Dividend - Relevant or Irrelevant?

Modigliani & Millar (1961) argued that share price could not be determined by dividend payment, it is actually determined by the future earning potential of the firm. However, authors like Linter (1956) and Gordon (1959) believe in the relevance of dividend. Both concept have an understandable rationales. It has to be noted though, M&M don't absolutely reject the payment of dividends but expresses it irrelevance to shareholder wealth. From an investor's point of view, the payment of dividends can mean a lot, some investors require the regular income from dividends for cash flow purposes therefore a lack of dividend payment automatically cuts out a huge amount of potential investors. Linter and Gordon tend to follow the "Bird in Hand Argument" basically meaning investors prefer dividends because of the security it offers as it provides some level of certainty to investors. Generally, the argument proposed by M&M that in place of dividends investors can sell their shares however, the duo neglected the fact that investors will lose part ownership of the firm by selling shares. This reason alone is enough to boost the relevance of dividend payments.

Also, the use of dividend payments to predict the performance of a company is common among investors therefore, not paying dividends could come across as bad news being emitted from the company. However, Pettit (1972) and Ahonery & Swary (1980) confirm that in reailty the reverse might be true. They believe in reality high dividends may indicate a lack of attractive investment thereby lower future investment returns and low dividends may indicate lots of attractive investment and ascertain future investment returns. This situations are valid however in times of economic downturns such as recorded in the US by Justin Baer in his article "US investors start year with paucity of pay-outs". Majority of companies in the US have cut dividend payments and some have even gone up to cancel it, their main reason being the economic downturn witnessed  in 2007. Analyst predict a tough time ahead for investors due to the effect of the economic downturn as companies all over the world are reviewing their dividend policy. The question in a situation of this nature is, can dividends be used to determine shareholder value? is it that relevant? Companies like Dow Chemical who has paid dividend for over 389 quarters have cut dividend payments, is this a diminish of shareholder wealth? if it is does it then mean dividends are relevant otherwise vice versa? 

Commerzbank - Capital Structure

Commerzbank this week announced its efforts and methods to raise huge amounts of  finance. As evidently expressed by Neil Hume in his article "Commerzbank's mind-numbing cash call", the organisation is taking very complicated actions towards this cash call. It carries on to express how the whole capital structure of the organisation will change as a result of this particular cash call. The cash call is a mixture of debt and equity, debt being "silent participations" from the German government and equity from a number of sources such as conditional equity, rights issues e.t.c.

This kind of cash call and capital structure re-arrangement could move Commerzbank closer to an" optimal capital structure" seen as this is the most favourable point for any business regardless of Mondiglian & Millar's concept of the in-existence of an optimal capital structure. It only makes sense for an optimal capital structure as it is impossible for the increase of debt no to record any favourable improvements in a firms activities. It is widely believed that, increases in debt will only be favourable until a creating point when it starts affecting share prices and dividend payment. In this scenario with Commerzbank, the business seem to have raised finance mainly from    investors. This is good in that, it's opened to less risk from interest payments, however, earning will have to split between a lot more investors thereby reducing earnings per share, which will diminish shareholder value.

The struggle to attain optimal capital structure can be difficult however, achieving it is great as means a firms is fully exhausting its capital options to its maximum abilities with operations still at its best.

Risk Assessment and Investment Appraisals

Risk assessment is a major part of any investment decision, as an analysis of the possible creation of shareholder wealth or value must be ascertained before subjecting to any contractual agreement. There are a few known methods of analyzing risk which are  - Sensitivity Analysis, Scenario Analysis and Probability Analysis. Theses techniques are used by multi nationals and SME's in assessing risk in relation to investment. 


Published in the past week by Paul J Davies on FT.com is a write up analyzing the situation on financial management in various industry and the effect the credit crunch had on the financial risk management of firms. Financial risk management is like the maintenance of financial risk assessment, meaning - the management of financial risk ascertains the assessment carried out at the teething period of investment. The write up explains - “Lots of financial business had what they thought was an effective risk management framework in place, but the crisis showed that it did not do what it said on the tin,” says Clive Martin.


This explains why a lot of firms have fallen short of their investments as, although the investment was right and the risk assessment was well done, bad management of risk most likely creates unplanned scenarios which especially affects the capital payback period as a shorter payback will always reduce the risk arising from the uncertainty of cash flows. Therefore, problems with management can make the payback period even longer which in turn reduces the profitability of the investment.


In conclusion, currently available investment appraisal methods have disadvantages but are still credible and of good use to managers that are able to determine the best method of calculating investment opportunities. Risk assessment also has disadvantages such as time period e.t.c. but the most important aspect of risk is the management. A bad risk assessment can still be corrected with good risk management. 

Could the Credit Crunch Have Been Avoided?

The inception of the credit crunch as documented was in 2007 as a result of bad news was reported from BNP Paribas,the French organisation. Considering the background of this big event, it is fair to say that, the situation was avoidable. Although, the US government reduced it's interest rates in order to improve it's economy for far too long as expressed by Jeffrey Sachs (2008). The government had genuine reason for the interest rate reduction but the investment effect of not knowing when to sell shares applies here as the government benefited from the income generated as result of its low interest rates. Banks had too much money thereby lending to uncertified lenders, creating a domino effect which infiltrated the banking sector and the economies involved.

The loss of trust that resulted from the securitization process will make it almost impossible for confidence to be regained in the system. This explains the reason behind the slow recovery, house prices continue to drop and lenders get even more strict therefore leaving the public afraid to spend. The fear of spending is justifiable since debt is not exactly readily available as it used to be. As time goes by, analyst believe, trust will be regained in the system but this wont be any time soon as this credit crunch had a huge adverse effect on interest rates. The big question still remains though,which is could the credit crunch have been avoided?

Mergers and Acquisitions: Are they really worth it?

Mergers and Acquisitions have been going on in the business world for God knows how long therefore you'll naturally expect it to boast of glorious and happy multinationals acquiring their subordinate companies, which in reality should maximize shareholder wealth. Studies,short term and long term, show M & A activities do not exactly increase shareholder profitability of the acquiring company but definitely is a boost for the shareholders of the acquiree.

This brings me back to my initial question, is it really worth it?. In my opinion M & A is a survival strategy meaning, multinationals see this as a game and there has to be winners and losers therefore gaining market power is what puts them ahead of the game. If not, why would they add soo much wealth to the acquirees' shareholder and loose some of their own shareholders' wealth?. It's all about the market powern

A good example of this is the proposed acquisition of BSkyB by News Corp.. The share value of BskyB has increased merely since talks of an acquisition emerged  and it's still increasing. Meanwhile share value of News Corp has dropped, this just proves the point made earlier regarding the motives of M & A. In this case, it's obvious it's mainly for the market power as the reason provided by Rupert Murdoch the CEO of News Corp. was mainly the strategic important asset BSkyB offered. The asset being News Corp's penetration into the UK market as BSkyB is renowned in the region.

Bearing this in mind, although studies show the acquirers' in M & A activities tend to loose shareholder value in the long run. I believe in a situation like this where it is used as a penetration mechanism in a highly progressed environment such as BSkyB in the UK, the long run profitability are quite feasible therefore its a win win situation.

Libya Crisis: Limitations or Demerits to FDI

Recents events in Libya have caused major TNCs (Transnational Companies) to pull their staffs out of the country. This and other major activities in Libya have caused an adverse effect on crude extractors and an increase in the price of crude in the global eceonomy. TNCs in areas like Libya have one main reason to go multinational and that is the need for the raw materials the country has to offer.

As TNC's in Libya are mainly after raw materials, they must have considered the effect of importing crude from developing countries but a major impediment is the sale of know how and corruption in developing countries. As much as it is easy to transfer the knowledge of extracting crude, there are very huge investments to be made i.e. equipements e.t.c. Today in most TNCs in Africa, although legislation makes it clear that the knowledge of extracting crude must be transfered to locals and the locals must occupy a fraction of the management, corruption makes it easy for TNC's to have their own management and exclude locals of the environment.

Due to the lack of knowledge of crude extraction and the heavy corruption and the economic instability in countries like Libya, a raw material seeking multinational has no option but to invest in the country and whether through all its impediments.

Also, theories like the Eclectic Paradigm by (Dunning, 1988) which states that "A location advatage of locating a particular economic activity in a specific location because of the characteristic (neutral or acquired) of the location". This clearly supports my ealier arguement that TNCs in developing countries are there due to the natural resources extractable from the area.

Ideally, FDIs in countries like Libya should cause major developments and advancements in its economy but the major corruption issue in countries like this make it hard to spot out the advantage of FDI and when issues of this nature i.e. crisis in Libya, pops up it affects the global economy. I beleive, if these TNCs' apply the governance applied in developed countries to the activities in developing countries, major changes will be recorded and a movement of such would see developing countries emerging to the greater economy.

Offshoring

Multinational companies have continually engaged in the movement of head office address due to the variations in tax regulations of countries. Various laws have tried tackling the problem of transfer pricing but the variations in taxing regulation will always allow for loopholes where these Multinationals can build on and save huge taxing cuts which in turn maximises shareholder returns. Companies like Tesco who engage in offshoring have recorded huge savings of up to £125 million. This could therefore serve as a competitive advantage for Tesco thereby reducing overall cost and improving profits which ultimately maximises shareholder wealth. However, competition strategies makes it inevitable for competitors not to follow in footsteps of its competitors otherwise they will be outplayed causing bankruptcy e.t.c.

Issues of offshoring is no news to the governments of the developed economies but various reasons deters them from pursuing laws to prevent such acts. Personally, the ability of firms to save cost by taking advantage of loopholes in the taxing system seems erroneous but its advantage to companies is limitless therefore, countries with higher tax brackets such as UK and US will highly benefit from reduced tax as not only will investor remain in their countries but they will also attract foreign investors.