The changing business environment and globalization necessitates businesses to change their strategies so as to sustain profitability. Businesses use acquisition strategy to improve their market share and asset base. It is necessary to ensure that acquisitions are properly managed so as to ensure success. This treatise discusses some of the various elements of managing corporate finance of British Media Publishing Company during the acquisition.
Contradictory perspective of investors and lenders
Investors in an organization are a group of people or organizations who contribute capital in organization. They inject capital through acquisition of shares in the organization. Investors expect to a have a high return from such capital contribution. The returns are periodic flow dividends. Investors expect to have a continuous flow of high dividends. Other than dividends, investors also expect to sell their shares at a profit. Therefore, they expect the value of shares to increase over time. Therefore, the ultimate goal of an investor is profits. An entity has to safeguard the interest of investors. On the other hand, a lender is a person who advances credit facilities to the organization. These loans can take various forms. They include bank loans (short term and long term), hire purchase, trade credit, overdraft facility, and bank guarantee among others. A lender makes money through charging the borrower interest. A lender would be interested in the ability of a company to repay the loan and interest. Therefore, their focus in the financial statement will be to know the profitability and the asset base of the company. This would enable them to know the ability of the company to repay the loan and the interest rate (Haber 37).
Financial statements as they are do not provide an in depth insight into the performance of an institution. Therefore, it is necessary to analyze the financial statements so as to get a better understanding of the performance. Ratio analysis gives a basis for analysis (Vance 12). An investor would require various ratios such as net profit margin, earnings before interest and tax, asset turnover, dividend cover, dividend yield, return on equity, and return on assets. For instance, net profit margin is the ratio of profit to sales. To an investor, this ratio shows the amount of net profits that a company can generate from sales. Asset turnover is the ratio of revenue to net assets. This ratio informs an investor about the amount of sales revenue generated from the use of capital employed. This would enable the investor to know the amount of sales that would be generated from his investment. Return on equity is the ratio of net income to shareholders’ equity. The ratio is the quite necessary to an investor. It shows an investor how much return he will earn from his capital contribution. These ratios and many more would give a deeper insight to an investor (Brigham and Joel 57).
On the other hand, a lender would be interested in gearing ratios, interest cover, current ratios, quick ratios, working capital turnover period, cash generation, and cash conversion cycle among others. Current ratio is computed through division of current assets by current liabilities. It shows the ability of a company to meet short term obligations with current assets. This may also give an indication of inefficiency in the level of activity of the organization. It can also be an indication of inability of a company to covert goods to cash. Quick ratio is more stringent than the current ratio. It is the ratio of current assets (subtract inventories) divided by current liabilities. It shows the ability of the company to pay its current obligations with liquid assets. Interest coverage ratio is also necessary for a borrower. It is a ratio of earnings before interest and tax and interest expense. The ratio shows the ability of a company to pay interest on outstanding debt that is, the number of times profits cover interest expense. A lower ratio may indicate that the company is unable to pay interest expense. An investor may also want to look at gearing ratio. It is a measure of financial leverage. It shows the degree to which owner’s funds versus creditor’s funds finances the firm’s activities. The ratios give a simplified understanding of the ability of the company to meet the investors’ demands (Siddiqui 19).
Computation of the ratios
A summary of ratios for both investors and borrowers is as shown below.
Table 1.0: Ratios for an investor
|Ratios for an investor|
|Net profit margin||18.66%|
|Price earnings ratio||6.95|
From the financial statements, it is apparent that the performance of the company to be acquired is below the industry averages. The profitability ratios shown above are low. The net profit margin is 18.66%. The return on equity is 24% while the return on assets is at 10%. An investor should monitor the performance of the company for a longer period say three to five years. This will enable an investor to monitor the performance so as to establish the possibility of improvement.
Table 1.1: Ratios for a borrower
|Ratios for a borrower|
|Working capital turnover period||3.53|
|Cash conversion cycle||13.15|
From the above summary, the current ratio and quick ratio are less than one. This shows that the company is not able to meet its current obligations using the current assets. The interest cover is low at 7.55 times. The low ratios may imply that the company is unable to make periodic repayment of the principle amount and interest.
Usefulness of the published financial statements to managers
In most jurisdictions, it is a statutory requirement for all companies to publish their financial statements on a periodic basis say annually or semi annually. The financial statements are expected to give the stakeholders of an entity a view about performance of an entity. The stakeholders include the shareholders, government, community, creditors, employees, customers, trade unions, suppliers, and potential investors among others. This is because the statements give historical information to the stakeholders of the entity. Such information does not meet the needs of managers. Managers require information for daily decision making and such historical information might not meet their daily needs. Some of the information required by managers is the changes in the business environment, changes in number competitors and the products they offer, reports on monthly performance of the business, changes in the customer base, and reports on budgetary controls among others. Besides, the managers have a better understanding of the financial information. Also, they often manipulate such statements so as to suit their needs (Eugene and Michael 97).
Contribution of mission statement to success of an organization
A mission statement is a statement of a rationale of an organization. A mission statement outlines the actions of the organization and the overall goal of the organization. It also gives a path and a guide for decision making. It provides a platform for formulation of strategies. The statement should be clear. It should represent an organization’s purpose for existence. Mission statements also provide guidance to all staff members. This is because it directs their duties so as to fulfil the company’s goals. Also, a mission statement enables the stakeholders to assess the possibility of deriving mutual benefits from ongoing business relationship. In essence, a mission statement contains the purpose of existence, strategy and strategic scope, standards and behavior and values. Therefore, a well defined mission statement that contains these parts should be able to provide direction for an organization and this will in turn impact on the success of the organization. A possible mission statement for the proposed acquisition is to enrich peoples’ lives with best programs, performances, products and services that inform, educate and entertain.
Critical success factors
Critical success factors are the necessary activities that determine achievement of the business strategies. Therefore, an organization should put emphasis on a few factors that immensely contributes to success of the organization. These few factors should be central to future success of the organization. Some of the critical factors include roles of the employees, new processes and technologies, organizational skills, and public interest objectives such as protection of minors among others factors. These factors change over time. This is because the business environment is dynamic. Therefore, the critical success factors may change from time to time so as to suit the changing business environment. There are four types of critical success factors. These are industry, environmental, strategy and temporal critical success factors. The mission statement is a key source of the critical success factor. Industry critical success factors result from the characteristics of the industry such as learning orientation and entrepreneurial management style in the industry. Strategy factors results from the competitive strategy of the business such as how the business position its product in the market. Temporal factors result from short lived internal organizational needs and changes such as changes in processes or management.
Key performance indicators (KPI) give a basis for monitoring the success of the critical success factors. Key performance indicators are measurements of success of the selected critical success factors. The key performance indicators are in most cases form the basis for preparing the balanced score card. Some of the key performance indicators include financial perspective, innovation and learning perspective, internal perspective and customer perspective.
Reasons for the key performance indicators
As mentioned above, the key performance indicators include financial perspective, innovation and learning perspective, internal perspective and customer perspective. Financial perspective is necessary so as to ensure that the organization attains the desired financial results within the stipulated time frame. Further, it helps the company to ensure that expenditures are within budget. This key performance indicator should be cascaded down to the individual staff members and performance for each staff member should be measured against the target. Innovation and learning ensures availability of new products which satisfies the needs of the customers. Innovation leads to improvement of the competitive edge of the company. Therefore, staff members should be encouraged to share with the product development team ideas that might be helpful for product development. Learning also improves the exposure of the staff members to changes in the industry and the overall business environment. It is a strategic venture that puts the staff members in a better place to match the dynamic business environment. Internal perspective helps in improvement the internal processes and controls. This perspective improves efficiency in service delivery and overall internal control environment of the organization. The final perspective is customer oriented. Customer taste and preferences constantly changes due to various reasons. The products of the organization should meet the needs of the customer as they change from time to time. Besides, there should be quality customer service. This is because the business is service oriented. Therefore, if emphasis is put on these perspectives, there will be efficiency in operations of the organization and greater returns. Therefore, the management of the organization needs to set the targets in line with these perspectives. These targets should be set for all staff members in organization. These targets need to be cascaded down to the department and finally to the staff members. Each staff member’s performance needs to be measured against the targeted key performance indicator. This exercise should be carried out on a periodic basis. Proper execution of performance management in line with critical success factors guarantees success of an organization (Hitt, Ireland, & Hoskisson 59).
Equity or debt financing
The decision as to whether to adopt debt or equity financing depends on the capital structure of the company. It is necessary to set a desired debt to equity ratio for the company. That ratio will form a basis for deciding on the amount of debt and equity financing to be used. It is also necessary to analyze the cost implication of the two modes of financing. For instance, the management should compare the cost of interest charges with the dividend payout ratio. The management should also consider the appropriate mix of short term and long term debt to be used. The management should also consider the terms of each mode of financing to be used. Such as the conditions that come with each mode of financing. It is also necessary to consider the tax implication of dividends and interest on loans. For instance, interest on loans is tax deductible while dividends are not. Therefore, using debt financing saves the company some money. The management should also consider the gearing level of the company. The management should not be dependent on debt financing as the source of working capital for the entity. This is because it can worsen the gearing level of the entity. The management of the organization should be able to match the term and source of the finance to the purpose. British Media Company should consider using a mixture of the two sources of finance. This is because the two sources of financing have pros and cons. This helps to minimize the risk associated with the use of only one source. Optimal capital structure of the company should be computed based rate of return required by the investors and lenders (Shim and Siegel 20).
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