This report will be presented under the senior financial manager’s point of view about choosing only one of the proposed projects, which the board believes to be successful in increasing the wealth of the shareholders in the case of Jebb plc, due to limited fund. One of the proposed projects is the takeover of a rival company that competes with Jebb plc for market share in their core business. The report includes five parts. Firstly, the introduction will be the overview of the company, Jebb plc. Secondly, the major findings include three sub-parts.
The first sub-part is about the reasons behind takeovers and the methods by which such takeovers may take place together with the potential effects of a takeover. The second sub-part is about the methods of investment appraisal which maybe applied to evaluate and rank potential investment opportunities and their relative merits and limitations. Also, in the last sub-part, the researcher will discuss about the nature of gearing and the potential effects of high gearing on perceived risk and cost of capital.
After all, in the conclusion, the researcher will summarize about the recommendation for Jebb plc, in each aspects in the major findings. In addition, in the appendices, the researcher will present about the theories in detail to support for the information in the main report. Also, the references will show the sources that the researcher used. I hope the readers will be able find out the necessary information for the readers’ purposes in this report below. Acknowledgement First, I would like to thank my teacher Hafitah Mansor, for explaining the necessary theories and giving examples.
Also, she always showed the responsibility by listening to and advised me in this module. She taught me how to ask questions and express my ideas. Also she showed me different ways to approach a research problem and the need to be persistent to accomplish any goal. A special thank to all the Professors and Researchers who wrote books, articles and newspapers about all the aspects in this project before, where I can find out the vital information. The readers can look for information in the references below. Limitations My research has a number of potential limitations.
First of all, there are not many academic sources for finding information, such as books, journals and articles, due to the fact that there are not many kinds of book in the National library, Hanoi library – two biggest libraries in Hanoi. Also, I can not access on any of academic online school library here because we do not have any of them as I have discovered. Also, when being asked, nearly nobody gives their own opinion about the stock market in Hanoi and Vietnam, because keeping information is one of the unspoken norms here.
This report is on the subject of the justification and discussion about the methods, reasons, valuation, and impacts on capital structure and gearing ratio of choosing the takeover the rival company that competes with Jebb plc – one large listed company in the market, for market share in their core business. The assumption is that the head quarter of Jebb plc is in the UK, and we take into consideration only its branch in Hanoi, Vietnam. Also, Jebb plc is one big car producer in Hanoi, and wants to takeover B car producing company in Hochiminh city.
First of all, the researcher will present about reasons behind takeovers, why the company should choose this method, and what they can earn from it. There are some reasons and profits for taking over. One example of significant acquisitions in the history is when in 1988, Tower Federal Savings Bank of Indiana acquired two financial institutions of Michigan. Then in 1991, the Standard Federal Bank strengthened their position in Ohio by acquiring a financial institution of Toledo. These two acquisitions had great impact on the banking sector of the USA in the late 1990s.
Following Berkovich and Narayanan 1993, they suggested three motives for takeovers: synergy, agency and hubris. And until now, Watson and Head, 2007 widened up these theories, as in general, there are four main reasons for taking over. The first is that if market value of the new firm exceeds separate market values, shareholders wealth increases. As we can see in the example about A and B above, the managers of the target company can be cut down. The reason is that, B who became the target for acquisition, might be due to the inefficient management. In consequences, the output or revenue can be increased by transferring of managerial skill.
We can look for further example of Vodafone and Mannesmann. The acquisition of Mannesmann would tremendously increase Vodafone’s market power. Such an acquisition would have been an acquisition for survival, and would have been easily rebuffed by a management team arguing that its shareholders should not side with a potentially losing team (Dr. Charles Byles, C. , Huvard, S. , Salcedo, R. , Tuppince, L. , Wentz, M. , and Zolad L. , 2006). In addition, we can increase cash flows from a range of market-related factors. For instance, we assume that Jebb plc- producing cars in Vietnam, wants to launch in Pho industry.
Therefore, they can buy the existing Pho 24 system rather than starting a new one to reduce the research and development costs, and so on. They need only to increase the market share, and rearrange the managing staffs. Besides, Houston and Ryngaert 1996 discussed cost cutting, revenue enhancement, and risk reduction as the most important reasons for acquisition. While in M;As. Sirower 1997, the most justifiable motive is synergies as increases in competitiveness and resulting cash flows. Eccles, Lanes and Wilson 1999 outline the source of synergies as cost savings, process involvements, financial engineering, and tax benefits.
Goold and Campbell 1998 report six forms of synergy including shared know-how, shared tangible resources, pooled negotiation power, coordinated strategies and so on. Because we assume that only Jebb plc in Hanoi is taken in consideration, so the next reason for acquisition is target under-valuation. This happens when the share price does not present value of the company. Due to the culture affected by the history, Vietnamese has the unspoken norm that is nearly everything is based on relationship. The more relationship you have, the closer you are, the more information you will achieve.
It is hard to prove the evidences about this, but it is always in the mind of the citizens here. Therefore, one million people in the market receive one million different information. When Jebb plc takes over the target company, it depends on the point that the managers take toward the stock market. However, it is still difficult to be sure if it is better or not, due to the reason above. The next important point is increasing the earning per share (EPS). The process whereby the firm seeks to increase the EPS through takeover is bootstrapping. The table below is the example of this process.