Blog 6

Do Dividends create Shareholder Value?

Companies which issue dividends will decide how much to pay their shareholders with a dividend policy. A dividend is a portion of the company’s earnings decided by the board of directors and they can be in the form of cash, stock or property, which are paid to investors on a quarterly or semi-annual basis. It is often seen that companies which offer shares and dividends tend to be the most secure and stable, though as we have seen recently with the Tesco profit scandal, that shareholders are willing and prepared to sell their shares as soon as something like that happens.

Dividend decisions are influenced, to some extent, by investment and financing decisions because if there are no attractive investments for the company, they may decide to increase dividends. On the other hand, if finance is a problem for the company, perhaps they will lower the dividends instead.

In the UK, dividends are paid out twice a year:

·         Interim dividend which is paid during the year

·         Final dividend which is paid after shareholder approval at the annual general meeting, and these dividends may be more than the interim dividends because final year results are available and so they know how much they can pay out.

Dividend policy should aim to maximise shareholder wealth. Porterfield, 1965, argued that this could only be achieved if P1+D≥ P0

Dividends can give investors a sense of what a company is really worth. The dividend discount model is a classic formula that explains the underlying value of a share, and it is a staple of the capital asset pricing model which, in turn, is the basis of corporate finance theory. According to the model, a share is worth the sum of all its prospective dividend payments, 'discounted back' to their net present value. As dividends are a form of cash flow to the investor, they are an important reflection of a company's value. The model is based on the belief that the market value of ordinary shares represents the sum of the expected future dividend flows, to infinity, discounted to present value, according to Arnold 2008.

On the Contrary, there are some companies that do not pay dividends, for example Dell and Warren Buffett’s Berkshire Hathaway. The reason why companies choose to do this is that they believe the funds are better used within the firm than if they were given to shareholders.

However, Modigliani and Millar, 1961, argued that share valuation is a function of the level of corporate earnings, which reflects a company's investment policy, rather than a function of the proportion of a company's earnings paid out as dividends. They also argue that only investment decisions are responsible for the future profitability of a company, hence share valuation is independent as it measures company's earnings, not dividend payments. M&M give the following assumptions, which make dividend policy irrelevant.

1. There are no taxes

2. There are no transaction costs

3. All investors can borrow and lend at the same interest rate

4. All investors have free access to all relevant information

5. Investors are indifferent between dividends and capital gains.

Given these assumptions, the determinant of value is the availability of projects with positive NVP’s; and the pattern of dividends makes no difference to the acceptance of these.

In the real business world, have placed great importance on dividends, suggesting they are very relevant in companies, who aim for stable dividends with stable growth.

Blog 5

What Contributes to the Success and Failures of Mergers and Acquisitions?

Mergers and Acquitions are happening constantly in the business world, where currently there are talks between BT and Telefonica, for BT to buy back O2, which they had owned previously until 2001.

Merger Motives

Each company will have their own reasons for undertaking M&A activity. According to Arnold, 2012, four classes of merger motives are identified. 

 

One example of a successful M&A is the acquisition of Pixar by Disney in 2006 in a $7.6billion deal. The success of movies such as the Toy Story franchise, Cars and Finding Nemo amongst many more is only a taste of Disney’s success in their M&A activity. In 2009, Marvel, one of the world's most prominent character-based entertainment companies, agreed a merger with Disney in a $4.3billion deal. Most recently, in 2012, Disney have acquired another franchise ‘Lucasfilm’, the creators of the successful Star Wars franchise in a $4.05bn deal. According to Arnold, the success of a M&A is not guaranteed as soon as the deal is complete, but rather its what happens after that makes it a success or failure. This is refered to as post-merger success. Whilst many may think the process of the M&A is the difficult part, they can be hugely mistaken. The success of M&A is what happens after and ensuring the companies communicate and integrate effectively to help this success. According to Stefan Stern from Arnold, 2012, who was discussing Proctor & Gamble and Gillette, he says “There are administrative, logistical and technical challenges. Will new contracts of employment be required? Where should the headquarters of the combined operations be located? How can companies’ information technology systems be integrated?” These are all issues and questions that many, if not all M&A need to take into consideration post-merger.

Not all M&A are successful like Disney and their acquisitions, in fac0,t there have been many failures throughout the years, for example in 2005 eBay announced they were going to buy internet telephony company Skype for $2.6billion. However, four years down the line and the merger ended when eBay said they were unloading Skype to a group of private investors for $1.9billion.

So what actually happened between these companies which caused this ordeal? Well according to PCWorld, when eBay bought Skype, it had hoped the VoIP service would improve communications between its customers. Buyers could talk easily with sellers about items they were interested in; in turn, sellers could build relationships with customers via the power of VoIP chats. But the Skype-eBay integration never panned out. The main reason: For most eBay users, email is good enough. Buyers and sellers don’t really need a voice call to seal a deal. The eBay-Skype marriage suffered from other problems too. First, the culture clash between the two companies was too great to overcome. “eBay is an extremely conservative, bank-like culture,” says Abramson, a marketing consultant and Internet telephony guru. “Skype was out to be the democratization of voice. They were out to be the leveler of the playing field, and they’ve done that.” In addition, Skype went through several management teams during its four-year eBay period—a lack of consistency that didn’t help matters at all.

As well as successful and failed M&A, there are also instances of companies interested in merging with another company, but for one reason or another, it never happens. One example of this is the potential M&A between Pfizer and AstraZeneca, where Pfizer placed a bid of £55 per share (£69billion) to takeover UK based Pharmaceutical Company AstraZeneca. The reason for the rejection was because Astra believed the company and their ‘attractive prospects’ they were being undervalued, as Mr Johansson said "We have attractive growth prospects and a rapidly progressing pipeline. In the coming months we anticipate positive news flow across our core therapeutic areas, which underpins our confidence in the long-term prospects of the business." The full article can be found on the BBC news website.