Is an ethical firm REALLY ethical?!?!

Wow, time flies! This blog post is going to be the last blog of mine for the semester. I hope you enjoy reading it. Cheers~

First, do you have any idea what an ethical firms should have within its organization? According to what I have learned in the lecture, I have further improve my understanding on ethic codes as the latest lecture class gave me a better knowledge on code of ethics. These ethics code is to be performed by firm to be moral.  I now realize that good ethics can be performed in various ways such as acting and promoting strong moral principles. In order to demonstrate good ethics within a firm, they should have strong moral principles such as sense of responsibility.

Imagine you are an employee working under a responsible employer in which this employer offers training course and medical examination to you solve your problems together with you and always check on the tools and equipment to ensure it will be used safely by you. Will you be happier to work under him? Will you be more productive? If it was me, I will definitely improve my job performance as I feel happier working under such conditions.

How do we know which firm is qualified to be labeled as ‘ethical’ firm? As long as they behave ethically? No… we do not know which firm is truly ethical and which is not. Some may seem ethical for us because they are hiding their dark side. How evil they are! Few months ago, The News reported that Co-operative Bank operation still claimed to be an ‘ethical’ bank despite its systematic customer defraud under the PPI scheme. The demand for PPI was already more than £20billion back to this august.  Financial experts even mentioned that banks could face pay out up to £33billion due to latest financial scandal. What if the complains go up continuously? It must be cure! Banks might need to pay more for failure of handling PPI claims. it is not a surprise to me that co-operative bank had been fine £113,000 for mishandling PPI . Oh gosh, all the figures are so huge, banks should have treat this as a serious issue before it further worsen the GDP growth level.

The PPI scandal showed the financial industry failure
for self-regulation .How can Co-op bank still claim themself as ‘ethical’ after all these happened. The term ‘ethical’ is getting confuse in my head. .Don’t you feel the term ‘ethical’ sounds more disbelieving now? I am not sure if it was due to customer-led ethical policy of Co-op bank which launched in 1992, but all I know is this bank is definitely at risk! What do you think? Do you agree with me? Tell me what do you think :>

How does ETHICS impact businesses?

Having watched the interesting financial documentaries regarding to 1.7 Billion dollar fraud in Olympus, I wonder if ethics issue could be one of the issue which caused the company to suffer from losses.

Olympus Corporation is a huge multibillion dollar optical company based in Japan. In late 2011, it is said that the newly appointed non- Japanese president, Michael Woodford was fired due to different style in managing which was mainly because of cultural differences between Japan and British.  Why did the chairman, Kikukawa appointed a non-japanese president and then fired him with the reason of cultural difference ? Was it really because of cultural difference, or was he trying to stop him for discovering more secrets behind Olympus? What were the actual reasons behind?  

Olympus tried to hide losses from poor investment by selling bad investment to related firm.This include the acquisition of Olympus with Gyrus group. Woodford have decided to whistle blow the illegal activities of Olympus after discovering their illegal act. Why did Olympus engage in illegal or unethical activities? Did Olympus think that hiding the truth was needed with the purpose of gaining profit? It might be true that the firm will be more profitable with hidden secret that might drag their reputation to the floor. However, I think Woodford acted professionally and did a great job as a whistle-blower.Will you do the same if you were Woodford? 

 If I was the president of Olympus, I wouldn’t hide the truth from the public despite the fact that I might lose trust and confidence from the public. As a president, I think it is my responsibility to tell the public what is wrong with the company. Wouldn’t it be worse if the secrets are revealed by someone else? The company could have lost all the trust from customers, sales might be driven down to floor and shareholder values might have a sharp decrease!! That was exactly what happened to Olympus after Woodford whistle-blow their secrets! Share values went down.. lost customers trust.. sales went down..  Besides, the stock of the company experienced a dive of 17% after firing Woodford. 

Diagram on the right shows the sharp decrease in stock after Woodford is fired.

Let’s talk about another ethical issue occurred among top level management in Olympus. I personally think it is extremely unethical that how the top level management in Olympus threatened and fired Woodford when he discovered the loss-hiding schemes. I think there were ethical issues in the management as they intimidated to sue Woodford for revealing confidential information of Olympus to public. Don’t you think it was unethical too?  I understand that the top management might feel threaten for losing profit, but they should be responsible for what they have done.

After watching the video I asked myself do most of the firms act unethically in order to survive in the competitive economy? Maybe a YES, or maybe a NO…However, I can ensure you that some companies act unethically due to economy greed.  Is ethics an important term in business? Do share your opinion with me about how you think of ethics in business. 

International Mergers and Acquisitions??

Hey guys~ glad that you are spending your precious time to have a look through my blog.  The following contents which you are going to read are about International Mergers and Acquisitions (M&A). 

M&A refer to consolidation of companies that take place beyond one specific country. The word ‘mergers’ here stand for combination of two different firms to form a new firms, while an acquisition is the act of purchasing one firm by another firm with no new company formed. M&A has been growing rapidly and have experienced waves of popularity which plays an important part of business in the world today.

 In the week’s lecture, I have learned that some of the merger motives are due to synergy, superior management, economics of scales, tax advantages and so on. However, do firms in the real world merge globally to obtain strategic benefits in the markets?  Do you think M&A is a good idea to gain beneficial advantages to the firm?  After having read some of the articles online, I think that M&A is an excellent way for firm to grow stronger as it is cost saving, risk diversifying , grow in speed and so on.

Let’s talk about the International merger and acquisition which involved City Football Group(CFG) and China Media Capital(CMC) which announced recently. This merger allows CFG to fund its growth in China by using capital from the share acquisition. It gives them the opportunity to expand in international business as well as developing infrastructure assets of CFG. On top of that, they are allowed to postpone their capital gain tax and maintain interest rate at a certain level. What do you think of this mergers and acquisitions?  Well for me, I think that Manchester City have made a good choice for merging with CMC as it provide growth opportunities for both the parties since Manchester City Football Club has the chance to evolve themselves with China’s incredible track record of creating value. Meanwhile in China, opportunity can be created to facilitate Chinese football from different aspects within the ecosystem. 

Despite the pros of M&A, how can we not forget the cons of it? What disadvantages can you think of for merging and acquisitioning internationally? Have you thought of the negative impact of cultural differences in International Mergers and Acquisitions? Previously, I personally thought that International M&A will only bring advantages for companies with no harm. Netherless, after going through some articles about International M&A,I then think that International M&A may bring negative effect to the parties involved as there will be problems in communication, leadership and trust. Furthermore, if one party is not aware of his partner’s corporate culture or national culture, the mergers or acquisition might be fail. One example is Damiler’s failures to integrate with their international partner which is Mitsubishi. Issue of national culture arose when Daimler did not adapt any Principles of Japan business culture and local practices. 

Although there are disadvantages of International M&A, i think that the benefits surplus the harms. Problems like cultural difference can be coped by practicing, communicating and acknowledging culture of each other. i would strongly prefer International M&A than operating a firm in a limited range.

So… will you merge or acquire another company if you have the ability to? Do not hesitate to tell me your thoughts and opinions. Do leave a comment below and tell me your answer.

is Margin Call a worth-watching film?

Well guys, I am back here again to give my review and comment on a financial movie named ‘Margin Call’.  The movie is about how the key people at an unnamed investment bank deal with early stages of financial crisis. I have to admit that I never once watch a financial movie and I never knew that a movie with full of financial talks could be that interesting until today.

After the movie, I realize that casts in the movie only cared about their profits and welfare. It is the CEO,John Tuld’s decision to decide whether he should order his company to start dumping worthless holding before the world spread that his company is worthless. John insist to sell something which has no value to buyers at current fair market despite knowing that it may destroy the market for years. I think the selfish act of corporations occur in the reality around the world.  In order to survive and to succeed, some corporations may have made cruel decision which could be harmful to the public but beneficial to the corporation itself.  This is why the Occupy Wall Street protesters are angry, they are angry about the dishonesty and greet of Wall Street.

It is a joke to me that the CEO of the company as well as the bosses dont have essential financial knowledge behind the products they make and sell to their customers. For example, Sam Rogers, the boss of Peter said that ‘"Oh Jesus, you know I can't read these things. Just speak to me in English’. They should have sufficient knowledge in finance to cope with obstacles they encounter while operating their firm. In the real world, insufficient knowledge of leading people in a company might make wrong moves and drag their firm down.

Furthermore, Peter (Zachary Quinto), an analyst who wasn't fired had to work in constricted space of the Wall Street manager.  Risk managers play important role as they see the whole picture of the company.  However, the risk managers in this film only provide recommendation which is clearly not effective and adequate when financial crisis is hitting them.  In reality, investment bank’s success at subverting the risk management rules are nicely correlated with how terribly they performed while facing financial crisis. Therefore, the investment bank in the movie could have a better ending if every person in charged could provide more contribution to the company.

The article above shows my opinion toward this film. It is a film that worth your time to watch especially when you are interested in how company deal with financial crisis. Do watch if you are curious about the film .

Is dividend that important?

Hey guys, I am glad that you guys are still spending your time to visit and read my blog. For this week’s blog, I am going to talk about dividend relevance theory and dividend irrelevance theory.

The ideas of these 2 theories have come to a conflict regarding the impact of dividend paid on firm’s value. Dividend relevance theory suggested by Linter and Gorden argue that dividends are preferable to capital gains because of uncertainty in future gain. They believed that investors would rather to have the money in their hand than leaving it tied up in uncertain investment that might be risky and affect the share price. On the other hand, Modigliani-Miller came up with dividend irrelevance theory and claimed that the dividend policy of a firm does not affect the shareholders wealth and value of the firm.  Which one of these is more applicable in the real world? Is it the irrelevance theory or relevance theory?

What I think is, both of the theories can be true. What matters is how you look at it in your perception. Large companies like Google and Amazon do not pay dividend to their shareholder. They chose to invest in future activities aggressively. Google has sufficient money to pay dividends due to the nice grow in earning per share and high free cash flow per share. Why are they not paying it?

Table above shows the result of free cash flow per share over the years and months

Source from : 
http://www.gurufocus.com/term/per%20share_freecashflow/GOOG/Free%252BCashflow%252Bper%252BShare/Alphabet%2BInc 

We can see that Google’s cash flow per share for the three months ended in Sep. 2015 was $4.89. During the past 12 months the average Free Cash Flow per Share Growth Rate of Google was 26.20% per year. Should they pay the dividend?  Maybe they should.

If I have a chance to invest in companies, I will not invest in company which don’t pay dividend because dividends give me a signal to judge the performance of the company. Although dividend relevance theory assume that high dividend is equivalent to good news and low dividend means bad news, but it may be false in reality.  I am a ‘short-sighted’ investor who hopes to receive my return without ‘creating’ my own dividend by selling my shares. Although some prefer to leave their funds in the company to buy more shares, but I am more preferable to receive money now than receiving capital gain by reinvesting and selling the share in the future which may be a long term process. Therefore, I think company with high dividend is performing well in the market and it is important to pay dividends to shareholders. What do you think? Tell me what is your point of view :) . 

Debt or Equity?

Every businesses and firms try to maximize value and maintain it.  Should they aim to achieve optimal capital structure? What is the right mixture of debt and equity should a firm take? Does optimal capital structure exist in the real world? Is it possible for a firm to achieve optimal capital structure? I don’t think so because it is hard to predict the market value of an equity share exactly. Different causes from the market that affect market value of equity share are extremely complicated. A rise in debt will decrease the equity in capital structure, causing imbalance between debt and equity. I think that aiming to achieve optimal capital structure is somehow not necessary if the company is well financed.

Furthermore, I personally think that it is hard for a firm to measure that whether they should finance the company  by debt,by equity or by both as both have its own advantages and disadvantages. To me, I think that debt financing is a better option due to its cheaper cost. Let’s take Wal-Mart as an example. Wal-Mart has capital structure which contain a mixture  of debt and equity. According to Ycharts, the debt-to-equity ratio of Walmart was at 0.5621 back to July of this year, which is lower than the industry average. This demonstrates that Wal-Mart has been successful in managing their debt than equity level. From there,I can conclude that Wal-Mart has lower risk and higher solvency. This may be due to the reduced tax paid, the fall in claiming on company’s asset from debt holders, and cheaper transaction cost for debt compared to ordinary shares.

the chart above show the debt to equity ratio of Wal-Mart Stores
source from https://ycharts.com/companies/WMT/debt_equity_ratio

However, Modigliani And Miller's theory (1958) argue that financing by debt or equity does not matter, it will not affect the WACC. Thus, no optimal structure exists. They assume that there is no taxation, no bankruptcy cost, perfect information is available to all economic agent with no cost of transaction and individuals can as much as they want as they can borrow as the same rate as companies. They believed that the company’s value depends purely on business risk. Are these true? Can these be accepted in the real world? I disagree with the assumption that M&M have made. Bankruptcy costs and taxes do make changes to the stock price of a company and the stock price will finally affect the performance of a company. Income taxes exist and its beneficial to debt whereas bankruptcy cost is is large in amount in the real world.

Besides that, information available to economic agent is not always perfect. Individuals too cannot borrow as cheap as companies as interest rate usually go up as they ask for more money. Therefore, i don't think it is acceptable in the real world. However, after realizing the importance and impact of tax on business, M&M decided to revised their paper and take tax into account in 1963. in this assumption, debt is more favorable because it is a tax deductible expense which can be offset against profit. in other way, it assume that an increase in gearing will reduce weighted average cost capital (WACC). 


Is it a good idea if a company keep increasing the gearing to reduce WACC? NO! Definitely not. Although debt has its own benefit at some point, but company should not keep accumulating their debt just to reduce their WACC. These debt will drag down the reputation of their own company. The debts have to be repaid anyway, so a company should stop accumulating their debt at certain level. 

Bank that ran out of money?

The Royal Bank of Scotland (RBS) which was founded in 1727 , is one of the oldest banks in the UK that had gone through their up and down in the past. The bank had successfully made billion of profits previously and was once the world’s largest bank with great bonus and reputation. However, the profit-making bank turned out to be a disaster in late 2008. The bank suffered the biggest loss in UK corporate history,which was worth 24 billion pounds that led to damaged in reputation of the bank and finally the lack of liquidity inside the bank. What were the main factors that cause the bank to suffer? Was that failure of management by Fred Goodwin? Financial crisis? Or any others?

From the video that I have watched, I got an idea that Fred Goodwin had the potential to become an executive and  lead the bank with his skill in cost cutting. I agree an management style like Fred’s would made the whole organisation more efficient and effective, and that was part of the reason why RBS grew bigger and bigger. However,  there were pros but also cons in his management style. The video mentioned that Fred had the reputation on being quite hard on the staff, inhibited others to express their view and quite difficult as a boss. Was this the one of the internal reason why bank did not perform well? I do think so! Imagine a leader with good attitude and behavior who get along well with the staff and employees.  Wouldn’t the employees be happier to work under him? Wouldn’t the employees become more effective and productive? Yes it would! Not only that, Fred could have came up with better strategy to cope various obstacles by having discussion with other seniors and staffs.

 The acquisition of one of the Europe’s largest bank, ABN AMRO played a primary  role in the bank’s failure. How the acquisition did made the bank failure?  I think the board and Fredwin should not go for acquisition with risk which is already identified. The poor decision made caused RBS to increase their reliance on short-term wholesale funding and also increased credit risk exposures in its trading portfolio. Why did Fredwin made the move to acquire ABN ARMO? Did he think that acquiring ABN AMRO would make profit in both short run and long run? Well, he probably did.  As what stated in the video, almost all the loss are in the sub-prime market of America, and related to the acquisition of ABN AMRO.  From the statement, I think that Fredwin had done poor decision making, especially in relation to risk. The bank might not fall into crisis if Fredwin did a clear and logical background research of ABN AMRO before acquiring it.  The failure of RBS can be clearly seen after the American bubble burst. The involvement of RBS in sub-prime lending made the shareholder and public lose their trust on the bank, no one was willing to lend money to RBS despite the lack of liquidity. Therefore,british government had to paid $45.5 billion to bail out the bank to avoid the collapse of the bank. However, some of these could be avoid if RBS had a better management.

Does diversification helps?

In this week’s lecture, I have learned that portfolio theory helps investor to maximize their return by holding a diversified portfolio of assets with various level of risk. Most of the investors are believed to receive a return for taking risk, the type of risk can be categorize in 2 different category, which are systematic risk, and unsystematic risk. Systematic risk affects all investment of a business. Unfortunately, this type of risk cannot be diversified, whereas unsystematic risk  is the risk which can be diversified in different ways to reduce the risk of one specific share or more. However, in a world of high correlation, it is hard to deal with diversification.

Research has confirmed that the act of diversification for most companies had cut down their profitability. Therefore, an investor must take serious consideration of the risk and return while taking diversification into account. However, a proper diversification reduces the unsystematic risk of business by spreading the risk into different investment. Other than that, a well diversified portfolio would maximize the profit of one’s business  . Amazon, the biggest e-retailer in the United State started their business as an online bookstore, and then diversifies to sell wide variety of stuffs such as DVDs, electronics, software and video game. What made Amazon successfully diversify into different investment in a competitive market? Is it by considering the risk and return of spreading their assets? Or by analyzing the capital asset pricing model (CAPM) including capital market line (CML) and security market line(SML) in the company? In my opinion, I think we have to take 

consideration of all of those I have mentioned.

Now, what strategy had IKEA used on their diversification in China to make it effective? In return of higher market share return,  IKEA chose to take the risk  of investing in foreign country like china. Firstly, IKEA identified its own competitive advantage among other competitors, then globalizing in Asia country with strategies like pricing strategy and joint venture. These strategies, together with other right strategy that IKEA implied over the year has successfully expand their product sales, leading to an increase in revenue as return. The graph below shows the total revenue of Ikea over the years until 2014. in the year 2015, IKEA's total sales increased by 8.9 %.

Furthermore, diversifying in china and other countries will too minimize the risk of IKEA than investing in only one country. I think that IKEA definitely made the right choice as china has become the top 1  purchasing country of IKEA’s product in 2015. China remained to be the fastest growing IKEA Group market in 2015, followed by Russia.

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Lastly, I think that a business could enhance their efficiency by analyzing CAPM, a model that show the relationship between risk and expected return for any risky asset. Since CML define efficient portfolios, therefore it is useful when measuring risk factor. If all the stocks and portfolios lie on the SML, it means the market portfolio is efficient, if not, then adjustment need to be done to ensure an efficient portfolio. Do you agree with the statements above? Tell me what you think. :)

Digby Jones- the troubleshooter

From the video that I have watched, Digby jones , the champion of British business has returned to TV screens as a troubleshooter .In this episode, the Digby's mission was to solve urgent problems encountered by a medium size furniture company called Hereford furniture.

after watching the video, I agree with Digby that Hereford furniture should just focus on one thing first instead of doing all manufacturing, importing and retailing at the same time. Although this range they provided was what made them survive during recession, but this will not last long as threat from competitors in the same firm keep increasing, that will lead to a contract in the market share. In addition to that, the managing director of Hereford furniture, Mike Muxworthy could not provide an excellent reason on what specialist knowledge they have. Therefore, it is most likely better if they just focus on either manufacturing, importing or retailing at the moment. In my opinion, focusing on one task at one time is more efficient and effective than multitasking at one time to focus on their workforce, working capital and maximize their value.

Does launching a new brand help the business? A brand is not just a logo to represent themselves, it is also something that link the company and customer together .An outstanding design or brand name may become a topic of discussion among us on social media., As social media is the largest influence in the 21^st century, it is important for a brand name to become a hot topic on the net. it is a way to grab attention of others and make them start questioning about the  brand, searching for products of the brand, looking for information or  and start talking about the brand, which will then lead to an increase in the brand reputation. A rise in product sales might be seen as customers has built a good amount of interest on the brand, which will lead them to buy the product with the brand on it. All these can be achieved by  Hereford furniture once  they launched the brand Hygge, which is the wonderful Danish word with no definition in English.

Another issue discussed in the video was the poor management of  Mike Muxworthy. As the head of a company, he should ensure that every area including production area, spray shop area and machine shop area in Hereford furniture to work together as a whole, and not just work together in one specific area. This will not only improve the communication among employees, it will also increase the productivity of the company. Furthermore, Mike should have strengthened the bond between himself and his employers to further improve productivity. As what I watched from the video, the impression of Mike in the eyes of his employer is not great.  Other than that,Mike should have employed another accountant who can come out with forecast and statement of cash flows because it approximately show how well or how bad is the company doing. Without it, the business may be drove to ground.

At the end, the video did not mention if the advice of  Digby works for Hereford Furniture. However, it is great to see how Mike is willing to accept the new challenges for himself as well as the business.