Acquisition and Shareholder Value

Firms purchase other corporations for the numerous benefits that are offered through acquisitions. The firm gains source supply because they have access to the source supply that the previous owner of the corporation did. They also acquire their new distribution channel. If they decide to keep the employees that were working at the corporation, they gain new creative talent that can offer the current workforce and different perspective on how to do things. Acquiring corporations adds value to a company and enhances its earnings per share. It can also add new product lines to ones already established. Firms gain the technology that the corporation was implementing and access to an established infrastructure. They increase their access to working capital finds and gain an advantage for time to market. The rapid expansion of customer base obviously isn’t the only benefit that makes acquiring corporations the best return on investment for large firms (Hari, 2011).

            The amount that a firm pays for the corporation that it is acquiring factors in many different aspects. The value of strategic fits are difficult for anyone to measure and are very much up to both of the companies involved in the merger. The accounting, tax, and legal aspects must be factored in a well and usually tend to be very complex. The firm may be gaining market share because they are eliminating the competition, which can appear very valuable to the firm. Mergers can also lead to a lower cost of capital and lower taxes (Advameg, Inc, 2012). All of these different benefits have to be factored into the valuation of the corporation that is being acquired. It is solely the firm’s decision when deciding how much they are willing to pay for corporations.

            The National Bureau of Economic Research (2012) suggests mergers and acquisitions destroy shareholder wealth in the acquiring companies and that “over the past 20 years, U.S. takeovers have led to losses of more than $200 billion for shareholders”. These losses are primarily dominated by acquisitions that are made by large firms. It is thought that when a large firm’s begins to go down the acquisition route, they have exhausted all internal growth opportunities. Even if a takeover results in a positive net present value, negative return can be seen in share prices following the transaction.

References

Advameg, Inc. (2012). References for Business. Retrieved from Mergers and Acquisitions- advantages, percentages, types, benefits, cost, Types of acquisitions: http://www.referenceforbusiness.com/small/Mail-Op/Mergers-and-Acquisitions.html#ixzz1rYs3xldm

Balls, A. (2012). The National Bureau of Economic Research. Retrieved from Big Firms Lose Value in Acquisitions: http://www.nber.org/digest/aug03/w9523.html

Hari. (2011, August 2). Knowswhy. Retrieved from Why Do Firms Purchase Other Corporations?: http://www.knowswhy.com/why-do-firms-purchase-other-corporations/

ISO 9000

The ISO 9000 focuses on quality management. More specifically, it addresses what an organization needs to do to meet customer quality requirements, abide by regulatory requirements, increase customer satisfaction, and continually improve performance (International Organization for Standardization, 2011).

            The benefits of using ISO 9000 when upgrading processes or software systems are numerous. Following the set of standardized requirements for these new quality management systems is critical because they provide the necessary fundamental aspects of performance improvement, documentation, training, finance and economics. The standards allow for the organization using them to be auditable. It is important to be auditable so that both internal and external groups have a way to measure if specific requirements are being met. Management can use it to see if they are fully in control of organizational activities and clients can use it to gain confidence that the organization can provide products and services that meet their requirements.
            If an otherwise good manager refused to enforce the prescribed standardized processes I would convey to them that enforcing the standards is not optional. It is something that is essential to the project being completed and is an imperative step. I would be forced to put them on a different project that did not involve enforcing standards for ISO 9000 is the continued to not comply. I may even be forced to downgrade them to a non-supervisory position until the upgrading process is complete. If the standards aren’t implemented, the organization is no longer auditable and the entire focus of ISO 9000 is not accomplished. I would, therefore, not be able to have managers on my team who did not support the mission, regardless of how good of a manager there are.

References

International Organization for Standardization. (2011). International Organization for Standardization. Retrieved from ISO 9000- Quality management: http://www.iso.org/iso/iso_catalogue/management_and_leadership_standards/quality_management.htm

Operations Management

The company should be able to take advantage of economies of scale and use collective resources in order to maximize usefulness. This will also keep the strategic and mission objectives from being pulled in too many directions. This would not be the best plan if there is an unexpected supply issue leading to essential resources being unavailable, inadaptable and unobtainable.

The structure of a company globally needs to be influenced by the identity of the organization. The company has to ensure that they are going to be able to grow and establish new market share without neglecting their current market share. If a company spreads themselves too thinly end up learning an expensive lesson that they were not fit to compete internationally (AIU, n.d.).

Formalization keeps established strategies and operations in place. This is important for accurately forecasting future performance of the company. Specialization allows for the creation of a niche market. This gives businesses a competitive advantage over the competition, regardless of their size. Centralization has the ability to both strengthen and isolate companies. Which impact is seen depends on the location strategy chosen. A central location proves to be most beneficial for strategic positioning.

The first big decision that a company needs to make based on their organizational identity and structure when going global is the location of their headquarters. The decision needs to be made whether or not the headquarters will be centralized in one main location or subdivided into various locations that would help to meet the goals and objectives of the organization better than one location. Organizational characteristics need to be adjusted for the culture of the new society.

            Organizations must be sensitive to international laws, labor laws, and regulatory concerns when they endeavor on an international expansion (Kogut, 1998). There should also be a focus on cultural translations of the service or product a company is providing. Ensuring that all aspects of the business translate well into each specific country is most beneficial for managing the risk of offending the consumer. The cost of doing business should also be considered, as things such as regulations and taxes can be pricey if not forecasted.

References

AIU. (n.d.). Course MGMT415- Global Operations Management. Retrieved from Managing Resources & Operations: https://mycampus.aiu-online.com/Classroom/Pages/multimediacoursetext.aspx?classid=316435&tid=204&uid=284898&HeaderText=Course Materials: MGMT415-1202A-02 : Global Operations Management

 Kogut, B. (1998). International business: The new bottom line. Foreign Policy, 152–162.

Global Business Competitiveness

Businesses have found it increasingly important to become competitive in the global business environment for several reasons. The advantages that come along with expanding into the international market place have given businesses a competitive edge over each other. The more efficiently that you can do business, the more money that you are going to be able to make. In order to dominate your specific market, executing effective operations management is key. If businesses cannot keep up with the face pace and standards of operations management in their industry, they will be left in the dust.

Operations management involves the acquisition, development, and utilization of resources for products, processes, services, and supply chains. Operations management is constantly advancing here is America as well as in countries around the globe. A software company in Walldorf, Germany named SAP was the originator of the concept of supply chain management server software (McGraw-Hill, 2006). It automated the supply chain management process.

I have been personally affected by this over the last year. I work for the Defense Logistics Agency and we are in the process of converting our supply chain management from BSM to EBS. Our EBS system was designed by that same German company, SAP.  We converted to the new system so that we can keep our supply chain management current and up to date with the acquisition industry. In order to be competitive, companies have to ensure that they are using the most innovative technology or their competitors will have the upper hand.

References

McGraw-Hill. (2006). Introduction to Operations Management. Retrieved from McGraw-Hill: http://highered.mcgraw-hill.com/sites/dl/free/0070965390/451252/samplech01.pdf

The Three Forms of Business Organizations

The three forms of a business organization are sole proprietorship, partnership, and corporation.

A sole proprietorship is an unincorporated business that is only owned by one person  (IRS, 2012). They are the most numerous form of business organizations in the United States. Sole proprietorships are very easy to both form and dissolve. Advantages include low start-up costs, low operational overhead, and no corporate income taxes. The sole owner receives all of the profits. These businesses are also subject to fewer regulations, which is an additional perk. Disadvantages include unlimited liability for the sole owner, limited life, and increased difficulty to raise capital (Garrison PhD., 2012). Unlimited liability for the sole owner means that the owner is personally responsible for all actions and debts incurred by the company and any of its employees. Limited life for the company means that when the owner dies, so does the business.

A partnership is an unincorporated business that has more than one owner (IRS, 2012).  A business is defined by the IRS as members who carry on business, trade, financial operations, or ventures and then divide the profits from them. The three different types of partnerships are general, limited, and limited liability partnership. The differences between the three are found in the degree of management control and personal liability. Advantages include the enhancement of value via synergy, ease of formation, greater potential for capital access, and no corporate income taxes. Partnerships, like sole proprietorships, are typically subject to fewer regulations. Disadvantages only slightly differ from those of a sole proprietorship. There is unlimited liability, limited life, and additionally, the possibility of conflicts arising between partners. Conflicts that are unable to be solved typically result in the dissolution of the partnership (Garrison PhD., 2012). Unlimited liability can be avoided with a limited liability partnership. A limited liability company can be owned by one or more members and each member has a limited personal liability for the actions and debts incurred by the company. Advantages of limited liability businesses include management flexibility and pass-through taxation (IRS, 2012).

Corporations are legal entities that do business. They differ from sole proprietorships and partnerships because they are distinct from the members who own the company. The types of corporations include public or private standard, for-profit, charitable, and not-for-profit. Advantages include unlimited commercial life, flexibility in capital raising, ease of ownership transfer, and limited liability. Disadvantages include regulatory restrictions, increased organizational and operational costs, and double taxation.

Financial managers are responsible for looking out for the corporation’s shareholders. The main goal of financial managers is to maximize profits and the main goal of a corporate financial manager is to maximize the current value per share of the existing stock (Ross, Westerfield, & Jordan, 2008). If the corporation’s stock is not publicly traded, the financial managers’ goal is to “maximize the market value of the existing owners’ equity” (Ross, Westerfield, & Jordan, 2008). I believe that the validity of the goal encompasses the essential core values that all financial managers should possess however, the statement could be interpreted the wrong way. If the financial manager is doing something illegal or unethical to increase the current value, he would be failing to make good financial decisions on behalf of the shareholder. A corporate financial manager should focus on making the best financial decision for the shareholder and include its profit potential alongside whether or not it is legal or ethical and how it would reflect on the corporation’s name. There is much more to making sound financial decisions than whether or not it will increase the value of the shares. That is why the main goal of financial managers for corporations in flawed in my opinion.

References

Garrison PhD., S. (2012). Study Finance. Retrieved from Types of Business Organization: http://www.studyfinance.com/lessons/busorg/

IRS. (2012, March 16). Retrieved from Sole Proprietorships: http://www.irs.gov/businesses/small/article/0,,id=98202,00.html

IRS. (2012). Retrieved from Limited Liability Company (LLC): http://www.irs.gov/businesses/small/article/0,,id=98277,00.html

IRS. (2012). Publication 541. Retrieved from Table of Contents: http://www.irs.gov/publications/p541/ar02.html#d0e252

Ross, Westerfield, & Jordan. (2008). Essentials of Corporate Finance. Retrieved from The Goal of Financial Management: http://highered.mcgraw-hill.com/sites/0073405132/student_view0/ebook/chapter1/chbody2/1_4_the_goal_of_financial_management.html

Financial Ratios

    The current ratio tests the liquidity of a company. It is calculated by dividing the current assets by the current liability. The ratio tells us the proportion of the current assets that are available for the company to cover the current liabilities that it has (Loth, 2012). The ratio ascertains whether the short term assets of a company can readily pay off the short term liabilities. Cash, marketable securities, inventory, receivables, and cash equivalents are all short term assets. Payables, taxes, accrued expenses, current portion of term debt, and notes payable are all short term liabilities. This ratio is frequently used in financial reporting because it is important for a company to have enough current assets to cover its current liabilities. The ratio is important to banks because short-term creditors should prefer a higher current ratio as it means reduced risks for the bank. The ratio is important for investors to understand because if a company has a lower current ratio, it is an indicator that the company is using more of their assets to grow the business (Internet Center for Management and Business Administration, Inc. , 2012).

The quick ratio is calculated by finding the sum of a company’s liquid current assets minus inventory and dividing those by current liabilities. It is much like the current ratio but excludes inventory. The higher the ratio, the more liquid that a company is thought to be. The current assets that are used to calculate the ratio cash, notes receivable, and accounts receivable. Banks can use this formula when determining whether a company is a good candidate for a loan. A good candidate is one who is low risk. Investors need to understand the quick ratio because it can help them to determine the likeliness of the company to yield a high return (Quickratio.org, 2011).

The debt ratio is a company’s total debt divided by its total assets. The ratio indicates the long term solvency of a company (Internet Center for Management and Business Administration, Inc. , 2012). The ratio can be important to banks because the measure how much and to what extent a company is using long term debt. It also measure the company’s ability to repay any long term debt they may have. Investors need to know the meaning of the ratio because it will help them in determining the company’s level of risk based of its financial health.

The return on equity ratio measure how profitable a company is. It is calculated by dividing the net income by the shareholder equity. Investors would be wise to understand the ratio because it is essentially the bottom line measurement of profits earned per dollar invested. It tells investors exactly how much their dollar is earning them. The higher the rate of return on equity, the more efficient that a company’s management has been in utilizing the equity base. It is important for banks to understand the return on equity ratio because it is a profitability indicator that can show just how well a company is doing (Kulkarni, 2011). This could also be used to mitigate risk when trying to decide whether or not to extend a line of credit to a company.

References

Internet Center for Management and Business Administration, Inc. . (2012). Finance. Retrieved from Financial Ratios: http://www.netmba.com/finance/financial/ratios/

Kulkarni, A. (2011). Buzzle.com. Retrieved from Return on Equity Ratio: http://www.buzzle.com/articles/return-on-equity-ratio.html

Loth, R. (2012). Investopedia. Retrieved from Current Ratio: http://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp#axzz1qF6PNKt1

Quickratio.org. (2011). Quickratio.org. Retrieved from The Importance of Quick Ratio: http://www.quickratio.org/

Big Investors vs. Small Investors

There are many disadvantages that come with being a small investor. Many believe that big investors in the stock market are the major players that get to earn most of the profit while the small investors are left in the dark. Often, small investors lack the capital to build a truly diversified portfolio. When buying and selling stock, larger lot sizes often take precedence over smaller lots sizes (Benoit, 2006). Small investors also usually receive news later than large traders, mutual funds, and brokers do. Another disadvantage that small investors face is the lack of access to highly sophisticated analytical software that large brokerage firms use to obtain the upper hand in their trading decisions.

It has also been noted that the more money an investor has, the better tips that they are likely to get. The Wall Street Journal sited Goldman Sachs holding trading huddles with the richest of their clients and giving them stock advice that they hadn’t divulged to their other customers with less money (Jagow, 2009). There is a lot of evidence to support the saying that the rich get richer. To the small investor, it can seem almost hopeless when trying to get the same treatment as you richer co-investors.  

While there are many disadvantages that small investors face, there are also many advantages that they have. Most individual investors can afford to hold the stocks that they own for five plus years. Most of the firms working on Wall Street cannon do this because of the pressure they face to have short term profits that are locked in. Ben Graham, a mater investor, explains that the market becomes more and more predictable as your time frame increase (Hanson, 2006). The buy and hold strategy reduces the fees, taxes, and commission cost significantly over time.

There are also many rules and regulations that favor the small investor. Small investors can exit IPO stocks right away, while most institutional players are limited in early exits. Small investors are therefore, less prone to the risk of fluctuating stock prices. Small investors also have a great ability to move in the same or opposite direction of the trend because their small purchases don’t move the stock price significantly. Big investors are forced to slowly build their position in any stock because of the impact that such a large purchase makes.

References

Benoit, D. (2006, March 1). Investment Banter. Retrieved from Name the disadvantages of being a small investor: http://www.investmentbanter.com/showthread.php?t=90820

Hanson, T. (2006, January 9). The Motley Fool. Retrieved from Secret Advantages for Small Investors: http://www.fool.com/investing/general/2006/01/09/secret-advantages-for-small-investors.aspx

Jagow, S. (2009, August 24). Marketplace Scratch Pad. Retrieved from Big investors vs small ones: http://www.marketplace.org/topics/business/marketplace-scratch-pad/big-investors-vs-small-ones