Transcript Corporate Finance

CORPORATE FINANCE
CORPORATE FINANCE: INTRODUCTION
Dr Kevin Campbell
March 2011
Dr Kevin Campbell, Corporate Finance, 2011
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CORPORATE FINANCE
INTRODUCTION
 What
is corporate finance?
 The
nature of the modern corporation
 The
agency problem
 Corporate
 The
governance
lessons of the global financial crisis
 Major
ideas in finance
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Recommended Textbook
 Best-selling
international
textbook
 Very
helpful the end-ofchapter Questions and
Problems
 Visit
the online learning centre
http://www.mcgraw-hill.co.uk/textbooks/hillier/
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The Financial Times

http://www.ft.com

Highly recommended
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Cash flows between the firm and
the financial markets
SOURCE: Hillier, Ross, Westerfield, Jaffe and Jordan, 2010, Corporate Finance: European Edition, McGraw-Hill, Figure 1.3
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DECISIONS MADE BY THE
FINANCIAL MANAGER
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Investment decisions
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Financing decisions
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Capital structure decisions
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Dividend policy decisions
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Short-term financial management decisions
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THE GOAL OF THE FIRM

Maximizing shareholders’ wealth, ie
» maximizing the share price
» maximizing the value of the equity
» maximizing the value of the firm
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Managers may not share the same goals as
shareholders
» this is called an agency problem
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CORPORATE GOVERNANCE
Separation of ownership and control
Board of Directors
Assets
Shareholders
Debt
Debtholders
Management
Equity
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THE AGENCY PROBLEM

Separation of ownership and control
 Berle & Means (1932), The Modern Corporation
and Private Property
 Asset ownership versus control

The core issue
– Managers are the agents of shareholders
– Managers may act in their own self interest
if the consequences are not severe enough

Shareholders vs Management
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Bondholders vs Shareholders
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Board Structure

Poland has a two-tier board structure, in common
with many continental European countries
» both a supervisory and a management board
» the management board runs the business
» the supervisory board appoints and supervises the
management board
» the supervisory board also controls the firm’s compliance
with the law and articles of the corporation and its
business strategies

In the UK and US there is a unitary (one-tier) board
» executive and non-executive directors sit together on
one board
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Executive vs Non-Executive Directors
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Executive Directors
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‘Inside’ directors
Determine strategy and manage day-to-day operations
CEO has overall charge of the Executive directors
Non-Executive Directors (NEDs)
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‘Outside’ directors
Provide independent judgement and outside experience
and objectivity
Represent the interests of shareholders
May be executives of other firms
The Chairman of the Board should be elected from the
NEDs
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Board Structure
Anglo-American Model
Unitary structure
Board of directors
•Executive Directors (incl. CEO)
•Non-executive Directors (NEDs)
Continental European Model
Two-tier structure
Supervisory board
• only non-executive Directors
Board committees
Executive committee
Other board committees
Management board
(Majority NEDs)
•Executive Directors only
Audit
Nominating
Remuneration
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Corporate Governance Models
Anglo-American Model
“Impatient Capital”
Continental European Model
“Patient Capital”
Shareholders
Shareholders
Firm
(management)
Main Bank
Banks
Firm
(management)
Employees
Frequently criticized as focusing on
short-term profitability rather than
long-term growth
Frequently criticized for its lack of
accountability to shareholders
while focusing on the demands of
too diffuse a group of stakeholders
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Corporate governance conflicts
Management
Controlling
shareholders
Minority
shareholders
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Corporate governance conflicts
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Type I agency problem: the conflict of interest
between managers and shareholders (the
‘classic’ agency problem)

Type II agency problem: when controlling
shareholders are present, eg families, they may
have an incentive to extract private benefits of
control at the expense of minority shareholders
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THE AGENCY PROBLEM IN THE
SPOTLIGHT
 Enron
 Tyco
 Xerox
 Global
Crossing
 Merrill Lynch
 WorldCom
 Hollinger International….
Business Week, May 6, 2002
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THE AGENCY PROBLEM ILLUSTRATED:
‘Conrad Black & Corporate Kleptocracy’
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Former Chairman of Hollinger
International
Accused of ‘skimming’ more than
$400m from the business over 7 years
Examples:
» Charged Hollinger almost $43,000 for
his wife’s birthday party at a New York
restaurant
» Claimed as expenses $2,463 for Lady
Black's handbags, $3,530 for
silverware for the Blacks' corporate jet
and $24,950 for "summer drinks".
[Source: Report of the Investigation of the Special
Committee of the Board of Directors of Hollinger
International, 2004]
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July 2007: found guilty on three charges of
fraud and one charge of obstructing justice
November 2007: sentenced to 6.5 years in
jail
July 2010: released on bail pending appeal
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THE AGENCY PROBLEM ILLUSTRATED
“NORTHERN ROCK BOARD ATTACKED OVER PAY
BOOST FOR EXECUTIVES BEFORE BAILOUT”
Headline, The Times, September 17, 2007
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
CEO Adam Applegarth awarded
a 10 per cent rise (from
£690,000 to £760,000) at the
AGM on April 24 2007
The impact of the sub-prime
crisis on the business was
known to directors at the time
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Mitigating the Agency Problem
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Internal control mechanisms
Board of directors
Audited financial statements
Share value–based compensation
Share ownership
External control mechanisms
Managerial labour market
Market for corporate control
Shareholder activism
Corporate Governance codes (‘soft law’)
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Codes of Best Practice ...

UK: FRC - independent regulator responsible for promoting
confidence in corporate reporting and governance
“The UK Corporate Governance Code” (2010)
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Poland: The Warsaw Stock Exchange
“Code of Best Practice for WSE Listed Companies” (2010)
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“OECD Principles of Corporate Governance” (2004)
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Corporate Governance dilemmas ...
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Remuneration policy (eg share-value based schemes) can
align managerial interests with those of shareholders
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But excessive remuneration is one of the possible ways
that managers can expropriate wealth from shareholders
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Homework Exercise #1
Agency Problems
Suppose you own shares in a company. The
current price per share is £25. Another company
has just announced that it wants to buy your
company, and will pay £35 per share to acquire
all the outstanding equity. Your company’s
management immediately begins fighting off this
hostile bid.
QUESTIONS:
Is management acting in the shareholders’ best
interests? Why or why not?
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Homework Exercise #2
Agency Problems
In 2009 the US company Kraft launched a takeover
bid for the UK chocolate company Cadbury.
Though Cadbury’s management initially resisted
the bid, they eventually recommended acceptance
and Cadbury was acquired by Kraft in 2010.
TASK & QUESTIONS:
Research the background to the bid using the
Internet (eg FT.com).
Do you believe that Cadbury’s shareholders
benefitted from the takeover? Do you believe that
Kraft’s shareholders benefitted? Why or why not?
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Homework Exercise #3
Agency Problems
In 1999, the UK company Cadbury bought Wedel,
the Polish chocolate company. After Cadbury’s
acquisition by the US company Kraft in 2010,
Wedel was sold to the Japanese conglomerate
Lotte Group to meet European Commission
requirements.
TASK & QUESTIONS:
Research the background to this transaction using
the Internet (eg FT.com).
Why did Kraft have to sell Wedel? Who benefitted
from this transaction?
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Koniec
Dziękuję za Uwagę!
[email protected]
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