Fundamentals to Improving Shareholder Value
Fundamentals to Improving Shareholder Value
In this assignment I will be discussing on the fundamental measures in which companies improve corporate strategy in order to improve shareholder value. And whether (advantages and disadvantages) of having a meta-fund manager (company manager) deal with the portfolio investment and divestments or leave this to fund manager (investors) as John Kay puts is.
The strategies of enhancing performance of the asset of a company involves; mergers, demergers, organic growth and acquisition. A merger is defined ‘as a situation in which two or more companies cease to be distinct.’ This can occur in two ways:
Brought under common ownership
There is an agreement that one of the company’s activities ceases to exist.
Mergers and Acquisitions
There are several types of mergers and these include vertical integration, horizontal integration and conglomerates. Mergers tend not to be successful and profit margins are not enhances, but despite all of this managers still take the risk of mergers and acquisitions. The reason being put is that it boosts earnings per share. In addition it is important that the markets under values companies and high real rates have meant that profits have been heavily discounted, thus make it cheaper to buy other companies than to expand in the current business through internal growth. Young suggest that the reason for expanding the boundaries of organisation:
Acquisitions allow established companies to change direction quickly and reposition themselves in the market.
Acquisitions may be necessary to fill gaps in the organisation’s profile.
Mergers may act as a means of integrating business with converging technologies.
Some of the factors which cause mergers may be pressure by shareholders to improve earnings per share as explained above, external economic factors (e.g. Single European Market) increased competition pressure, to fill a weakness in an organisation portfolio of products or as a means to change the direction and reposition the organisation or diversification.