Blog 4: Taxation

Taxation is not a voluntary payment or donation. It is a toll which is enforced contribution imposed by government. It is a non-penal, but compulsory transfer of resources from the private to the public sector (Wikipedia). Therefore, international company plans the strategy which will minimize the overall worldwide tax burden with most tax efficient position.

The most direct method for company to minimize the tax is keeping its operational base in low tax rate country. There are many countries tax rate are lower than UK, such as Philadelphia with 10% corporation tax, Cayman Islands with only 0% corporation tax. However, back to the discussion during the lecture, tax minimization strategy would have benefits for both the shareholder and the customer. Nevertheless, there would also generate loser. This discussion will leave to the last conclusion.

In my viewpoint, taxes are justified as it is necessary and beneficial to society because it reduces economic inequality which “the rich get richer and the poor get poorer” in a society. Let’s look at hot topic on Barclays paid ₤113m in corporation tax to the UK in 2009 which only 2.4% of its ₤4.6bn global annual profit. As we can see that the day after the news, tax-avoidance activists have targeted Barclays Bank. It is because bank has serious responsibilities as a corporate citizen. We need a strong banking system to support the economy growth for the society.

As we know long and short term cashflow may impact tax bill. Therefore, these figures cause the debate about excessive profits and bonuses in an industry underpinned by taxpayers’ money. Barclays therefore have commitment to the Treasury in Project Merlin that it would reduce the total paid out in bonuses. And result the banks decrease the bonuses compare with this year than last year.

In 2010, the total group revenue of Barclays is ₤31.44bn. However, there is also rising salary for staff which rose costs by 20% to ₤11.9bn, which ₤3,5bn was paid in bonuses. It is still a huge amount that affects the profit before tax. Therefore, Barclays has reported pre-tax profits of ₤6.07bn for 2010. Even Barclays paid over ₤2.8bn in taxes in the UK in this year. The bank still enjoying a better financial climate with only public opprobrium over bonuses remains unchanged.

What we need is ‘Parallel universe’, taxpayer subsidy for Barclays Capital and Barcap being able to borrow relatively cheaper which make profit at the end. However, Barclays had paid themselves (chief executive, shareholder, staff) with high salaries and bonuses. As the result, the taxes paid would be in a low amount. Let’s back to the discussion, don’t you think that the loser would be the taxpayer!?



Reference: 
Tax - Wikipedia, the free encyclopedia. Available at: http://en.wikipedia.org/wiki/Tax (Accessed: 24 Februrary 2011)

Blog 3: Ordinary shares

Company raises money through equity finance. Relatively, investors invest their saving to buy the ordinary shares of the firm to seek for return. Ordinary shares which represent the equity share capital of the firm. Therefore, after making profit, the company has the obligation to distribute dividends to those investors who buy the ordinary shares of their company. The remainder profit are kept inside the company and used for investing in the future of the company called stockholder’s equity. However, the retained earnings reinvested to the company may not always produce expectable returns. Therefore, there are another uses of retained earnings for company to avoid the accumulation of excessive amounts of cash in the corporation. It is share repurchase (share buyback).

The Anglo-Australian giant, BHP Billiton said it would be more than a double of its share buyback to $10billion that completed in 2011. The Chief Executive of BHP, Kloppers said that because they currently stand in the commodity price cycle, it  probably has increased price expectations for those assets, so they have clear opportunity to continue to invest money in their organic portfolio which is share repurchase.

Is that the only reason? From my point of view, it probably not.

Another reason would be BHP may reduce the number of share held by the public, so it reduces the float of shares. The profit remains the same and less ordinary share in the market. As the result, earning per share increase and result in a strong return on investment that stimulate the share price of BHP. In addition, BHP repurchase share used to signal of undervaluation. BHP shares last traded down 1.8 percent at AUS$46.50, lagging a 0.3 percent fall in the broader market. Repurchase share might undertake a fixed price tender offer show the premium is offered over current market price.

However, the BHP’s share price declined in Australian trading, Investors had high hopes for a big share buyback as the BHP is nearly debt free, its cash flow is booming and its failure to complete major takeovers limits its expansion options. It reflecting investors might disagree with BHP the use the cash flow for share buyback than expansion and hadn’t used it to fund a greater dividend for them.  

In conclusion, the aim of company to repurchase share is avoid the accumulation of excessive amounts of cash in the corporation that makes firm become a more attractive company that invested by the investor for raising money. But the company has to take care of the investor interest because investor is the most important person who ‘provides’ funds to the company. Otherwise, it would violate the aim from the beginning about joining the stock market.

Blog 2: Investors would be affected by the merger of stock exchange.

At first, I hereby declare that the history of London Stock Exchange (LSE) in this article with reference to Penton’s articles - ‘What’s driving exchanges’ urge to merge?’ accessed on 10 February 2011.

Penton describes how the exchange became the LSE which I have not yet born in the early 1980s. Starting from few institutions monopolize the market, it become filled with conflict of interest of LSE. The formation of this environment due to The Government adopted deregulation policy that competitive invasions of market segments in the early 1980s.

Nowadays, the information technology rapidly improve, no matter where the UK’s investors are, they still can invest their capital all over the world which not only LSE. Therefore, Stock Exchange became a liquid market which provides investors free trade in and out of their shares. Also, the shares transaction of investment institutions can be carried out under this planform. Stock market gives global investors a wide capital market to invest.

For instance, LSE or New York Share Exchange (NYSE) are two of world’s capital market which no longer to be the only Stock Exchange that providing financial services to investors because of globalization and technological change which  investors might use internet services for trading.

Therefore, in order to remain the ability of competitive, every Stock Exchange market has to improve its efficiency of trading system and reduce the cost to survive. Simultaneously, corporate will expand their market to face the fierce market competition, so they will choose merge with other business.

On the 8^th and 9^th February, LSE and NYSE which are two of world’s leading market announced merge with stock market of Canadian and German separately.  

LSE agree to merge with TMX group of Canadian will become the world's largest exchange for mining companies. Effective to LSE immediately, shares in the LSE climbed sharply to close up 3.1% shown in figure1. 

Figure1: London Stock Exchange Group last updated at 11 FEB 2011, 16:30

The day after LSE announced merge with TMX group, NYSE Euronext and Deutsche Boerse said they were in talks about a merger. If it is successful, this deal would create the world’s biggest stock exchange firm. As the result, NYSE Euronext's shares jumped 14 per cent to close at $38.10 in New York.

The announcement of NYSE and German came on the day after LSE confirmed merge with Canada’s TMX, this caught the attention of investment analysts.

This announcement obviously is a competitive to overshadow merger of the LSE and TMX. If the deal goes ahead, those investors would be attracted by this great stage of investment platform. If it comes true, NYSE and German not only become the winner, also reduce a large amount of cost of publicity!

Change from monopoly market to free market for investors. It would generate of competition. Therefore, the more good news of business, the more attraction of ‘free’ investors.

Are we really a free investor? Or we just leaded by the news from stock market? And as investor, in this short term, how should the decision make in this two world’s leading market?

Blog 1: Alpha take over Messey

I am going to write about how the wealth of shareholders was affected by company decision. The case study of Alpha set to take over Massey for $7.1 billion would be referred.

The wealth of shareholders would be affected by company long-term and short-term objective. John Kay point out that the firm may concentrate on making the best procedure rather than just focus on shareholder value. Thus, it will bring best return to shareholder.

Alpha is the biggest producer of metallurgical coal in Abingdon, Va., The aims of Alpha take over Massey is to create a global leadership in metallurgical coal reserves and production. Combination between Massey and Alpha may bring high growth and profit to both companies. Alpha poised to become the world’s third-biggest producer of metallurgical coal used by steelmakers.

Several of Massey’s directors and executives think that it would create more shareholder value if keeping independent of Massey. However, due to the accident at Massey’s Upper Big Branch mine which killed 29 miners in April, Massey’s board was under pressure because prestige of Massey severely decreased by the accident.

Even Massey might improve its stock price over next few year by itself, operational and reputational risk are important determinants which decision are made (Coleman et al, 2010) And Alpha offer 1.025 share for each share of Massey, plus $10 a share in cash. That represents 21% premium over Massey’s closing share price from $57.23 to $69.33. Due to those factors, combine with Alpha might be the best method for Massey to recover their reputation and make profit in the shortest time.

Combination between Alpha and Massey perhaps very compelling, it may stimulates the stock price for the company in short time.

However, think about after combine Alpha and Massey, is it good for both companies? Have a look on AOL merge with Time Warner to emerge the world’s largest internet and media company in 2000. It is similar to Alpha and Massey that AOL and Time Warner have similar strengths in their respective business, but it finally destroyed billions of the wealth of shareholders due to changes of accounting rule. People would think about why choose AOL Time Warner rather than BBC or CNN?
The same situation may occur, people may invest to BHP Billiton Metallurgical Coal which the largest global supplier of seaborne traded hard coking coal rather than Alpha and Massey.

Strictly thinking for the decision may affect long term objective of the firm. Therefore, the deal should involve the approval by shareholders and regulators.