary 12). BT unveils £1bn share placing to help fund EE takeover. Retrieved March 16, 2015, from The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11407624/BT-unveils-1bn-share-placing-to-help-fund-EE-takeover.html

Thomas, D. (2015, Feburary 12). BT raises £1bn to help fund EE acquisition. Retrieved March 16, 2015, from Financial Times: http://www.ft.com/cms/s/0/6a09a1e0-b2d0-11e4-b234-00144feab7de.html#axzz3aISVhmJy

Watson, & Head. Corporate Finance: Principles and Practice: . Harlow: Pearson.

Williams, C. (2015, Feburary 02). Apple to borrow '$6.5bn' despite record profits. Retrieved March 16, 2015, from The Telegraph : http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11384597/Apple-to-borrow-5bn-despite-record-profits.html

Portfolio diversification

Warren Buffett’s Portfolio diversification

This blog post is all about the US business giant Warran Buffett’s empire and how he has diversified his portfolio in order to maintain success.

The seminal author Markowitz who suggested diversifying your portfolio would reduce the risk associated with investing created the idea behind this theory. The theory is that spreading the risk of investment across a number of businesses will counteract any unexpected bad news from one business with good news by another within your portfolio. (Watson & Head, 2013).  However investing in shares will always have an element of systematic risk associated with it, and therefore no matter how many businesses one invests in, there is always a possibility of making a loss on your investment.

Recently Warren Buffett secured a deal with German Motorbike Company Detlev Louis Motorradvertriebs to add it to the swelling collection of business’s Berkshire Hathaway owns. The Business giant said this is a smaller acquisition than normal however he is viewing it as a door opener to Germany and the rest of Europe, which will allow him to invest larger sums into the continent.

Berkshire Hathaway is the third largest company in the US, however it is not as well known outside of the states and that is because only 15% of the conglomerate’s revenue comes from the rest of the world. Warren Buffett recognizes this as an issue as in line with portfolio theory having investments that are correlated may have short-term benefits; however in the long term the risk it greater. This is not to say the business hasn’t diversified its portfolio within the US as that would be wrong, it has a very substantial and diversified portfolio with investments in everything from energy, food and drink, media, Banking, Insurance and finance to health and manufacturing (Berkshire Hathaway, 2015).

It is clear from the number of industries Buffett has invested into that he deems diversification as a means to reduce unsystematic risk a key strategy. This is supported by they release of the budget assigned to investments and acquisitions by the company coming to a whopping $56bn! (Foley, 2015). What this shows is that Buffett is looking to significantly expand his empire internationally into other financial markets such as the FTSE 100. This will allow opportunities for the business to growth and increase revenues however it will also begin to increase the percentage of the business’s revenues that come from outside the US. This further diversification will increase the business’s security as a long lasting company as it will make it less receptive to domestic financial fluctuations such as the financial crisis of 2008, that negatively impact US business’s. 

References

Berkshire Hathaway. (2015). BERKSHIRE HATHAWAY INC list of subsiduaries. Retrieved 3 7, 2015, from BERKSHIRE HATHAWAY : http://www.berkshirehathaway.com/subs/sublinks.html

Foley, S. (2015, Feburary 20). Buffett dons biker gear with German deal. Retrieved March 7, 2015, from Financial Times: http://www.ft.com/cms/s/0/f8faf4f6-b6f1-11e4-95dc-00144feab7de.html#axzz3aISVhmJy

Watson, D., & Head, A. (2013). Corporate finance: principles and practice. Harlow: Pearson.