An Acquisition in the time of trouble: Sony acquires Ericsson with cash

The global market makes the international trade available, and at the same time, it raises a requirement for the currency exchange. And the currency movement could influence the return rate in their business. When the domestic currency rate rises up, and the trade currency keeps still or drops down, so the actual returns would be condensed down. Moreover, the reduced trade currency could decrease the value of acquisition. Besides, except the US dollar, the international currency, some special trade requires to trade in the special currency. This special currency changes the environment of their business.

On 18^th February, Sony Corp. declared that they paid 1.05 billion euros to Ericsson to acquire Ericsson’s stake in the Sony & Ericsson Mobile Communication AB which was founded in 2001 in joint venture form by the two company. Since then, Sony obtained the whole company's conduction and renamed as Sony Mobile Communications. However, the trade form, Euro, performed not very stable by the influence of European Debt Crisis. This acquisition could be treated as a risk trade. The company would reduce their value by the drop of Euro in the future. So why they make deal in this time of trouble? Do other reasons to support their decision?

I have researched on Japanese Yan currency trend in the three month, and it keeps rising in the past. This influence reduced their sales returns from Europe. At the same time, as the Sony & Ericsson was founded in London, they have to transfer their sales back to Yan, and use that to purchase the inventories in Japan, which makes more trouble in their operation. Thus, this purchase could be as an action to reduce the effects from Japanese Yan jumping. Apart from that, another reason is the strategic requirement. According to Mr. Kazuo Hirai, the vice-CEO of Sony, mentioned that Ericsson’s android focus did not provide the competition advantages to their business in the competition with iphone, so Sony wants to consolidate their capability on game with their mobile phone business. This acquisition would help to make their strategy realized. The company believed this consolidation could contribute greatly to their business and it could cover their risk and lost on the currency trade.

In my opinion, I think the currency could be a very important factor taken in account. However, like Sony, their action made great sense to their future, and this could be a key step to the business, at that time, the currency could be trade as a special expense to consider. To trade in the currency crisis, the decision could not only be narrowed into currency profit but also business horizon.

The Dignity’s Brilliant Strategy, good for investors and financial managers?!

This week, we focus on the decision tool for managers. The WACC (Weighted Average Cost of Capital) should be treated as a common tool to help managers to decide whether to operate a project or not. In simple, the WACC is the capital return rate of running a business, including debt interest and equity return rate. And the rates could be formed as the following formula:

WACC=kE*WE + kD*WD. (kE is equity return rate, and kD is debt return rate. WE is the proportion of the equity in the whole capital, and WD is the proportion of debt). Besides, the enterprise value is the result of it that the expect cash flow is divided by WACC, so the enterprise value has directly relationship with WACC.

In December of 2010, according to London Stock Exchange news, compared with the other companies in the same area, the Dignity plc stock price increased much more greatly. The reason is the company published special dividends, which encouraged the investors in the depression market. And I read about their annual report and find their brilliant strategy. Dignity had been readjusting their capital in the recent year to exchange their equity to debt, and the company explained that they did that because they thought the cost of debt was much cheaper than the equity cost. It is true a method to reduce their WACC in their business. However, it was not only for that reason.

When they reduce their liability account, they increased the return rate every year, which could be attributed to their decrease liability, not for their development on their business. Because the cost of debt is cheaper than that of equity, when they increase the proportion of the debt and decrease the percentage of equity, the WACC would be reduced a lot. Then, they increased a little their equity return rate gradually, and the WACC could be decreased at the same time, which could be used to show great management achievement of the managers in Dignity plc and the market would put positive opinion on the company. Most important, the investors would benefit for the increasing dividends, and they would praise the managers in the company.Apart from that, as the WACC decreased, the enterprise value could be increased at the same time. Thus, the strategy of Dignity is so brilliant to obtain three goals together.  It seem to be win-win action for managers. However, it could not be so bright as we imagined.

Since the financial crisis, the whole British market became depression. The pressure of the management team was increased greatly. The adjustment of capital could provide a method for them to improve their achievement, but it could release more problems for the company. For example, the debt account could reduce their cash ability in the future, and it could put the company on an increasing risk gradually. Especially, in financial crisis, the cash ability could give the company opportunity to survival, when they is in trouble. So is it a brilliant method for managers? Mangers should use it after they thought twice.

Federal Reserve’s Operation Twist

When we talk about the finance, financial market would be one of the most important factors we discuss about. Financial market is like a stage access company to the public to raise capital, and at the same time, it also provides investors an opportunity to join the promising business. Apart from that, financial market is the main tool used by governments to manage their national economy in the market economy countries.

On 10^th February, The Wall Street Journal reported the Federal Reserve’s (it would be short for “fed” in the following part) operation twist attracted attention and discuss in the financial world. In the past year, Fed has spent $400 billion on the long-term national debt to increase the price and decrease the return rate, while, at the same time, they sold the short-term debts in their hands to the market. Long-term debt could be treated as a tool to avoid the risk in depression market, but long-term debt reduces the activity in the market. Since 2008 financial crisis, governments tried their best to enlighten their capital market, thus American Fed input $400 billion to the national debt market to reduce the return rate. In this way, they expect this action could increase the liquidity of the market and leave a positive impression on each investor in the America. However, their action was doubted by the analysts in the market.

Most of the investment banks have been confused with debt price trend. Generally, when the price of long-term debt increases, they should reduce their national debt account to decrease the influence of lower return rate. However, this time, the price of national debt was not decreased for booming economy but the scarcity of the supplies. If this operation twist stop, long-term return rate may be back in a dramatic speed. The market could not give a convinced clue for the investors’ next action. Fed does twist the market! What is more, the hesitation in the market leads an unusual change. In this way, the long-term debt in the market stays low level, and the price of these debts still keep a high price. And this twist could be formed as a bad cycle.

Speaking from my angle, I do not think to use the financial method to conduct the market is clear way to encourage market, compared with to develop the market. It is just like that when you feel cold, your drink alcohol to let you feel warm, however, it would be colder than it before you drink. The better way could be to move up to create heat. So, what do you think “ alcohol” or “ move upon”? 

Apple’s Core Objective Type --Sweatshop Event Analysis

Financial management begins with the objectives. Objectives are very important to conduct their decisions in organizations. Generally, the objectives could be concluded as three aspects: shareholder wealth maximization, profit maximization and stakeholder. Different company operated differently to meet their objectives. Thus objective should be set ahead of time, and so that the performance could be examined in the end of each fiscal year.

SWM (Shareholder wealth maximization) seems to be the most frequent objective used all over the world. Mangers concentrate themselves on the operations to ensure shareholders' long horizon dividends. To be mentioned, SWM could often be connected with the profit maximization. Although SWM take profit seriously, SWM managers pay more attention to balance risks to persuade their long-term receives, and they communicate their long-term capability on SWM to their investors. Profit maximization managers focus on the decisions to develop their profits, and in some situation, managers would like to put organizations' future on risk to “make up their face” beautifully. Stakeholder managers are interested on the aspects that will influence the organization. Sometimes, in order to take social or community's benefits in account, some companies have to burden more expenses or other actions to reduce their profits.

To research on organization's objectives is the core to analyze their financial management and to find their competences. When they make decision to balance trade-offs, the objectives must be treated as a core. Therefore, objectives could help us to read a company and predict their performance practically.

This week Apple co. could be a target in main newspapers. It is not only because their great achievement on profit and their huge amount of cash in hand, but also they was connected with sweatshop. Their manufacture factory could be one of the most curial companies for workers in the past two years. The world was shocked, for13 people suicide for high pressure and heavy workload. Apple Company tried to communicate to their stakeholders including government, investors and shareholders and tried to save their reputation. However, two year pasted, their actions are limited, so last week, New York Times exposed their curial business. And then, the CEO of Apple promised to supervise their manufacturer's business to ensure their rights and develop their working environment. The reaction of this event is still a promise in words instead of real and actual plans, the reason could be found below.

Last month, the trend for Apple share price keeps an upward trend. And the only fall point happened on the day when news of great cash in hand published. There is no clear reaction of share price for the sweatshop event. Therefore, Tim Cook, the CEO of Apple, did not act so much to readjust their behavior. Cheap labour and quick manufacture are more valuable for Apple than the worker’s benefits, and to ensure their long-term achievements, they should keep their reputation, so they provided promises out. And how and when it could be realized, no one would tell!

According to the details of Apple’s reaction, they should likely be a SWM Company. What they did to the events is to use the minimum cost to save their future, and kept their eyes on middle term development. Speaking for Apple and their investors, it could be a good thing. They would still obtain the low cost manufacture and at the same time, their reputation also has been saved for future develop.