What a price management is! - IBM’s dividends publish and buyback

Dividends should be the directly income of investing in the stocks for the general investors, and the news on the dividend publishing could always be communicated to the market and incent the share price in the market. The general investors could consider their high dividends and decide join their business. Moreover, buyback should be another action to put up their share price. And the shares from the buyback would be saved as the treasury shares. And this should be used to reduce the pressure of managers in the company. In that case, at the same level of profit, their EPS would be increased. Another reason these two actions could calm down the investors, before the company does some risky acquisition or investment. Indeed, the money could let the investors forget the risk in the future. However, it should be really considered carefully, for these actions are like squeezing the value. When the company faces the troubles, it will not keep that price, and the wealth of investors could be condensed faster that how you imagine.

On 27^th April 2012, IBM published their dividend, and they promised to raise the return of investment for the general investors, and at the same time, the BOD approved $7 billion to buyback their shares in the market, for the top bosses of IBM feel so good about its financial prospects. High dividends and buyback are increased the price sharply. And I think at this moment, the managers of IBM should be one of the happiest in the market. Their pressure has been reduced. And for IBM, because of their top market position, unless the market has been destroyed, what they do now is withdraw their future expectation. To balance the risks, they company keeps to acquire new company and investment since 2000 to increase their size and capital amount. What a brilliant action for a company is! However, there is a truly risk existing. The American government has been aware of their monopoly position in the market, the future is uncertain.

Since 2000, it keeps use this method to push up the price, it is still a great risk for this action. Indeed, the market room has been created again and again, but it does not mean this could be used forever. When the acquisition and investment are stopped, the managers should face up with a great-accumulated pressure! That would be a disaster for IBM.

The Credit Squeeze in Financial Crisis by Bank of England

This Friday, I visited the Bank of England with our professor. And the history about their financial management in this country shocked me greatly. However, compared with the Federal Reserve, their policies presented to be more conservation. According to the definition of Credit Squeeze, government measures designed to limit the supply of credit in the economy, in order to curb inflation by controlling growth in the money supply. Two example of credit squeeze include restricting bank lending and credit sales, and increasing interest rates. Regarding the capital structure, debts could obtain some advantages to help companies survive the crisis. For example, debts are before taxation item, so that the company could reduce their taxes. But, at the same time, it also provides the extra risk on companies’ cash ability and the credit risk in the whole industry.

Last Thursday, the Wall Street Journal has comment about UK’s credit squeeze policy in the financial crisis. In this February, the real estate suffered from the sharply drop on the price, and the costs of debt are increasingly pushed up. Moreover, because of the credit squeeze policy, more and more small and middle size companies defaulted in their business. Commenters has post their attitude that they believe the UK may suffer more about the depression in the market, and they are gambling about their future.

Speak from the MPC (Monetary Policy Committee), what they did was aimed to keep their market steady and reduce the risks in the capital market. However, the policies really did harm to the development. In this financial crisis, the sub-credit swap broke the confidence of the capital market. Their policy aimed to reduce the doubts in the market, and more assets as deposits, if these are some troubles in the market, the creditor would reduce their lost. Secondly, the inflation could be controlled by these policies. The Quantitative Easing Policy speeds the liquidity up, and at the same time, the inflation is trigged. The market would be destroyed in the great inflation.

However, whether the policy is successful or not is due to the harm of inflation and lack of liquidity. If the inflation provides more harm to the national economy, the credit squeeze should be more effective, vice versa. In this financial crisis, UK faced with the depression of the market. Customers were doubt about their purchase ability, and the employment market was terrible. Companies cut their employment plan to survive. I think the government has to do something to incentive the market, and the liquidity is so low that it possesses the potential to develop without inflation. Last but not least, the squeeze destroyed the fairness in the market, and if companies started play unethically, the market fairness would be recovered very slowly in the future, which could occur the further troubles to the national economy. Therefore, I think that it is the time to loose their controls on the credits to give opportunities to the market.   

SRI: the double-sword for Starbucks

SRI (the socially responsible investment) attracted more attention in each industry. And socially responsible investing, also known as sustainable, socially conscious, green or ethical investing, is any investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity, and/ or the military. Normally, because of SRI, companies could obtain good reputation on their business. Customer in the market would take companies’ imagine in account to encourage their purchase or build the brand trust, and in this way, companies could be benefit from their SRI spending. However, because of the regulation and culture, companies would suffer from the SRI judgment in different area.

The Settle Times, 20^th March 2012, has published that Starbucks was in trouble of blame for SRI. On Starbuck’s Wednesday’s annual shareholders meeting, Mr. Howard Schultz, the CEO of Starbucks, was expected more on the both profitability and socially responsibility. Starbucks has taken care their social imagine for a long time, and they received the benefits from their socially responsible investment. For example, the company promised to buy the coffee beans from importers who pay above-market prices to small farmers, for this reason, their customers accepted the higher selling price of Starbucks. However, because their socially responsible behaviours, the market required more about their investment or attention on the social benefits, like environment. An activist shareholder, John Harrington, encouraged the company to create a committee on environmental sustainability. The committee will burden more on the company’s operation. Moreover, sometimes, Starbucks has no choice. Another nonprofit organization, the National Gun Victims Action, called for a boycott of Starbucks for allowing people to carry guns in stores. Actually, because the differences in each state of USA, the regulations for guns are different, thus, how to deal with the guns could not be so easy to the company. Therefore, this brings the trouble to the company, that the good imagine brought profit, and as the same time, they also made troubles to the company.

In my opinion, the company should not be so flexible. SRI is a wonderful sense for companies, but it also works within limits. Because companies all have their limits on ability, the company could should be their strategy and plan for their SRI, and do what they plan to do and explain the rest. And if companies, like Starbucks, Nike, Levis’, have enough ability both on financial and social area, they could burden more responsibility but limited. The smaller or weaker companies could not perform so much, for the most important thing is to survive from the competition. On contrary, the market or society should think rationally that there is no company can do any things to meet any one in the society, and actually, some of the requirement could go against each other. Just like what I believe, to do what they should and could do is more appropriate. 

The Federal Reserve Keeps Expansionary Monetary Policy: Good or Not?

Last few weeks, my blog focused on the corporation finance: merger and acquisition. However, to operate the business, the macroeconomic environment should be taken in account. This week, I would like to review the Federal Reserve’s (FR) monetary policy. According the definition of monetary policy, in order to keep the stability of the market and GDP development, the Federal Reserve uses the interest rate and money supply to control the macro economy. The monetary policy could be divided into two parts: expansionary monetary policy and tight monetary policy. In this credit crisis, the Federal Reserve provided the expansionary monetary, which means that they increase the supply of the money to the market.

On 14^th, March, the Federal Reserve declared their policy would keep the expansionary monetary method. Since the 2007, the FR provided the expansionary monetary policy. From 18^th, September 2007, the FR adjusted the federal funds rate from 5.48% to 0.25%. At the same time, the FR increased the minimum period of liability, from 1 day to 90 days. Meanwhile, the FR used the 700 billion dollar to incentive the market to develop the liquidity of the market again. However, the result is not so convinced. American economy did not recover from the crisis. Apart from that, the increased money liquidity leads to a new challenge of inflation. Golden price, petrol price and commodity prices have been challenged at the same time. So is this policy real benefit for the market? The efficiency and effect of this policy have been doubted by the market.

 

Where was the money? According to the research by Dr. Ye of University of Alabama in the USA, these policies did not let the capital flow to the companies, but just buy the NPA (non-performing asset). And the interest policy just pushed the investors from the long-term financial investment, shelter. The benefited party should be these giant investors who lost money in the financial crisis. Compared with the Roosevelt's New Deal in 1927 crisis, these policies in this crisis lost their target and efficiency. In 1927's crisis, the government spent the money on the public infrastructures to provide the opportunities in the market, but this time, the FR just want to fix their lost. Is that a good thing for survive the crisis? So why do they keep these policies? 

Coca-Cola failed to merge with Huiyuan Juice --- The Influence of Non-economy Factors

After we discussed about the cooperate format, this week my topic would involve the merger itself. Speaking for the semantics definition of merger, it could be described as the combining of two business entities under common ownership. Before the mergers, the company should think about what they could achieve by these processes and what are the benefits. Normally, companies should experience regulation, pre-bid, bid and post-bid to finish the merger. During processes, companies have to consider the difficulties of the mergers, from finance and management. However, there are other kinds of factors that also influence the result very much, such as, the politician and culture. Governments could have several ways to influence the result of mergers, such as the cost increase, the bureaucratic functions. This blog would focus on the Coca-Cola’s merging failure and discuss why the Chinese government wants to reject this merger and the effects of the failures.

On March 23th, 2009, the biggest international merger of Coca-Cola was declared to be failure with the statement of Ministry of Commerce (MOC). The MOC rejected this merger, for they thought this merger could lead the unbalance competition in Chinese beverage industry. Coca-Cola, the biggest carbonated beverage producer, would use their great distribution ability to aggress into the whole Chinese market with the basement of Huiyuan. This merger was looked forward by both of the company, for Huiyuan, it could be challenge to develop themselves with advanced technology, marketing and management, and for Cola, it was a great opportunity to obtain the competences in Chinese Market, their third large market in the world. There was no conflict between the two companies, so the main reason for this failure could be attributed to the political factors.

Why did the government want to force this merger to be rejected? According to Brussels’ report, the main reason could be Cola-Colonization. Cola had invested in Meizhiyuan (Minute Maid) in Chinese juice industry, but it was not obtain the main market share successfully. Thus, Cola wanted to used Huiyuan, the biggest pure juice producer, to achieve their colonization strategy. If this merger has been reached, the biggest market share would be obtained by the company, the other companies, like Wahaha Co., Qianshou Juice Co and other the local brands would run their business in a unfair market, which was not match to Chinese government policy to develop their national brand. Besides, the Cola would gain the buyer power and seller power at the same time, it would do harm to the customers’ benefits without doubt. Additionally, they considered the difficulties of technology transfers, and found it would be difficult to achieve the technology from Cola. Even though, the technologies could be transferred, the benefit could not overweight the drawbacks in the market. So the merger failed. However, what was the conclusion for this failure?

 

Speaking from the Huiyuan, they was listed in Hong Kong stock exchange market, and their shareholders felt very disappointed with this result, and there were 42% price dropped, and Cola dropped 20% in the following 6 months, which could not react so fierce like the former. Some comments point this disaster to Chinese government directly. In my opinion, this hard result could be cruel, but this could be the last protection for the new market from unbalance competition, which could contribute to the organized booming in the new market in totally. In terms of improvement, the better way may try to use economic control but political control instead to provide a soft landing for the failure.