Hong Kong Conglomerate Acquires O2 (Assessed Blog 5)

On the 24th March 2015, Hutchison Whampoa, an investment holding company based in Hong Kong, announced that they are set to create Britain’s largest mobile network after agreeing a £10.3bn deal to acquire O2 in the UK from Spain’s Telefónica (South China Morning Post, 2015).

You may be wondering why a Hong Kong investment company, that at first made its success from specialized in real estate and ports in Hong Kong, would want to purchase O2. This is because the group actually owns numerous telecommunication businesses such as Hutchison Telecommunications Hong Kong Holdings (HTHKH) and the Three Group. The company intends to combine this new acquisition with it other telecom company in the UK (Three mobile) to create the largest mobile network in the UK, bringing together 31m customers, or about 41% of the UK wireless market (Financial Times, 2015). The deal is likely to result in financial synergies e.g. a lower cost of capital, strengthen the investment company’s portfolio (diversify risk), and generate additional shareholder wealth. However, the deal is still subject to regulatory approvals.

The company estimates that it could make cost savings of around £3bn to £4bn from the deal, which will be financed with £6bn of debt and £3bn in equity from sovereign wealth funds. An upfront payment of £9.25bn will be followed by £1bn when annual free cash flow reaches £1.8bn (Financial Times, 2015).

Figure 1: Telefónica share price prior to the announcement

Source: Telefonica (2015)

The takeover announcement was made on Tuesday the 24th March 2015, yet Telefónica’s share price had been increase from the 19th of March [See Figure 1]. Based on the hypothesis that the stock markets are efficient (Fama, 1970), in my opinion, this indicates the announcement was anticipated. Inside information may have been leaked in the days leading up to the announcement of the deal. This suggests the market could be in the strong, yet inefficient form. Share price appears to reflect all known information and even appears to reflect information that had not been released. In addition, Jensen and Ruback (1983) suggest that, corporate takeovers generate positive gains for target firm, benefiting their shareholders, thus share price is likely to increase prior to the announcement, which can be seen above. The academic literature also suggests that the bidding company’s share price will decrease when a deal in announced, however this is difficult to argue in this case [See Figure 2]. Perhaps investors see the acquisition and potential market dominance as a positive move for the company. Similarly, one could be argue that since there was a lot of speculation of the deal back in April 2014 (Telegraph, 2014), the share price may already reflect the information that the deal would be likely to occur (Ball and Brown, 1968). It will be interesting to find out what happens to both the companies share prices once the deal has been either approved or rejected by the competition commission.

Figure 2: Hutchison Whampoa share price around the time of the announcement

Source: Hutchison Whampoa (2015)

The aim of the takeover is to create shareholder wealth. I believe this deal, if approved, will generate additional shareholder wealth for shareholders of Hutchison Whampoa in the long term due to benefits stated above, despite the academic literature suggesting this may not be the case. In addition, I also think that this deal will face sharp scrutiny from the European regulatory authorities due to the reduced competition in the market, which will likely result in a long investigation from the European Commission (EC).  The EC may conclude that the conglomerate may have too much dominance in the UK telecommunications market, and the deal may fall through, which will be a major obstacle to generating additional shareholder wealth, as currently three mobile is a small player in the market.

References

Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159-178. Retrieved from Ebsco http://search.ebscohost.com

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. doi:10.1111/j.1540-6261.1970.tb00518.x

Financial Times (2015). O2 deal catapults Three from smallest to biggest UK mobile group. Retreived 25th March 2015, from http://www.ft.com/cms/s/0/37f13900-d2e9-11e4-a792-00144feab7de.html?siteedition=uk#axzz3VKF6UyRN

Forbes (2015). The World’s Billionaires. Retrieved 25th March 2015 from,   http://www.forbes.com/billionaires/list/#version:static

Jensen, M. C., & Ruback, R. S. (1983). The market for corporate control. Journal of Financial Economics, 11(1), 5-50. doi:10.1016/0304-405X(83)90004-1

Hutchinson Whampoa (2015). Share Price. Retrieved 25th March 2015, from http://www.hutchison-whampoa.com/en/ir/share.php?cat=historical&from_dd=19&from_mm=3&from_yy=2015&to_dd=25&to_mm=3&to_yy=2015

South China Morning Post (2015). Li Ka-shing’s conglomerate agrees to HK$118 billion takeover of Britain's O2 mobile network. Retrieved 25th March 2015, from http://www.scmp.com/lifestyle/technology/article/1746889/li-ka-shings-conglomerate-agrees-ps1025-billion-takeover

Telegraph (2014). Three rules out O2 UK acquisition. Retrieved 25th March 2015, from http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/10736245/Three-rules-out-O2-UK-acquisition.html

Telefonica (2015). Historic Share Price Data. Retrieved 25th March 2015, from http://www.telefonica.com/en/shareholders-investors/html/share/historico.shtml

Holcim and Lafarge Merger Bound for Failure?

This week’s blog looks into the merger of two European companies, namely Holcim and Lafarge. Based in Switzerland, Holcim is a global company, operating in 70 countries across all continents, specialising building material which include the production of cement, aggregates, concrete products and asphalt. Lafarge is a French company operating in 61 countries, specialises in the production of cement, construction aggregates, and concrete. Lafarge is a slightly smaller company than Holcim, it also has lower earnings and weaker cash generation. Just from this basic information, it clearly suggests that we could have horizontal merger on the horizon. Combined, the group is claimed to be “uniquely positioned in 90 countries around the world with a balanced exposure to both developed and high growth markets and hope to “Enhance performance through incremental synergies” (Lafarge, 2015 para. 5). However, as I discuss, all may not be as it seems.

It was back in April 2014, when Holcim and Lafarge announced their intention to combine the two companies. LafargeHolcim, new global company with European roots is said to “offer an unprecedented range of products and services to answer the changing demands of the building materials industry and the challenges of increasing urbanization” (Lafarge, 2015, para. 2). However, this deal has not been as simple process. On March 15 2015, a letter from the Chairman of the Board of Directors of Holcim indicated the decision of the Board of Holcim not to pursue the execution of the Combination Agreement, challenging the financial terms and governance structure of the proposed merger. This deal was rejected by Holcim just a day later. Shareholders complained that, given the leadership changes and lower ratio, this is a takeover without a premium (Financial Times, 2015a). However, on 20^th March 2015 the two companies finally announced that they had reached an agreement on revised terms for the merger of equals between both companies. Using a share-to-share merger, both parties agreed on a new exchange ratio of 9 Holcim shares for 10 Lafarge shares, which in my opinion will satisfy Lafarge’s shareholders much more than Holcim’s.

In my opinion, this merger is bound for failure. Evidence to support this view has been kindly provided by the chairman and chief executive of France’s Lafarge decision to use a private jet to fly across the US. A decision said to be against Holcim’s company guidelines (Financial Times, 2015b). In addition to this, it raises concerns as to why a man who was set to lead the group can spend tens of thousands of euros for a flight! This is clearly not in the best interest of shareholders and may even impact on customers. Not a wise move at all in my opinion.

The decision to select a suitable merger is often primarily driven by financial and strategic considerations, yet many mergers fail to meet expectations because the cultures of the partners are incompatible (Cartwright & Cooper, 1993). Corporate and cultural differences are a major issue which should be considered in the initial value assessing process prior to the announcement of the merger. To me this indicates that the managers are so determined to get the deal done, they have clearly disregarded the basics. I believe this deal is heavily drive by senior management ego’s and not the best interests of the shareholders, who’s primary concern is the company’s ability to generate additional wealth.

Successful M&A's tend to complete a deal quickly as a way of demonstrating that the new combination of companies is already producing value (Angwin, 2004), this is certainly not the case here. The deal has been a long ongoing process which in my opinion suggests there will be further complications and disruption if this deal is eventually fully approved. It would be a fair argument to state that they must take their time to ensure the deal is made correctly, however these issues should have been resolved long before this stage. In fact, this blog was difficult to create and I had originally planned to post it much sooner, but given all these developments, it would be mindless of me not to address this.

To summarise, bringing together two companies of such size is an enormous task. Although the company’s state that the deal will create synergies and reduce cost etc., I don’t believe this will occur, certainly not to the extent implied by senior management. Firstly because I believe the merger is very much lead by the egos of both company’s senior management. Secondly I think the deal will generate diseconomies of scale. These are the two largest players in the industry, I believe that combined the company will be too big and will no longer be able to operate efficiently without making gigantic cuts. This considered with the clear cut cultural issues to me, suggests this merger is headed for failure.  

References

Angwin, D. (2004). Speed in M&A integration: The first 100 days. European Management Journal, 22(4), 418-430. doi:10.1016/j.emj.2004.06.005

Cartwright, S., & Cooper, C. L. (1993). The role of culture compatibility in successful organizational marriage. The Academy of Management Executive (1993-2005), 7(2), 57-70.Retrieved from Ebsco http://search.ebscohost.com

Financial Times (2015a). Holcim rejects €40bn merger with rival Lafarge. Retrieved 23td March 2015, from http://www.ft.com/cms/s/0/c965ab5c-cbb2-11e4-aeb5-00144feab7de.html#axzz3VaCwjqTb

Financial Times (2015b). Holcim and Lafarge: A merger of egos. Retrieved 23^rd March 2015, from http://www.ft.com/cms/s/0/41d317c8-d14e-11e4-98a4-00144feab7de.html

Lafarge (2015). Merger project. Retrieved 23^rd March 2015, from http://www.lafarge.com/wps/portal/1_9-Projet-fusion

Lafarge (2015). Lafarge Merger Project Press Release. Retrieved 23^rd March 2015, from http://www.lafarge.com/03202015-press_finance-LafargeHolcim_mergerproject-uk.pdf

Dividend Policy: Standard Chartered (Assessed Blog 4)

“Standard Chartered reiterated that it has no plans to turn to the market to bolster its capital position, instead setting out plans to cut capital-intensive risk assets and to sell and exit under-performing businesses, as the emerging markets bank maintained its dividend despite a 30% drop in pre-tax profit in 2014” (Morning Star, 2015, para. 1)

Standard Chartered is British multinational banking and financial services company headquartered in London which conducts most of its business in Asia, Africa and the Middle East (Financial Times, 2015). The company have recently announced that pre-tax profit fell to $4.24 billion in 2014 from $6.06 billion in 2013, a fall of a staggering $1.82bn (30%)! The company blamed tough market conditions, low interest rates, low volatility, high levels of liquidity, and changing regulations, for their disappointing performance in 2014 (Standard Chartered, 2015).  

Nevertheless, Standard Chartered shares surprisingly reacted positively to the bank's earnings statement [See Figure 1], signalling investors have confidence in the future direction of the company despite the significant fall in this years profits. Investors could have perhaps been influenced by Standard Chartered claim to have a ‘comprehensive programme’ of ongoing actions to return Standard Chartered to sustainable profitable growth which include a cost savings of more than $400 million for 2015 with a total of $1.8 billion targeted over the next 3 years (Standard Chartered, 2015). This, combined with the company’s reluctance to cut dividends may send signals to the market that the company is really striving to achieve its objectives, which will generate greater shareholder wealth in the future.

Figure 1: Share price when the 30% decline in earning was announced 

Source: Standard Chartered (2015b)

This example is very similar to that of Statoil presented in lecture 7. However the case of Standard Chartered is slightly bizarre in my opinion. This is because banks traditionally tend to cut dividends right away when profitability falls as indicated in the Financial Times article (2010) Italian banks to slash pay-outs presented in the lecture regarding the 2007-2008 financial crises. On the other hand, it could be argued that Standard Chartered did not want to cut dividends due to the clientele effect (Moles & Terry, 1997).

In this instance, the clientele effect is Standard Chartered’s ability to attract and retain particular types of investors using their dividend policy. In addition, consistent will Gordon (1959), I believe many individual shareholders suffer from short-termism. Investors would rather have money now in the form of dividends rather than leave it tied up with Standard Chartered for the foreseeable future especially in the wake of this significant fall in profitability as investors may be unsure about the future direction of the company. I also believe that Standard Chartered are aware of this principle, thus deciding not to reduce dividends in fear that investors may “cash-out” and invest elsewhere. Clearly stating the plans for the future may have been an attempt to try to alleviate this uncertainty for investors. This is very much contrary to Modigliani and Millar's (1961) Dividend Irrelevance Theory. Similarly to the Statoil example, institutional investors make up a large percentage of the Standard Chartered’s shareholders as demonstrated below [See Figure 2]. The top 10 largest shareholders in Standard Chartered hold over 50% of total shares. Institutional investors tend to invest in companies which payout high dividends, therefore Standard Chartered will not want to dissatisfy these investors, as they may sell their shares and find a company which will meet their needs of high dividend payments (Hirschman, 1970). Thus the company has decided to payout a high dividend in hope of retaining these investors.

Figure 2: Largest Shareholders of Standard Chartered 2015

Source: OSIRIS (2015)

Pettit (1972) argues that the use of dividends as an information disseminating device is inefficient since it is an imperfect means of describing the firms' future prospects. He believed that publishing managerial expectations might reduce uncertainty for investors better than the conveying of information through dividend changes. I believe this is occurring with Standard Chartered, if the company was to pay out a lower dividend, it would send signals to the market that the company may be performing badly (which would be a reasonable assumption given the profitability figures). However, the company has good future plans to regenerate profitability and shareholder wealth and clearly does not want investors sell their shares, which would likely result in the devaluation of the firm. Instead, they have maintained a similar dividend to prior years, and released a big statement to reduce investor uncertainty, thus investors will be less likely to “jump the gun” and sell their shares.

Although Standard Chartered have had a bad year,I believe they refused to cut dividends because the future looks brighter for shareholders. In addition, they did not want to upset their large institutional investors who hold a large proportion of equity. The company’s recent announcement clearly transmits this message to investors, clearly stating the company’s intentions to regain profitability and shareholder wealth. Investors are clearly satisfied enough with this information, which is evident in the company's share price. The word information has been highlighted because information is key to reducing uncertainty and risk. If Standard Chartered did not have a detailed response as to how profitability and shareholder wealth could be regained, the shareholders would be extremely anxious and would be likely to sell their shares, which would subsequently devalue the firm.

References

Moles, P. & Terry, N. (1997).The Handbook of International Financial Terms: Clientele effect. Oxford University Press.

Financial Times (2010). Italian banks to slash pay-outs. Retrieved 6^th March 2015, from http://www.ft.com/cms/s/0/98f76256-df9b-11df-bed9-00144feabdc0.html#axzz3TzhUEEs8

Financial Times (2015). Standard Chartered chief Peter Sands waives bonus as profits slide. Retrieved 06^th March 2015, from http://www.ft.com/cms/s/0/06508694-c24a-11e4-bd9f-00144feab7de.html#axzz3Tbs9iRGP

Gordon, M. J. (1962). The savings investment and valuation of a corporation. The Review of Economics and Statistics, 44(1), 37-51. Retrieved from jstor http://www.jstor.org/  

Hirschman, A. O. (1970). Exit, voice and loyalty: Responses to decline in firms, organizations and states. Cambridge, Mass: Harvard University Press.

Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433. doi:10.1086/294442

Morning Star (2015). Standard Chartered Rejects Capital Raising As Profit Drops 30%. Retrieved 06^th March 2015, from http://www.morningstar.co.uk/uk/news/AN_1425464041282392800/update-standard-chartered-rejects-capital-raising-as-profit-drops-30.aspx

OSIRIS (2015). STANDARD CHARTERED PLC. Retrieved 10^th March 2015, from https://osiris.bvdinfo.com/  

Pettit, R. R. (1972). Dividend announcements, security performance, and capital market efficiency. The Journal of Finance, 27(5), 993-1007. doi:10.1111/j.1540-6261.1972.tb03018.x

Standard Chartered (2015a). 2014 full year results: profits are down but there is a plan of action. Retrieved 06^th March 2015, from https://www.sc.com/en/news-and-media/news/global/2015-03-04-full-year-results-2014.html

Standard Chartered (2015b). Share information. Retrieved 06^th March 2015, from http://investors.sc.com/en/stockquote.cfm

Passive Investment Funds Leading the Way (Assessed Blog 3)

The Vanguard Group is a privately owned investment manager. The firm primarily provides its services to investment companies. They invest in public equity and fixed income markets across the globe and employ a combination of fundamental and quantitative analysis to create their portfolios (Bloomberg, 2015). It was announced on the 1st March 2015 that the company has recorded the highest net fund flows in the industry at a staggering $291bn (Financial times, 2015). The company adopts a passive investment technique and is currently outperforming its peers significantly, especially those adopting an active fund strategy, for example Pimco that has an estimated net outflow of $175bn!

Figure 1: A chart to show how companies adopting passive investment techniques are outperforming their rivals

Source: Financial Times (2015)

The companies that are highlighted in green are those investment companies that deploy a passive investment fund strategy and those filled red adopt an active strategy. From the chart, we can see that those highlighted in green (those adopting a passive fund management technique) are clearly outperforming their competitors who actively manage their funds. 

It is not coincidental that Vanguard’s passive investment fund has generated higher net funds than companies like Pimco. Other large passive investment fund providers such as BlackRock and State Street Global Advisers also attracted billions of dollars in new business last year. BlackRock enjoyed $178bn in estimated net inflows, the second-best performer, and State Street attracted $42bn in new business, the fifth-best performer.

Vanguard’s popularity and Pimco’s problems highlight the growing popularity of passive investment funds, which track an index and charge much lower fees than active investment funds. Vanguard has $2tn in tracker funds and $450bn in global exchange traded funds, making it one of the world’s biggest providers of these products (Financial Times, 2015). Pimco, on the other hand, use an active technique, which aims to select investments that outperform the broader market. Outperforming the market is much more difficult to do, as it is a zero-sum game. In addition depending upon the efficiency of the market (Fama, 1970), this is said to be extremely difficult because in a perfectly efficient market, only a privileged few will have the skill to outperform and spot inefficiencies that are big enough to profit from (Financial times, 2011).

Tim Buckley the chief investment officer at Vanguard attributed the company’s success to relentlessly cutting fees. Active fund managers find it difficult to compete with passive investment funds like Vanguard’s because of the high fees associated with active funds, which is why many active funds under-perform the market. These high fees have been compared to “paying someone to toss a coin” (Watson & head, 2013, p. 48). Thus, active management is claimed to be a wealth destroyer rather than maximiser. In addition, Vanguard is able to reduce their cost due to their sheer scale and unique ownership structure stating “Investors can’t control the markets, but they can control the costs of investing” (Vanguard, 2015, para. 5).

If we refer back to Vignette 2.2 in Watson and Head (2014, p. 47), the third seminar discussion was heavily revolved around whether it is better to hold an active or passive fund. Is it  better to hold an active fund, where the weight of the portfolio was changed a lot, or  was it better to hold a passive fund, which remained unaltered for a much longer period of time. Cremers & Petajisto (2009) find that funds with the highest Active Share significantly outperform their benchmarks both before and after expenses, and they exhibit strong performance persistence. Non-index funds with the lowest Active Share under-perform their benchmarks. In reality however, this in not always true, this is evident at the present time. Passive funds are currently outperforming active funds

It has long been debated as to which investment strategy is best, consistency is a major concern, just because passive investment fund companies are doing well currently, this does not mean they will continue to be ahead of their competitors in the long run. If we refer to Newton’s third law of motion, every out-performer requires an equal opposite under-performer. I believe that although passive funds are becoming more popular at this present time, this will be a short term trend and it won’t be long before active funds start to generate more wealth.

References

Bloomberg (2015). Company Overview of the Vanguard Group, Inc. Retrieved 01 March 2015, from http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=417222

Cremers, K. J. M., & Petajisto, A. (2009). How active is your fund manager?: A new measure that predicts performance. The Review of Financial Studies, 22(9), 3329-3365. doi:10.1093/rfs/hhp057

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. doi:10.1111/j.1540-6261.1970.tb00518.x

Financial Times (2015). Vanguard tops mutual fund survey with $291bn in new business. Retrieved 01 March 2015, from http://www.ft.com/cms/s/0/55b87a46-be96-11e4-a341-00144feab7de.html?siteedition=uk#axzz3TJNAA1SW

Financial Times (2011). Chasing the elusive alpha.   Retrieved 01 March 2015, from http://www.ft.com/cms/s/0/e9433bec-6207-11e0-8ee4-00144feab49a.html#axzz3TKnKvq3d

Vanguard (2015). A low-cost investment leader that puts clients first. Retrieved 01 March 2015, from https://www.vanguard.co.uk/uk/portal/about-vanguard/about-us

Watson, D., & Head, A. (2013). Corporate finance: Principles and practice. (6^th Ed.), New York: Pearson

Agency Problem and Shareholder Wealth Maximisation: Walmart (Assessed Blog 2)

Walmart, the largest retailer in the world (Euromonitor, 2015), yesterday announced their plans to boost pay for an estimated 500,000 of its U.S. employees to at least $10 an hour by next year (Walmart, 2015). This figure is well above the federal minimum wage of US$7.25 (United States Department of Labor, 2009). Walmart’s decision is said to represent a partial victory for unions and employee groups, which have campaigned for a minimum hourly rate of $15. One group, Our Walmart, organised a series of strikes on the busiest shopping day of the year in November, arguing many of the company’s workers lived in poverty and had to rely on food stamps to survive (Financial Times, 2015). Nonetheless, investors reacted negatively to this announcement as Walmart shares fell 3.21% by the close of New York trading. This is because the company estimates that the change will cost $1bn and is expected to wipe 20 cents a share off earnings in the fiscal year (Walmart, 2015).

Berle and Means (1932) were the first to observe and examine the complications that arise from the separation of ownership and control back in the 1930s. The separation between management and ownership is common referred to in financial theory as agency theory or the principle and agent problem, which may lead managers to maximise their own needs rather than that of the firm. Jenson and Meckling (1976) whose work became key in the development of agency theory, used the term agency cost to describe the reduction in a firm’s value, which arises when managers fail to serve shareholder interests. In the context of the Walmart, there appears to be a trade-off between satisfying employee’s (by increasing their wages), at the expense of shareholder wealth (lower dividend). This conflict of interests and shareholder dissatisfaction is evident in the company share price on the day that Walmart made the announcement.

Figure 1: Walmart's share price on the day of the announcement

Source: Yahoo finance (2015)

So, was this a good decision by Walmart? Walmart is the biggest private employer in America, so this will obviously bring joy to all of their low paid workers. In addition, Walmart will be hoping to get plenty of good press for this decision. Contrary to this, it’s worth examining the decision less based on whether they deserve applause on some moral grounds and more based on the economic forces that led them to act. Did Walmart simply think that they will need to raise wages in the next couple of years anyway in order to retain good workers and maximize profitability, so they may as well get ‘ahead of the game’ and get a positive publicity out of it now? Nonetheless, investors seem to be struggling to understand the benefits (to them) of this wage increase.

Overall, as the theory suggests, it is difficult to determine whether this was a good decision by Walmart. Viewpoints on this announcement vary significantly depending upon the perspective of the stakeholder. Clearly, this was good news for employees, however shareholders have reacted negatively this. What I can conclude is that the decision is unlikely to have a significant negative impact on the firm in the long term.  This is certainly not a decision that will jeopardise Walmart’s competitive positioning and their huge market presence both in America and across the globe. Would Walmart increase wages if they thought it could compromise the financial stability of the firm? In my opinion, this would be highly unlikely.

References

Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York: Macmillan.

Euromonitor (2015). Wal-Mart Stores Inc in Retailing. Retrieved 20^th February 2015, from https://www.portal.euromonitor.com/portal/analysis/tab

Financial Times (2015).Walmart to raise pay of 500,000 employees. Retrieved 20^th February 2015, from http://www.ft.com/cms/s/0/1fdceba4-b83e-11e4-b6a5-00144feab7de.html#axzz3SHbqT7vE

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. doi:10.1016/0304-405X(76)90026-X

United States of America. United States Department of labor wage and hour division (2009). Employee Rights under the Fair Labor Standards Act. Retrieved from http://www.dol.gov/whd/regs/compliance/posters/minwage.pdf 

Walmart (2015). Walmart announces Q4 underlying EPS of $1.61 and additional strategic investments in people & e-commerce; Walmart U.S. comp sales increased 1.5 percent. Retrieved 20^th February 2015, fromhttp://news.walmart.com/news-archive/investors/2015/02/19/walmart-announces-q4-underlying-eps-of-161-and-additional-strategic-investments-in-people-e-commerce-walmart-us-comp-sales-increased-15-percent

Yahoo finance (2015). Wal-Mart Stores Inc: Historic Prices. Retrieved 20^th February 2015, from https://uk.finance.yahoo.com/q/hp?s=WMT&b=15&a=01&c=2015&e=16&d=01&f=2015&g=d

Hong Kong Stock Exchange vs New York Stock Exchange: The ‘Fight’ for Alibaba’s IPO (Assessed Blog 1)

Back in September 2014, Alibaba, one of China’s largest e-commerce businesses, listed on the New York Stock Exchange (NYSE) in the largest initial public offer of all time, at a record US$25 billion (Bloomberg, 2014). It reportedly sought an exemption from the Stock Exchange of Hong Kong's (SEHK) one-third rule which states that one third of the board of directors must be independent. However, Alibaba tried to institute a system whereby the founding shareholders, in a partnership structure, would have exclusive rights to appoint directors. The exemption was rejected by the listing authorities in Hong Kong. Instead, Alibaba is now listed on the NYSE which accepted this provision.

Alibaba whom originally attempted to be listed on the Hong Kong Stock Exchange, made as a condition of its listing, the ability for it to retain control over the composition of directors on its board. This would have given 28 partners (mainly founders and senior executives, who own about 10% of the company) the power to nominate a majority of its board members (South China Morning Post, 2013).The SEHK, on the other hand, wanted to hold true to its principle that all shareholders should be treated fairly and rejected the proposal (Wall Street Journal, 2013). The Securities and Futures Commission (SFC) said giving partners that much voting power would cut across the one-share, one-vote principle that underpins Hong Kong's securities law.

More recently, towards the end of January 2015, it was claimed that Alibaba misled investors in the lead-up to its IPO, after a Chinese government regulator revealed the group had failed to disclose a regulatory probe (Financial Times, 2015), criticising Alibaba for inadequate supervision of its eCommerce merchants. This information was not released publicly until now, as it may have impeded Alibaba’s preparations for its initial public offering! The US Securities and Exchange Commission, which enforces IPO disclosure rules, refused to address this situation which in my opinion should be taken more seriously, as it is a punishable offence! This exemplifies that the enforcement of rules in the US are weak, further indicating poorer corporate governance standards in the US.

The availability of reliable information is vitally important to investors. Having current up-to-date information will allow them to make rational decisions and investments (Slovic, Fleissne, & Bauman, 1972). The efficient markets hypothesis (EMH) developed by Fama (1965), popularly known as the Random Walk Theory, is the proposition that current stock prices fully reflect available information about the value of the firm.  Alibaba have failed to provide this information to the public. In order for a stock market to be efficient, in both the strong and semi-strong form, share prices must reflect all historic and publicly available information (Fama, 1970). This was not present at the time when investors rushed to buy shares in the company back in September 2014.

Figure 1: Alibaba's share price from December 2014 to February 2015

Source: Financial Times (2015)

Following the announcement of this information being leaked to the public at the end of January 2015, Alibaba's share price dropped quite significantly, indicating that investors were clearly unhappy about this.

Minority expropriation problems have been a long-running feature in the block-held corporate economy of Hong Kong (Barker & Chiu, 2015). This is identified throughout academic literature, most significantly in LaPorta et al. (1998) whose study showed that countries with concentrated share ownership have poor investor protection. However, Shleifer and Vishny (1997) argue Hong Kong’s strong legal environment may prevent large investors from expropriating minority shareholders’ rights. This is supported by LaPorta et al's (1997) analysis of legal protection and enforcement in a range of different countries including Hong Kong. The case of Alibaba’s IPO suggests that Shleifer and Vishny's (1997) argument is extremely viable, even though they wrote their paper 18 years ago! In my opinion corporate governance in Hong Kong has developed significantly since these studies, given Hong Kong’s corporate governance reforms over the past decade.

I think it is admiral that the SEHK and SFC are committed to maintain a high level of minority shareholder protection and are determined not to dilute their high corporate governance standards. The SEHK and SFC seem determined not to ‘water down’ corporate governance standards even though having Alibaba listed on the SEHK would have been greatly beneficial. The loss of Alibaba’s potential listing in Hong Kong due to a failure to agree on an acceptable governance structure between issuer and regulator caused fury in the investment and professional services industries due to the loss of fee revenues such as flotation that the deal would have generated.

On the other hand, I can’t help but feel disappointed that Alibaba are allowed to get their own way on the NYSE. To me, this implies that corporate governance standards in the US are significantly lower than that of Hong Kong. I am currently writing my dissertation which is heavily based around corporate governance in Hong Kong, and I am therefore aware that unlike the majority of Europe and Hong Kong, US companies follow a rule based governance code rather than principles based (Sama & Shoaf, 2005). In my opinion, this approach is a step back and doesn’t reflect the spirit of the corporate governance codes.

To conclude, I believe the SEHK made the correct decision to refuse Alibaba’s initial public offering. If Alibaba was allowed to be listed on the SEHK, both the SEHK and SFC would need to dilute Hong Kong’s corporate governance standards, which would be a shame as corporate governance has improved significantly in Hong Kong over the past decade. In addition, I can’t help but feel frustrated at the fact Alibaba can so easily be listed on the NYSE. This example is a simple indicator that governance standards are lower in America than in Hong Kong. If anyone has any opposing views, please leave a comment below.

References

Barker, R., & Chiu, I. H. -. Y. (2015). Protecting minority shareholders in blockholder-controlled companies: Evaluating the UK's enhanced listing regime in comparison with investor protection regimes in new york and hong kong. Capital Markets Law Journal, 10(1), 98-132. doi:10.1093/cmlj/kmu031

Bloomberg (2014). Alibaba’s Banks Boost IPO Size to Record of $25 Billion. Retrieved 08^th February 2015, from http://www.bloomberg.com/news/articles/2014-09-22/alibaba-s-banks-said-to-increase-ipo-size-to-record-25-billion

Fama, E. F. (1965). The behavior of stock-market prices. The Journal of Business, 38(1), 34-105. doi:10.1086/294743

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. doi:10.1111/j.1540-6261.1970.tb00518.x

Financial Times (2015). Alibaba denies misleading investors over Chinese regulator’s probe. Retrieved 08^th February 2015, from http://www.ft.com/cms/s/0/8e6a7c70-a6dd-11e4-8a71-00144feab7de.html#axzz3ViEBkWqm

LaPorta, R., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The Journal of Finance, 52(3), 1131-1150. doi:10.1111/j.1540-6261.1997.tb02727.x

LaPorta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113-1155. doi:10.1086/250042

Sama, L. M., & Shoaf, V. (2005). Reconciling rules and principles: An ethics-based approach to corporate governance. Journal of Business Ethics, 58(1/3), 177-185. doi:10.1007/s10551-005-1402-y

Shleifer, A. & Vishny, R. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783. doi:10.1111/j.1540-6261.1997.tb04820.x

South China Morning Post (2013). HKEx Mulls Consultation on Shareholding Structures. Retrieved 08^th February 2015, from http://www.scmp.com/business/money/markets-investing/article/1343234/hkex-mulls-consultation-shareholding-structures

The Wall Street Journal (2013). HKEx to Alibaba: Thanks, but No Thanks. Retrieved 08^th February 2015, from http://blogs.wsj.com/moneybeat/2013/09/25/hkex-to-alibaba-thanks-but-no-thanks/

Failing to Maximise Shareholder Wealth: Mattel

For those who are unfamiliar with the company, Mattel is a US company that designs, manufactures, and markets a range of toy products worldwide, most famously, the Barbie doll. Unfortunately for Mattel, their recent earnings are not as ‘perfect’ as their dolls. 

The company has just reported a 60% drop in fourth-quarter earnings! The company’s CEO and chairman Brian Stockton, has now resigned following his consistent poor performance. Profits have fallen more than £250m over the past year (BBC, 2015), causing a significant fall in the company’s share price as shown below.

Figure 1: Mattel’s share price from 2012 to present

Source: Financial Times (2015)

From the graph, we can see that share price declined significantly from mid 2013. Poor strategy and poor leadership may have caused this. The CEO has been criticised for neglecting the creative side of the business, while fostering a bureaucratic, top-down culture (Financial Times, 2015). None of his strategies have been able to stop the recent plummet in sales. Lately, the toy industry has been struggling to cope with an increase in competition, as children’s attention draws towards electronic gadgets such as iPad’s. In addition, Mattel recently lost the licence to make the many of the more popular Disney character dolls, to their rival Hasbro starting in 2016 (Bloomberg, 2014). Furthermore, major rival LEGO, have now overtake Mattel as the largest toymaker in the industry in terms of revenue.

In this instance, due to the declining profit, the managers’ may be reluctance to embrace shareholder value. According to Loderer, Roth, Waelchli & Joerg (2010) this is probably because generating shareholder wealth is simply not implementable given Mattel’s poor financial performance. It also supports theory that managers may in fact be wealth destroyers, which relates back to the principle and agent problem first discussed by Berle and Means (1932) which implies that managers don’t necessarily have the same objectives as shareholders.

This case reminds me of the AOL Time Warner case in lecture 2, not because of the merger, due to the CEO quitting. I believe the current CEO has managed to get out at a similar time to that of Gerald Levin in the AOL Time Warner case. I hold this opinion because I believe that the Barbie dolls will continue to decrease in demand and losing the licence to make dolls to a rival will further cause a decline in revenue in the future. I believe the CEO is lucky to get out now, because I cannot see future earnings increasing without a dramatic change in strategy.

To conclude, it is clear that the company did have the right capabilities and finance available to thrive in the market however, a poor performing CEO and strategy has let the company down. In my opinion, I cannot see Mattel recovering any time soon due to the changing nature of the market, which is swaying children towards more technical products, as, appose to plastic figures. However, I also believe the company could potentially change their strategy in the long run to suit this change in consumer buying habits, but I cannot see this happening any time soon. I wish the new CEO Christopher Sinclair the best of luck, but it will take a dramatic shift in strategy to turn around this struggling business.

References

BBC (2015). Mattel boss resigns on Barbie sales slide. Retrieved 30^th January 2015, from http://www.bbc.co.uk/news/business-30980751

Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York: Macmillan

Bloomberg (2014). Hasbro Wins Disney Frozen Toy Licenses in Blow to Mattel. Retrieved 29^th January 2015, from http://www.bloomberg.com/news/articles/2014-09-24/hasbro-swipes-disney-s-frozen-princess-licenses-from-mattel  

Financial Times (2015). Mattel chief quits as earnings drop 60%. Retrieved 29^th January 2015, from http://www.ft.com/cms/s/0/8513351c-a576-11e4-bf11-00144feab7de.html?siteedition=uk#axzz3QJQ6U5pa

Loderer, C., Roth, L., Waelchli, U., & Joerg, P. (2010). Shareholder value: Principles, declarations, and actions. Financial Management, 39(1), 5-32. doi:10.1111/j.1755-053X.2009.01064.x